Why customer churn is a huge deal
If you have P&L responsibility, how does customer churn impact your bonus? If you are a multi-product and product + services company, how important is it to know which products or services are no longer being purchased by customers? If you are the Product Manager of a declining area, it is all about your career. If you have broad responsibilities, it is also critical; how else will you know which profit contributors are starting to decline, how bad the situation is, and when to invest or kill the weakening line?
Calculating customer churn
But before we begin this discussion, let me explain, at a high level, the steps needed to calculate the annual customer churn rate:
- Identify all of your customers as of Jan 1
- Identify all of your customers as of Dec 31
- From the second list, eliminate all new customers for the year in question
- The second list should be the same or shorter than the Jan.1st list, or you did something wrong
- The customer churn rate is the difference in length of both lists divided by the size of the Jan 1 list, expressed as a percentage.
In addition to looking at your customers as a single group, you should also segment them by products and services used, geography, and financial and strategic importance to your company. This is because by just looking at continuing purchases, you will fail to identify people that have given up on one or more of your products and services while still buying others. Drilling down is always critical to gain insight from your data!
This is where it gets exciting. Suppose your company designs, manufactures, sells, and services medical devices like blood and urine analyzers. If your customers potentially have one of each instrument and you provide service on both products, then you have to look at the customer churn rate for four product lines; blood analyzer product, blood analyzer service, and the same for the urine analyzer. And if you sell and service in multiple countries or areas (e.g., Americas, EMEA, APAC), the possibilities rapidly increase. But using Excel, this does not sound like a daunting task.
The major obstacle to overcome is the integrity of your customer database. Most companies periodically attempt to cleanse their customer records and eventually give up in frustration. Common problems include:
- Duplicate entries – easy to fix
- The same business is listed under different names due to mergers, re-naming, and data input errors.
- Same products identified with different names or model numbers caused by assigning unique part numbers for variations of the same primary product
- Different product and service databases caused by not recognizing that revenue comes from customers, not products or services and, hence, not aligning databases with the customer base
- Missing data because data integrity is not anyone’s responsibility and is not viewed as a corporate asset
Here is a short example. I was once our company’s Vice President of Manufacturing and wanted to streamline our supply chain by minimizing our number of distributors. The challenge was that our Engineering department assigned part numbers sequentially, so the same basic part, with different values, had part numbers that did not even indicate what it was. We had to redo our parts list to include a field for family, e.g., IC, resistor, switch, and gear, so that we could sort and group parts to offer packages to distributors for quoting. This was a significant effort, but the ROI was fantastic!
Data and your customer churn strategy
The best way to begin this part of your customer retention strategy is to assess the quality of your customer database.
- Purge duplicate entries
- Ensure you have enough information to segment the base meaningfully or add fields supporting your efforts.
- Estimate the accuracy of the primary data. The key word is estimate. Sampling is the magic bullet here. This table shows the sample size needed to achieve a specific Margin of Error (±) at 95% confidence:
Once you have gotten this far, you know how large a hill (not as large as you probably thought) you must climb, so you may as well start your database cleanup efforts now because procrastinating will only worsen it. Then calculate the customer churn rate for each segment and start creating and implementing individual retention plans for each segment.
This is not glamorous work, but you will be amazed at the insight you can bring to the table the next time sales and revenue strategies are discussed.
Related article – Understanding Churn, Retention, And Sales Rate Metrics
About Middlesex Consulting
Middlesex Consulting is an experienced team of professionals with the primary goal of helping capital equipment companies create more value for their clients and stakeholders. Middlesex Consulting continues to provide superior solutions to meet the needs of its clients by focusing on our strengths in Services, Manufacturing, Customer Experience, and Engineering. If you want to learn more about how we can help your organization minimize the risk of churning your customers, please contact us or check out some of our free articles and white papers here.