Customer churn is the movement of customers out of your business. There are many reasons why customer churn happens. It’s a fact of life and business. But it can be managed and mitigated. 

Stopping or reducing customer churn is essential to achieving sustainable growth. Strategies for dealing with customer churn include the following:

  • Finding out why customers churn so that changes and improvements can be made. This is in order to prevent other customers churning for the same reason.
  • Being able to identify when customers are likely to churn and taking steps necessary for them to stay
  • Developing better ongoing relationships with customers
  • Doing a better job of onboarding customers and supporting them through the customer lifecycle
  • Encouraging customers’ loyalty through structured programs

In this post we will cover:

What is customer churn?

What is customer churn Rate?

Why is customer churn rate important?

Causes of customer churn

8 warning signs your customer is about to churn

How to reduce customer churn

How to predict customer churn

Customer churn analysis and measurement

How to calculate how much losing a customer costs

Start getting customer feedback to reduce customer churn

What is customer churn?

Customer churn is also known as customer attrition, customer turnover and customer loss. Customer churn does not describe a net loss of customers (that would be net customer churn, see below). Rather it describes only the removal or departure of customers. 

Net customer churn

Most organizations acquire new customers at the same time as losing others. The balance of these two variables has a major influence on business growth. Typically only a net increase in customers will support growth. By the same token, only a net loss will significantly impact top line revenue.

So why isn’t net customer churn the better metric? Often organizations can overlook customer churn when things overall are going well. A period of positive growth can effectively mask the fact that customers are churning. This is why measuring customer churn is a better idea.

The leaky bucket effect

The process of losing customers while also acquiring them is known as the leaky bucket effect. The lesson of this analogy is how much more inefficient it is to add more water (customer acquisition) than plug the holes (customer retention). 

Measuring customer churn is critical to avoiding this inefficiency and, by doing so, achieving stronger growth. By determining how many customers are churning and why, organizations can focus on addressing the issue and its drivers. This avoids the tendency to blindly push more resources into customer acquisition. There are many reasons why retaining customers is at least as productive as acquiring new customers, including:

  • Not having to acquire customers removes costs of sale/customer acquisition costs
  • Existing customers are more likely to repurchase, try new offerings and forgive your mistakes
  • Retained customers are a captive audience for additional upselling
  • Having regularly transacting customers enables stable financial planning
  • Loyal customers can more readily become advocates for your brand 

Not all customer churn is bad 

It is tempting to assume that customer churn is universally bad, but this is not true. Being attuned to customer churn in your business allows you to understand reasons why customers leave. This individual-level understanding could throw up one of the following 3 drivers of ‘positive customer churn’.

Unprofitable customers

Some customers are more profitable than others. There could be lots of reasons for this depending on your business. Perhaps the customer is buying very small volumes. Or leaning heavily on your support desk, eroding your margin. Maybe they are situated a long distance away. Losing these customers will be good for your finances. You might even have nudged them toward the exit door.

Poor fit customers

There are other customers that just don’t belong. The most common is the customer that doesn’t value you. Their expectations are out of whack. Perhaps what you offer just doesn’t fit their requirements. Maybe they’re rude and employees dislike dealing with them. The effect is corrosive. They clearly belong somewhere else, and could be in danger of trashing your reputation telling others of their discontent because they don’t understand your value. They certainly aren’t making your team feel comfortable. Like unprofitable customers, you could be happy to see these go.

‘Don’t need you anymore’ customers

The existence of this third group somewhat depends on your line of business. It doesn’t so much apply if your product or service is a source of continual value, no matter what. In many instances, your value is meeting a requirement or solving a problem. And once that problem is solved, you aren’t needed anymore. A good example would be Weight Watchers. Weight Watchers might have regulars that are customers for several years, but  the idea is that the service eventually makes itself obsolete, the customer churns and that’s the end of it.

What is Customer Churn Rate?

Customer churn rate (CCR) is the essential metric for tracking how many customers are leaving you. Specifically, how many as a proportion of your customer base. Customer churn rate is always expressed as a percentage. It also always covers a specific period of time. For example, “a 10% customer churn rate for the last quarter”.

Another thing to bear in mind is that customer churn rate is symbiotically related to customer retention rate. If you have a churn rate of 10%, your retention rate is therefore 90%. This matters because decision makers looking at customer retention and customer churn are looking at the same thing from opposite ends. Addressing customer churn is therefore an essential part of achieving the benefits of customer retention.

Calculating Customer Churn Rate

You need two values to calculate a customer churn rate:

  • Number of customers lost during the period
  • Total number of customers at the start of the period

The first of these (no. customers lost) should be a true figure of those customers who have left. Do not simply calculate this figure by comparing the number of customers at the start and end of the period. If you do this, you will conflate customer churn with customer acquisition and your figures will be wrong.

Once you have the two values above, the equation is as follows:

(No. customers lost in period ÷ Total customers at start of period) x 100

For example, let’s say 45 customers were lost during the last 3 months. At the start of that 3-month period, the total number of customers was 840. 

= (45 ÷ 840) x 100

= 0.054 x 100

= 5.4%

In this example, the customer churn rate is 5.4% per quarter. This figure reflects the current rate at which customers are lost every 3 months. Remember that this figure takes no account of customer acquisition. It may be that the net customer total has increased over the period, despite the churn.   

Why is Customer Churn Rate important?

The value of knowing your customer churn rate is to give insight into customer turnover. This is important for business planning purposes; helping organizations decide how to resource customer retention and customer acquisition efforts relatively. 

Clearly, a high rate of churn is very likely to reduce the overall number of customers you have. This reduces revenues and profitability. Lower rates are less concerning, particularly when new customers easily make up for the ones you’ve lost in a given period.

The other important aspect of customer churn rate is that minor variances can make a big difference. Companies that target reductions in churn do so knowing that it will have a disproportionate effect on business performance. As stated above, measuring customer churn is the first preliminary step to achieving customer retention and all its related benefits. 

Customer churn rate

There are a few further aspects of customer churn that should be understood when dealing with metrics like customer churn rate:

Customer churn rate assumes all customers are equal

Losing 20 customers out of 100 may be no disaster if they are your smallest, most problematic and least profitable. Likewise, losing just your single biggest customer could be terrible news if they’re central to your business finances. Customer churn rate cannot detect these nuances – it treats all customers as being of equal value.

Consider metrics like revenue-adjusted churn rate to uncover the revenue loss associated with lost customers during a period. 

‘Good’ customer churn rates differ industry by industry

Finding out you have a customer churn rate of 10% could feel like a devastating blow. But it all depends on whether that’s high or low for your industry sector. It’s quite normal for credit card companies and wireless operators to report annual churn rates of 20 or 30%. In other sectors, 5% is a better yardstick. Highly competitive markets, and similar products and services that are easy to switch between, tend to be associated with higher churn rates. But some sectors can have outliers that really buck the trend too. 

Consider a detailed competitive analysis of churn rates before determining whether your own is good or bad. Use this baseline to set out a target churn rate and plan to achieve it.

Customer churn rates can be volatile, especially with smaller customer groups

Customer churn rates can be influenced by concerted programs that address customer loyalty and retention. But they can also be affected by external factors beyond your control, like new competition and even seasonal effects. For B2B organizations with small customer cohorts (perhaps 50 customers or so), churn rates can move around quite significantly from period to period. With 50 customers, losing 1 customer one quarter and 5 customers another quarter is just 4 customers difference. But the difference in churn rate would be between 2% and 10%. 

Consider tracking churn rate over time to plot a ‘line of best fit’. This is more reliable to work from than applying the difference between the latest available figures and the period before.

Causes of customer churn

Any study of customer churn must consider the reasons why. This enables future churn to be minimized. Anything short of this is guesswork.

Customer feedback’s role in understanding customer churn causes 

Customers leave for all sorts of reasons, as detailed below. Typically the customer knows which one. Often the organization doesn’t. Asking for feedback from customers is essential to understanding the drivers for churn.

Asking for customer feedback after they churn

Asking for customer feedback at the point customers depart makes a lot of sense from a contextual point of view. An email along the lines of “we’re sorry to see you go but could we please ask why?” is fairly common in such instances. This context is important to the accuracy and relevance of feedback, which should always be fresh. Such insights are likely to be very honest and therefore highly useful.

One downside to this approach is that ‘ex-customers’ have virtually nothing to gain from providing such insight to you. They owe you nothing. They may have a negative view of your business – hence deciding to leave you – and refuse to participate. Most customers leave without telling you why. At least with this approach you are trying to find out. 

The other downside is that you face an uphill battle convincing a customer to stay once they have already decided to leave. The situation is not irretrievable, particularly when equipped with the knowledge as to why the customer left, but it would be far easier to manage if the feedback were gleaned before they left.

Asking for customer feedback before they churn 

It can be hard to know when customers are considering leaving you. A shame, because that would be the ideal time to ask them the reasons why. But just replay that logic a couple more times. Why wait until things deteriorate? Why risk getting your timing wrong? And why can’t ‘asking for customer feedback before they churn’ be the same as simply asking them for feedback regularly?

This is where other uses for customer feedback come in, such as for customer satisfaction (CSAT) and customer loyalty. CSAT measures how happy customers are in relation to the expectations they have. Customer loyalty metrics, like Net Promoter Score® (NPS), measure the likelihood customers will recommend the business to others. These are the proverbial ‘canaries down the coal mine’ of customer churn. They can also be the avenue for asking why customers aren’t satisfied or why they don’t feel like recommending you – long before churning becomes a potential decision for them. We discuss CSAT and NPS, and their applications in customer churn analysis, in a later section.

8 warning signs your customer is about to churn

There are hundreds, possibly thousands, or reasons customers could churn. Many are beyond your control, like the downtown coffee shop that loses local customers when they move out of the area. 

However, some crop up time and time again. And more often than not, there is something you can do about them. Like the 8 below. In each case, we identify what they might look like, before the customer decides to go.  

Customers don’t feel valued

Emotions drive decisions just as much, if not more, than logic and reason. The feeling that someone doesn’t think you’re important can be devastating to that individual’s self worth and status. Customer relationships, just like any relationship, have peaks and troughs. Often there’s a honeymoon period when everything is new and customers are given the red carpet onboarding treatment. This is difficult to sustain over time. Some customers don’t particularly mind, or barely notice. Others will feel a sting of abandonment and betrayal.

You’ve ideally got to know what customers are thinking about this kind of thing. And be sensitive to picking up minor changes that you can address. Use customer feedback to gain the right insights. And don’t underestimate the value of treating customers with courtesy, curiosity and patience.

Customers are tempted by attractive offers made by competitors

It is easy to argue that 100% of churned customers go to your competition. If a customer has a need, someone in the market will meet that need. The question is, how many are being driven to the competition by strong pull factors?

This is where customer feedback research into those who have already decided to leave is valuable. Identifying these issues as early as possible is critical to building an effective response before more customers leave for the same reason.

Customers don’t think your service/support is good enough

If you’re getting complaints about your customer support or customer service, you could be about to lose business. But most people don’t complain, they just endure the pain until their patience snaps. That’s why it’s so important to obtain customer feedback regularly.

Customer support is a great opportunity to interact with customers about the problems they are experiencing. Why else would they contact customer support? Going the extra mile, – even making the experience positive and enjoyable – should be the goal. Customers hate long wait times, poor responses and impersonal or rude service – so avoid these issues. Focus on fixing problems and delivering on promises. 

Customers are put off by how expensive you’ve become

How price-sensitive are your customers? And do you find out by changing prices first and looking at your sales figures later? For some customers, even small price rises can be too much. Sometimes they can’t take the fact that you’ve kept prices the same while your competition has dropped theirs. You won’t know unless you find out through asking for customer feedback.

All too often, the issue is not customers being unable to afford your price. It’s customers being unable to understand your value. In which case an education process is called for. 

Customers find it hard to communicate with you the way they want

Is your organization easy to do business with? Do you make everything effortless? Customer effort is a cost you ask your customers to pay every day. It’s in the processes you operate, the hoops they have to jump through. Everything from reordering on your website to making support requests or checking service delivery. Too much effort and some customers will give up and go elsewhere. Customer feedback can help here, particularly around measuring metrics like Customer Effort Score

And is it as easy for customers to deal with your company digitally as in person? Are email interactions as fulfilling as phone or webchat? These consistencies matter because different customers have different communications preferences. If your phone-based service sucks, don’t be surprised if customers who like to do business over the phone are leaving you in higher numbers than those who don’t.  

Customers no longer think you can help them achieve their desired outcomes

Customer satisfaction is all about meeting expectations. Exceed expectations, even if they are set low, and satisfaction will be high. Fail to meet them and the countdown to churn will inevitably begin.

Finding out what customers ultimately want to achieve is crucial. It allows you to make the connection with why they need your product or service. But every customer is different. Tapping into these motivations is possible through customer feedback, enabling you to set expectations in the way you communicate, and meet expectations in the way you deliver.

Customers feel they were sold on a lie or made a mistake using you

This again is related to the question of expectations. Not every customer will be right for the product or service you’re offering. It’s just as well that, eventually, these customers leave. However, what’s more troubling is the customer who is right for your product/service but who thinks they are a bad fit. Losing this customer would be a great loss, but the situation is recoverable.

It starts by being able to identify these customers through customer feedback. Are their expectations being met? Did they get what they came for? It’s particularly important, when acting on these findings, that you have your customer acquisition and customer retention efforts pulling in the same direction.

Customers don’t understand what drives your brand and what you stand for

The science of brands has a big influence on customer behavior. Brands are increasingly touting their ethical stance on a range of issues from human rights to animal testing, environmental responsibility and social justice. Customers have been shown to react positively to brands that clearly articulate a ‘purpose’ beyond merely making money and delivering shareholder value.

What do your customers think about your brand? What do they think it stands for and does this resonate with them? These questions must ultimately be posed to customers so you can get their direct take. Like with any feedback, do more of what customers like and less of what they don’t. Use customer feedback to narrow down specific improvements that, once implemented, you can validate the effectiveness of by… asking customers for their feedback!

How to Reduce Customer Churn

Reducing customer churn requires a set of disciplines that rely heavily on data. Others are just plain common sense. 

6 strategies to reduce Customer Churn

Here are 6 strategies for reducing customer churn in your organization.

Find out why your customers churn and fix it

To reiterate once again – finding out why customers churn is everything. There are various ways of doing this, each drawing on customer feedback. 

All customer feedback is good, even the negative stuff. Make it as easy as possible for customers to provide you with feedback any time they like and especially when you ask for it. Make surveys short – ideally just a single question at a time. Make them engaging and contextually relevant. Be grateful when customers respond.

Most importantly of all, act upon the feedback you receive. Map the customer journey end to end and make the right improvements where necessary. Use feedback again to validate whether they worked. 

Get the relationship off to the best start

Customers are less likely to churn if they are right for your product or service. This starts before you’ve acquired the customer in the first place; setting the right expectations so they immediately recognize your value. 

Onboarding your customer is also incredibly crucial to the long-term success of the customer relationship. It ensures they have what they need to achieve the outcome they hoped the product or service would facilitate. Welcome packs are a novel way of officially kicking off a new customer relationship with a surprise package containing useful information as well as a thoughtful gift. Good onboarding negates ‘buyer’s remorse’ and pours cold water on the restless potential all customers have of wondering if the competition would have turned out better than you. And it sets the tone of personalized care and mutual respect that you can use as the foundations for strong, long-lasting customer loyalty.

customer thermometer love pack success

Track the right metrics

Remember you’re going for a mix of customer feedback-driven KPIs like CSAT, NPS and CES, together with operational insights arising from your back-office data. CSAT, NPS and CES each have a dual-purpose; to identify potential customer churn and to pursue deeper reasons why customers are dissatisfied, contemplating disloyalty or feeling like doing business with you is too much effort.

Set trigger alerts for all your data sources and learn the signs of impending churn. Standby to respond to feedback of different kinds, in different ways. 

Provide the best possible customer experience

As we’ve established with Customer Effort Score (CES), being easy to do business with is one of the hallmarks of a great customer experience. Other crucial pillars include having an outstanding customer support team ready to help customers when they require assistance. 

Let’s not kid ourselves – it’s not so much that customers love a good customer support interaction. It’s that they hate a bad one. Waiting on hold, having to repeat information, being passed around to people who don’t take responsibility or don’t appear to care. All these things make it easy for customers to churn. Instead you want to make it really difficult.

Today’s customer experiences go way beyond dealing with your staff or using the product. It’s the whole omnichannel ‘brand experience’, from the tone of voice you use on social media to the ethical causes your organization is committed to. Use customer feedback to drill down into specific areas of the customer experience, to give people what they want.

Reward and incentivize customer loyalty

So much attention in customer retention is focused on preventing customers with a reason to leave from going through with it. What about those customers who are loyal and who like buying from you? These are, in effect, your best customers, and the worst thing you can do is become complacent and neglect them.

Instead, there are a range of tactics for rewarding and incentivizing more customer loyalty. Like referral programs that facilitate existing customers prone to recommending you to actually bring new customers through the door. Pay referral fees for each new customer conversion, or provide generous discounts on their next purchases.

Then there’s loyalty programs that grant privileges and status to customer members. Many of these are points-based and increasingly include ‘gamified’ elements that make them fun to be part of. The ultimate objective is engendering loyalty in the form of repeat purchases, making it habit-forming and less likely customers will choose competitors. Loyalty programs should be:

  • Simple to understand
  • Easy to join
  • Fueled by relevant, desired and meaningful rewards
  • Relevant to and inclusive of the brand experience

Listen to changing requirements, tailor to new preferences

Customer churn is a constant challenge. Finding out what makes customers churn and fixing it is a great start, but one you have to keep going or risk losing ground.

In our digitally-dominated world, customers find it increasingly easy to switch between suppliers. This, combined with stiff competition, makes for a tough environment where relevance to customer challenges is paramount. Being able to understand what customers need and those needs change is something else customer feedback can help with. But it has to be nimble, engaging and capable of serving up real-time data insights.

That applies both in general terms – across all customers – and with individuals you wish to offer a more personalized experience to. Customers want to have their expectations met, or exceeded, and be treated as individuals. So upping your customer feedback game is a must.

How to predict customer churn

Finding a reliable mechanism for predicting customer churn is notoriously difficult. The idea is that, by predicting customer churn, you are able to prevent it. That isn’t completely true for two reasons:

  1. The customer may be committed to churning no matter what
  2. Predicting that a customer is about to churn is not the same as predicting why the customer is about to churn. Therefore it may not be straightforward to know how to prevent the churn from happening, even if it has been accurately predicted to happen.

That being said, there are undoubtedly ways of understanding customer churn patterns that can be applied to predict churn events.

The one remaining issue with predicting customer churn is that not all customer churn can be predicted. A customer that never responds to customer feedback requests is an enigma to a churn prediction system. Likewise, one that exhibits the purchasing levels and frequency of a happy, loyal customer but who then leaves for unknown reasons. 

Building a customer churn prediction model

It isn’t easy to predict the future. All you can do is use variables and assumptions that have been repeatedly observed in a large number of past cases. If this data isn’t available, then filling in the gaps is a good place to start. You ultimately need to determine a reliable picture of:

  • The most likely triggers for churn among your customers
  • How triggers may differ according to different customer cohorts
  • What metric readings are associated with customers shortly prior to leaving (for example, an NPS score consistently below 5 or a declining repeat purchase level of more than 75% below normal)

On the last point, a combination of factors will be very important to triangulate factors and increase prediction accuracy. Customer churn analysis really benefits when you use both CSAT and NPS alongside operational insights. For example, a customer with declining CSAT scores who has also just drifted into NPS detractor territory is definitely showing strong churn signals.

All this should enable you to set thresholds for identifying potentially churning customers. Once these thresholds are met, a process is begun aimed at preventing the churn from happening.

Defining the second-stage reaction process is as important as the first-stage ‘engine build’ and may take some trial and error to refine appropriately. Ultimately the response should be rapid, targeted and diligently followed up to ‘close the loop’ and bring the response to its optimum conclusion. 

Customer churn analysis and measurement

There’s more you can do to understand customer churn than just measuring customer churn rate. As described earlier, feedback metrics like CSAT and NPS can be very useful in complementing your evidence base for decision making. The same is true of operational insights such as sales data.

Analysis is important because identifying and sizing your customer churn problem isn’t enough. You need to know the patterns and causes before you decide on solutions. And once solutions and mitigations for customer churn are introduced, analysis will enable you to check whether or not they’re working.

Using CSAT in customer churn analysis

CSAT measures customer contentment; whether they are happy in relation to having their expectations met. Customers with low to middling CSAT rates should be setting off alarm bells. If you’re getting regular feedback, a low CSAT score could be a one-off aberration that deviates from the norm. Whichever, ensure you are pinpointing why the customer hasn’t had their expectations met. Put a feedback response plan in place to apologize for your shortcomings and remedy the issue. 

CSAT scores are also useful in identifying trends over time. For example, certain customers whose CSAT scores used to be high but are steadily declining. This again should be a trigger for action. Your data may also be able to tell you the likelihood of customer churn based on CSAT level. We cover how to predict customer churn in more detail in a later section.

Using NPS in customer churn analysis

NPS (Net Promoter Score®) is a common KPI for measuring customer loyalty. Applying it to customer churn analysis works in much the same way as CSAT in that low or declining scores should be a trigger for action. Again it’s critically important to use the NPS feedback process to uncover reasons why customers gave their specific scores.

The slight difference with NPS is that certain rating levels are synonymous with predefined customer cohorts. These are called ‘promoters’ (scoring you 9 or 10 out of a possible 10), passives (scoring you 7 or 8) and ‘detractors’ (scoring you 6 or less). You don’t want any of your customers to be detractors. And if they are, you need to be taking steps to raise them up to be passives or promoters. Detractors are the most likely to churn. 

Using operational insights in customer churn analysis 

You’d think it would be simple for organizations to measure “having a customer” versus “not having a customer”, or being able to detect when existing customers leave. Sometimes this can be very difficult, such as in retail. Does a customer stop being a customer when they haven’t bought something for 6 months? Getting this definition right for your business is important. A gap of 6 months could be appropriate for a grocery store, but not for a car dealership that mightn’t expect to see their most loyal customers returning inside 2 years.

Repeat purchases are a useful data source for customer churn analysis. Clearly it helps if you have a way of tagging purchases to specific customers, such as via customer accounts. There’s bound to be even richer data available in your systems to go even further. Such as monthly purchasing levels, so you can look for signs of decline over time (another potential churn signal). 

Going beyond financial accounting and sales data, there are other sources you could look at. In your support department for example. Is your time-to-resolution declining for a particular customer? Who is making more support calls per month than average? And do these customers have anything else in common, like location, age, company size or purchase type?

Determining which customer churn remediations work

Much of the customer feedback and operational insights you obtain and analyze will inform improvements that benefit all customers. For example, learning more about deficiencies in your onboarding process to improve it where necessary. Sometimes, however, the necessary actions are much more tactical. Analyzing these tells you how to create repeatable practices that can be brought to bear when customer churn triggers are detected.

Let’s take the example of a large hotel with 500 rooms. Everything runs smoothly and customer satisfaction is high. Processes have been optimized in response to customer feedback and many ‘old’ mistakes are no longer made. But occasionally, when the hotel is at full capacity, there is a problem with check-out timings that mean a new guest might have to wait a little longer in the lobby than expected. Some customers who are tired after a long journey will hate this so much they will never want to use the hotel again. The problem is rare but has come up enough times to have learnt what works and what doesn’t. 

What doesn’t work is giving the guest a $50 gift certificate to use on their next stay. This does nothing to prevent them from churning. What does work is telling the guest you’ve reserved a seat in the bar and they are welcome to a complimentary drink and bar snacks until the room is available. It isn’t perfect but most guests feel pretty good about it and forgive the issue.   

Revenue churn rate

Revenue churn rate looks at the financial impact of churn instead of numbers of customers lost. This is useful to placing customer churn rate into context. For example, an organization may have the same customer churn rate for two successive quarters. However, revenue churn rate may be different and, if so, will reveal the financial implications to the business.

The metric is best applied in situations where the customer makes regular purchases, potentially in line with a retained contract or subscription model. One of the measurements often used in calculating revenue churn rate is MRR, or monthly recurring revenue.

To calculate gross revenue churn rate, simply divide the amount of recurring revenue lost during a period (due to customers leaving) by the total recurring revenue booked at the beginning of the period.

Gross revenue churn rate = (Recurring revenue lost during period ÷ Recurring revenue at start of period) x 100

Let’s say the MRR at the start of the month was $50,000, and at the end of month was $45,000: 

= (50,000-45,000 ÷ 50,000) x 100

= (5,000 ÷ 50,000) x 100

= 0.1 x 100

= 10%

If revenue increased during the period, the churn rate would be negative. Let say the MRR went from $50,000 to $53,000 in the month:

= (50,000-53,000 ÷ 50,000) x 100

= (-3,000 ÷ 50,000) x 100

= -0.06 x 100

= -6%

How to calculate how much losing a customer costs

There are multiple theories of calculating the cost of a lost customer. One thing’s for sure, it will likely be unique to your business.

It all depends on how you approach the question, particularly the definition of ‘cost’. Because there isn’t technically a cost, as in a payment or fine, to losing a customer. It’s a case of how much revenue the organization stands to lose out on in future – and getting an accurate measure of that.

Ultimately the organization is going to want to replace that customer with others. In which case, a sensible approach would be to calculate how much it would cost to restore equilibrium by identifying and acquiring a customer of equivalent value. That really does represent a cost. What we’re left with is two approaches:

  1. Calculating how much revenue the customer would have provided if they hadn’t left
  2. Calculating how much it would cost to adequately replace the lost customer

Lost revenue of lost customers

As we explored with revenue churn rate, it’s possible to put a figure on the recurring revenue that individual customers contribute. This isn’t easy if the customer relationship is informal rather than contractual or habitual. A more universal calculation is ‘customer lifetime value’ or LTV. 

Customer lifetime value (LTV)

LTV is calculated by determining a customer’s known revenue contribution over a short interval and extrapolating this over the estimated lifetime of the customer. By the way, this is not their physical ‘cradle to grave’ lifetime; we mean the time they will last as customers!

Organizations typically find it easier to determine an average LTV for all customers, or to segment customers into cohorts with shared characteristics and determine averages for those. For example, a dry cleaning business:

  • Average customer spend per purchase = $25
  • Average purchase frequency = Every 4 weeks
  • Average customer value per year = $25 x 13 = $325 (since purchases occur 13 times per year).
  • Average customer lifespan = 4 years (line of best fit determined from business experience; many customers have been coming for over 10 years, others are less loyal).
  • Customer LTV = 4 x $325 = $1,300

If a customer had been using the dry cleaning business for 2 years (half the projected lifetime) and then left, the total lost revenue could be approximated as 50% of $1,300 ($650). 

Cost of replacing lost customers

The primary metric when considering the cost of replacing customers is customer acquisition cost (CAC). This is a measure of total sales, marketing, advertising and promotional costs during a period divided by the number of customers acquired during the same period. Let’s say for the sake of example, the average CAC is $50. 

Does this adequately reflect the cost of replacing that customer? Well not quite, and this is where more specific analysis may be needed. The CAC will be higher for certain types of customers than for others. At the dry cleaning business, it may take a lot more time and money to acquire the local football team as a customer for cleaning their uniforms, than an individual who occasionally launders their eveningwear. The CAC for one could be $500, and $5 for the other.

Total cost of lost customers

Arriving at a total cost of losing a customer depends on your outlook. If you want to factor in the lost revenue from customers prematuring ending their relationship with you, it could make sense to add this to your CAC calculation. And averages might be appropriate in most cases, but in others it could be worth getting really specific about the hole a given customer has left in your finances.

Start Getting Customer Feedback to Stop Churn

Give Customer Thermometer a try and start sending customer feedback surveys in minutes. Our free trial should give you plenty of opportunities to experiment with fast, effective feedback surveys. We integrate with practically every platform and generate some of the best response rates in the business. Simply fill out the form below to get more feedback to aid in stopping customer churn.