Two of the most important metrics a start-up needs to look at
are customer retention and churn. These figures should be two of your
key performance indicators (KPIs), and getting systems in place early to
track and minimise issues in these areas will set you in great stead
for your business life.
Customer retention
Customer retention is a measure of how many of your customers are
loyal to your brand and return for another visit. Customer retention
only deals with existing customers, with no consideration for new
customers.
All companies spend a lot of money to acquire customers so sometimes
it can be shocking how easily we let them walk away. It costs an
estimated seven times more to acquire a new customer than it does to
sell to an old one, due to factors such as lack of brand recognition,
offering new customers incentives (e.g. a discount) and not having
contact details to initiate a conversation.
Calculating customer retention
First things first, decide on a ‘churn time’, i.e. a period in which
you would expect a customer to make a repeat purchase. Where I work an
average user would be expected to re-order every three months, and in
total we’d expect the vast majority of customers to have ordered at
least every six months before thinking something is wrong.
This will obviously vary by product, so a supermarket’s churn time will be vastly different to a holiday booking’s company.
Next, you simply take whatever date period you wish to calculate
retention for, and compare how many existing customers ordered within
the expected time frame.
For example: to calculate our recent retention rate, we’d look at
existing customer repeat orders in the past three months, and compare
these customers to how many ordered in the three months before.
Customers ordered from Jan to Mar = 500
How many of these customers ordered again between Apr-Jun = 400
Customer retention rate - 400 / 500 = 80%
Customer churn
Churn, sometimes known as customer attrition, is the opposite end of the spectrum, i.e. how many customers don’t
return to your company after making a purchase. Customer churn takes
into account new customers in its calculation, which is a major
difference to retention metrics.
Churn is obviously something you want to avoid, as it’s nigh on
impossible for a business to grow with a high churn rate. Thus it is a
fantastic indicator of whether something is wrong with your product or
service.
Calculating customer churn
Again, the first step is to decide on a churn time as we did above.
Next, ensure you can accurately track the total customers you have
in a given time period. Don’t forget to include all the different ways a
customer can reach you. For example, website, fax or phone orders all
count as conversions in our system even though they are processed and
recorded differently.
Now to calculate! Imagine a company with a churn period of 30 days.
Day 1 - you have 100 customers
During the next 30 days you acquire 30 new customers.
During the same 30 days, 5 of your existing 100 customers do not convert, or cancel a subscription for whatever reason (assumed lost).
Total customers = 100 + 30 - 5 = 125
Churn rate = 5 / 125 = 4%
Monitoring these two metrics gives a great performance benchmark that
you can aim to better each period. If you implement any service changes
or new features, these two KPIs will give you an accurate idea of the
possible benefits to your company's performance. Couple this with some
long-term customer value estimations and you’re well on your way to some
fantastic performance data!
In my next post I’ll cover some easy methods of reducing churn and increasing your customer retention rates.
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