How to reduce customer churn: 5 retention strategies for success

[Updated post from March 25, 2021]

Running a business can often feel like a leaky container. No matter how many customers you pour in the top, that’s always a percentage that keeps running out the bottom.

This is known as customer churn - and it makes sustainable growth a major challenge for brands.

Customer churn is tied closely to customer satisfaction. If your customers are unhappy with their experience, your churn rate is likely to increase.

But by making the effort to understand the causes of customer churn, you’re on track to achieve lasting growth – and happier customers.

In this post, we’re going to define customer churn and how your business can combat it effectively with 5 actionable customer retention strategies.

What is customer churn?

Customer churn, also known as customer attrition, measures how many customers choose to stop buying your product or service over a defined period of time. When expressed as a percentage of your total customer base, this is referred to as your customer churn rate or customer attrition rate.

Depending on your business model, customer churn can take several different forms. If you're a subscription-based business, customer churn refers to the number of customers who’ve chosen to end their subscription. For an apparel retailer, a customer may be classed as 'lost' if they haven't made a repeat purchase within a certain period of time.

In sum, customer retention is the exact opposite of your customer retention rate. The higher your churn rate, the fewer customers your business is managing to retain over time.

Churned customers are a major problem for brands and retailers because they represent a significant amount of lost revenue. By an effort to understand the causes of customer churn and identify at-risk customers, you can work to reduce churn and increase customer lifetime value.

How to calculate your customer churn rate

The simplest way to calculate customer churn is to choose a specific time period and divide the number of customers you’ve lost by the total number of customers over that period.

Let’s say that you’re a subscription box company and want to calculate your customer churn rate for one subscription cycle (a month). This requires you to divide the number of subscribers you lost over that month by the number you had at the beginning.

So, if you started the month with 500 subscribers and lost 30 by the end of the month, your churn rate would be 6%.

What is a good customer churn rate to aim for?

A 5% churn rate is commonly cited as the optimum number for businesses to aim for. But what qualifies as a 'good' or 'bad' churn rate will vary hugely between product categories and business models.

Many retailers, especially those in fast fashion and accessories, can survive and even thrive with high customer churn because they have a huge audience and can spend big on customer acquisition. However, this strategy would be unsustainable for brands with a niche audience or lesser marketing budget.

Ultimately, it's impossible to prevent customer churn - and that's not necessarily a bad thing. Customers will always find reasons or incentives to shop with other retailers. If you play your cards right, one of those retailers could be you.

Why does customer churn matter?

Acquiring customers is expensive

When you’re growing your business, your primary objective is simple: Get more customers.

But this is easier said than done. The more established your business is, the harder it typically gets.

As the e-commerce landscape grows more competitive, customer loyalty is more challenging to come by because customers have so many different vendors to choose from. Moreover, customer acquisition costs start climbing because brands need to spend more on ads and digital marketing to reach their target audience and grow customer engagement.

This is the reason behind the often-quoted statistic that customer acquisition costs businesses around five times more than retention; if you’re unable to retain customers after that initial acquisition cost, your bottom line is going to suffer.

In sum, by focusing on the acquisition of new customers at the expense of building loyalty with existing customers, your customer churn rate is likely to skyrocket.

There’s a much more sustainable strategy out there for online sellers: To increase customer retention by providing current customers with proactive customer service and a positive customer experience.

Why? Because your converted customers don't need much convincing to buy from you. They already know your brand and your value proposition, which makes it easier to encourage customers back into your sales funnel.

Returning customers are your most valuable source of revenue

It's easy for brands to neglect customers once they've converted by moving on to the next sales target. But the longer you can maintain your relationships with existing customers, the more profitable these relationships become.

Once a customer has made a purchase, the chance of them returning to your store increases significantly. After just one sale, there’s a 60%-70% chance of a customer making another purchase, compared to just 20-30% for a first-time customer.

By maximizing your most stable source of revenue – your loyal customers – you can reduce customer churn and avoid getting stuck in a cycle of mounting acquisition costs. Reducing customer churn by even a couple of percentage points will translate to massive revenue gains for your business.

Customer churn can be indicative of poor customer service

If retaining customers is a serious challenge to your business, this is a sign that your customer service strategy may require an overhaul. While there are a variety of factors that contribute to customer churn, a negative customer experience is by far one of the biggest.

According to Forbes, three-quarters of customers reported having stopped supporting a brand due to bad customer service. With customer expectations in e-commerce at an all-time high, shoppers can encounter friction at multiple points in the customer journey. From difficulty placing orders to delays with shipping and delivery, these experiences like these are very likely to result in brands losing customers.

To reduce customer churn, brands need to prioritize proactive customer service and make an effort the re-engage inactive customers who may be waiting for the right offer or incentive to purchase. Your customer service teams are essential to these efforts, especially when it comes to gathering customer feedback.

In sum, offer stellar customer service, and customer churn will likely improve right along with it.

What are the common causes of customer churn?

To reduce customer churn rate, you need to understand what is using you to lose customers in the first place. Common reasons for customer churn include:

Price. If your product or service is more expensive than a customer is willing to pay, they're going to look for a cheaper vendor. This is common in situations where a first-time customer has purchased a product or signed up for a subscription plan at a significant discount and experiences 'price shock' when prices return to normal.

Poor onboarding process. Subscription and SaaS companies need to maintain a high level of engagement with customers after they've subscribed. If it's not simple and clear what customers need to manage their subscription, customize their account, or find help guides, they're going to end their service usage very quickly.

Lack of engagement with complaints/customer feedback. Customers feel that their experiences matter to the businesses they support. If all they receive after providing feedback is video silence, they're unlikely to respond positively and may decide to abandon the brand altogether.

Poor customer service. As we discussed above, a lack of attentive customer service is a major turn-off for any customer who may have considered purchasing from you again. Customers leave brands when customer support teams are unable to solve issues promptly, or when they put an undue burden on customers to solve issues themselves.

5 Strategies to reduce your customer churn rate

1. Loyalty rewards and memberships

If you want customers to keep supporting you in a highly competitive marketplace, you have to make it worth their while. You won’t have to look far to find someone willing to undercut you on the same or a similar product. This means you need to offer incentives other than price to entice customers to stay loyal and reduce customer churn.

Loyalty reward programs are a fantastic way to reward your most valuable customers for frequent purchases and other desirable behaviors, such as leaving customer reviews or following your brand's social media channels. But to offer genuinely useful perks, you need to think outside of the discount-based 'earn and burn' programs that don't offer customers an incentive not to churn once rewards are redeemed.

For example, you could offer a paid loyalty program that gives customers access to more advanced rewards, such as free shipping, product samples, or early bird access to sales, in exchange for an annual fee. When customers make this commitment, they’re much more likely to make frequent purchases to maximize their investment; studies show that 62% of consumers are more likely to spend more on the brand after subscribing to a paid loyalty program – double the rate of free loyalty programs.

2. Don't rely on flash sales or steep discounts

Flash sales are a very useful tool in e-commerce to boost sales and brand awareness. However, relying too heavily on steep discounts to acquire customers can come at a price.

An unfortunate side-effect of flash sales is that brands can end up attracting the wrong kind of customer. If customers are more loyal to low prices than to your brand, this can result in high levels of customer churn.

Instead, make sure that your discounts are targeted at loyal customers via discount codes in email campaigns or via loyalty program perks. This reduces customer churn by making sure that you're not targeting shoppers who are likely to be one-time buyers.

For more on how to avoid the pitfalls of flash sales, check out our full guide.

3. Identify inactive customers

There's an important step that happens before customers churn; they become inactive.

Inactive customers are those who haven't purchased from you in a while or chose to end their subscriptions early. They no longer respond to your marketing efforts and are on verge of dropping off the radar altogether.

But what separates inactive customers from lost customers is that with the right engagement, you have a chance of winning them back. By identifying customers who are at risk of churn, you can reduce customer churn and boost customer satisfaction with your product or service.

There are a range of different ways you can re-engage at-risk customers. For example, SaaS companies can use in-app messaging to draw attention to new features or tools that users haven't come across yet or offer customers the chance to re-activate their subscription at a steep discount. For retailers, it's important to make an effort to touch base with customers once the sales cycles has ended, such as by sending an email recommending companion products.

4. Proactive communication

Effective communication is the backbone to excellent customer service in e-commerce. When consumers can’t talk to you face-to-face, they expect to be able to connect with your customer service department seamlessly.

But if customers cannot get queries answered effectively before and after purchasing, they’re going to drop out of your sales funnel in huge numbers.

For example, if a customer's order hasn't arrived by the promised delivery date, they’ll want to contact your customer support team as quickly as possible. Adding a live chat function to your website allows customers to register problems quickly with a customer service representative for speedy resolutions.

Issues such as late or missed delivery are major faux pas in e-commerce that relies on seamless communication to resolve. But if you’re able to address these problems effectively, this will go a long way to reducing customer churn rate.

5. Ask for customer feedback at regular intervals

There’s little point in tracking your customer churn rate if aren’t making the effort to find out why churn is happening. The key to reducing customer churn is understanding what points of friction are occurring in the customer journey -and this comes from asking your customers.

While negative feedback is might be hard to hear, your customer success team must make space for customers to share their experiences. By showing that you genuinely value and incorporate customer feedback, customers are more likely to 1) share feedback and 2) stick with your brand because they have faith that issues will be resolved rather than ignored.

You can garner valuable customer feedback by:

• Asking customers to leave a review after they've received an order/renewed their subscription.
• Sending NPS surveys via email/web visits
• Asking customers to rate their customer experience after their support ticket has been resolved.
• Soliciting feedback about your product or service via social media
• Adding a comment or multi-choice section so customers can explain why they are ending their subscription.

By building a better picture of the causes behind customer churn at your business, you can come up with effective strategies to combat it.

Customer churn is a disappointing but unavoidable part of being a business. But making the effort to investigate the causes of customer churn and resolve friction in the customer journey puts you in a much better position to reduce customer churn - and build a stable base of repeat loyal customers.