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How Churn Prediction Helps Reduce Customer Loss

News and Trends

9min

11 May 2022

Kristina

Kristina Shkriabina is a marketer who spent most of her professional life working as a journalist. She believes that content should be high-quality, original, and genuinely helpful to people. In her free time, she leads book clubs, keeps houseplants, and enjoys skateboarding.

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Customer churn is expensive and substantially negatively affects your business growth. Even a tiny increase in churn rate higher than your industry average stops you from winning the competition and taking an already successful product or service to the next level 🚀

And vice versa – a 5% increase in customer retention can increase profits by 25% to 95%, according to research from Bain & Company. That fact pushes us to explore customer engagement strategies. But you can’t build them without understanding the reasons behind attrition rates, as well as without targeting the right audience.

Customer churn prediction is the first and foremost step on this path ☝️

With this technology, you will be able to identify those most likely to cancel subscriptions or close accounts BEFORE they become lost.

This article will give you a clear view of customer churn prediction and prevention, specifically on how:

🔘 to calculate customer churn

🔘 to define customers at risk to be not renewing with you

🔘 to find the reasons why people are leaving

What is churn prediction?

Customer churn(also known as customer attrition, customer defection, or customer turnover) is the percentage of people who stopped using your product or service during a certain time frame.

You can calculate your churn rate by dividing the number of customers you lost during a specific period by the number of customers you had at the beginning of that period.

For instance, if you start your year with 700 customers and end with 650, your churn rate is 7% because you lost 7% of your customers.

💡It’s one of the most vital metrics for a SaaS company to track because it gives you the ability to predict that a particular customer is at risk of churning while there is still some time to do something about it.

It’s super important to catch this moment because it costs 6–7 times more to acquire new customers than to retain the existing ones. Furthermore, the probability of selling to an existing client is 60-70% and only 5-20% to a new prospect.

But that’s not all.

The KPMG claims that customer retention is the primary driver of a company’s revenue.

What are churn rates across industries?

Churn rates vary much across industries and even sectors within them. With different data pointing only towards customer turnover rates among B2B SaaS companies and subscriptions, retailers often struggle to reach exact amounts.

Typically, B2B businesses get average churn rates of around 5% compared with the 7.05% for B2C companies.

As you can see, an acceptable churn rate for SaaS companies is near 5% annually.

Bessemer Venture Partners, an investor in SaaS businesses, states an acceptable churn rate for these is in the 5 – 7% range annually (0.42 – 0.58% monthly).

However, rates vary depending on the company size. Thus, Venture Capitalist Tomasz Tunguz says that small and medium-sized enterprises (SMB) customers tend to go out of business more frequently than bigger businesses. That is why an acceptable annual churn rate, in this case, is 31%-58%.

The numbers for Mid-Market are 11%-22% (1-2% monthly) and for Enterprises 6%-10% (0.5-1% per month).

Is the loss of current dollars the only concern when a customer is lost?

No, it also can ruin your planning and even damage your brand. It’s reasonable for an unhappy client to leave a bad review. And the more dissatisfied people are, the more negative word of mouth you receive.

For these reasons alone, you should try to repair relationships with your clients. And you can start by running a churn prediction analysis.

What is churn prediction analysis?

The customer churn analysis is a way to turn customer attrition rates along with sales and retention metrics into meaningful results.

It will help you:

✅ identify clients who are least likely to continue their contracts

✅ detect key stages in the customer journey where people are falling off

✅ develop strategies to retain high-risk profiles

☝️While SMBs may be able to process this information manually, larger businesses need more robust methods to track the customer journey. When paired with a customer relationship management (CRM) system, customer churn prediction software can quickly analyze the data on a regular basis.

A CRM system collects information about prospects and customers like:

✅ identity data

✅ lifestyle details

✅ measurable data points on how your contact has interacted with your brand

✅ motivations, attitudes, and behaviors that relate to their buying decisions

After capturing data, the CRM platform groups it into customer profiles, assigning a level of sales-readiness. This feature is prominent not only for lead scoring and lead nurturing but also for identifying your customer’s next move.

Thus, some CRM software deploys Artificial Intelligence (AI) to flag any customers at risk.

For instance, recently, CRM #1 – Salesforce – launched a new feature that uses AI and analyzes all the data in one click – Salesforce Churn Predictions.

HOW IT WORKS 🤔

Using AI, Salesforce Churn Predictions processes customer data and combines it with external data, such as billing and data usage.

It then uses all that information to develop a predictive view of subscribers, such as:

✅ if they are happy with the service

✅ if there is any indication they may leave the provider

For example, if a particular user posted about a negative experience with your brand on Twitter, your CRM tool can incorporate this information into churn prediction algorithms.

Moreover, algorithms can predict the factors affecting the customers and study future churners by analyzing their behavior. This is a MUST for understanding the most likely causes of customer dissatisfaction.

Why customers churn

Most people don’t just wake up one morning and decide to cancel. Instead, they quit for a reason. While some causes are out of your control, some are addressable.

Below we’ve picked out the top-3 reasons for customer churn and laid out tips to improve customer experience.

Not providing value

Customers don’t churn because the price is too high or their budget got cut. Instead, they leave because the value is too low, and they no longer want to pay for non-essential services or products.

But how do you measure VALUE exactly? You don’t. Your customers do, and you have to listen to them and think about their pain points.

Keep asking yourself: “What are the biggest challenges you build this product for?” 🤔

If your solution is personalized, customized, and unique compared to potential alternatives, you have everything to start providing a great customer experience.

☝️However, remember that DELIVERY matters. Thus, all Customer Management Processes like onboarding, nurturing, establishing loyalty programs, building community, and asking for feedback are essential for creating more customer value.

Poor customer service

The most prominent reason customers leave is not because they found a better price. Instead, 68% of customers go because they are upset with customer support, reported the U.S. Small Business Administration and the U.S. Chamber of Commerce.

Another piece of data to prove this point is from McKinsey. 70% of buying experiences are based on how people feel they are being treated.

When problems occur, clients don’t want to wade through a massive knowledge base or chat with a bot on your website. Instead, they want to talk to real people who can help them.

Unfortunately, bad customer service can often lead to high churn. But there are countless ways you can go about fixing it, depending on the particular problem.

So, we advise you to start by collecting feedback and addressing specific issues. After establishing the source of the customer dissatisfaction, you will see the direction for future tasks. In the end, your customer support should be a priority.

Attracting the wrong audience

It’s astonishing how often people sign up for a product or service without knowing whether it meets their needs. And when they discover that product or service isn’t tailored for them, they’ll resign a contract and choose another company 😐

Moreover, even companies themselves don’t know who their ideal customer is. So instead, they just target a broad demographic in the hope of attracting their ideal customer. As you can imagine, this tends to be a recipe for disaster.

To avoid this scenario, you need to know who you’re targeting and why.

Here are 4 steps to ensure you attract the right customers:

1️⃣ Create a buyer persona and narrow down the range of customers you’re targeting by disqualifying leads who are not a good fit.

Leads are your contacts who can become your customers one day.

The buyer persona is a detailed characterization of someone who represents your target audience. This persona is unreal but based on deep research of your existing or desired audience.

2️⃣ Find out which channels fit your target audience and use them for engagement.

3️⃣ Set up lead nurturing, educating, supporting, and building meaningful relationships with your clients at every stage of the buyer’s journey.

Lead nurturing is an ongoing valuable engagement with your contacts through all stages of the buyer’s journey. It shines a light on your products or services.

4️⃣ Build a thriving customer community, providing additional trust, insights, networking, and support.

Once you create an environment where the brand and customers can come together to share opinions and get to know each other, it will create bonds that make your solution unique. In addition, a community like this will push the right customers to join.