Customer churn measures lost sales as a result of customers who’ve previously made purchases at a business, but now will not return.
To calculate churn, take a random sample of customers from one month and see how many of those customers make a purchase the next month*. The percent of customers who did not come back have “churned” out of the business, and thus you should count their monthly spending as lost sales.
Remember to adjust depending on frequency — if your customers come in weekly (e.g. coffee shop) or quarterly (e.g. jewelry store), measure the affect of customer churn week-by-week or quarter-by-quarter.
Let’s run through a simple thought experiment to see how churn affects a business:
Think of a healthy business like a bucket filled up with water — calculating the effect of churn lets you find the hole in the bucket. Once you’ve identified churn as an issue, you can then figure out what important decisions you need to make to greatly increase the health of your business. For example, say a business finds that churn is increasing — immediately, the following departments can spring into action:
What are other campaigns that I should run to make sure my existing customers come back more frequently?
What do my best customers like about the products/goods/services I sell? How can I produce more products and services tailored for this type of buyer?
How much more should I spend to service unhappy customers and make sure they come back?
How did the changes I made to address customer churn affect overall sales?
Obviously, our above example is a very simple illustration of a fairly complex calculation. That’s why we put together an easy calculator you can use to get an accurate estimate of customer churn.
Don’t forget that every business has to address customer churn. Getting more customers to come back is the most cost effective way to increase sales. From the calculator, you can see how changes in repeat purchase rate would affect the impact of Customer Churn on your business.
As you can see from the calculator, businesses that increase repeat purchase rate see a dramatic increase in sales. Bain and Company found that a 5% increase in retention (i.e. a 5% decrease in churn)produces a 95% increase in profit Thanx helps some of the fastest-growing restauranteurs and retailers do just that.
Please email us us if you have any more questions about improving customer churn and we’ll get right back to you. We’re happy to help you figure out how to grow your relationships with existing customers to increase sales, frequency, and satisfaction.