Years ago, I remember my grandmother sitting me down in front of her butter churn. This was repetitive, tedious and even boring work.
In today’s marketplace, some small business owners, executives and sales professionals also engaged in churning. Instead of the end result of butter, the end result of this churning action is lost customers.
To determine the churn rate begins by first identifying how the solution (product or service) is priced. If the solution is a monthly subscription, then the churn rate should be calculated on a monthly basis not the typical yearly basis many firms use.
The churn rate can also be a good predictor of keeping customers. A low churn rate suggests the small business is addressing customers’ wants and needs to the customers’ satisfaction.
Understanding the churn rate is essential specific to keeping customers loyal and potentially can increase word of mouth referrals. The customer research by Frederick Reichheld of Bain & Company revealed a 5 percent increase in customer retention rates increased profits by 25 percent to 95 percent. This research reaffirms other studies that suggest acquiring a new customer is five to 25 times more costly than retaining a current customer.
What is important about the churn rate is it is a leading indicator of the overall sales culture of the organization. Customers are not just lost by the salespeople, but by everyone in the organization and their actions. How many times have you inwardly groaned when confronted with the robotic, automatic telephone recording? Then when you discover a business where the phone is answered by a real live person, you suddenly begin to inwardly smile.
One negative interaction with one employee can send a loyal customer quickly out the door or off the website. As it has been said, people don’t leave companies, they leave managers. This is also true of customers. For the most part they don’t leave companies, they leave because of the employees or the policies enacted by management.
Finally, by analyzing the churn rate, senior executives can determine if potentially they are acquiring the wrong types of customers. Not every customer is a good fit. The goal in customer acquisition is to find the right customers for the solutions being offered.
Yes, it is hard to fire customers especially when times are not good or when times are good. However, those customers who are not a good fit may quickly leave you for a better price, better delivery or better quality. By understanding the true client acquisition costs can support changes in marketing to other internal policies to ensure your small business is attracting the right customers.
Leanne Hoagland-Smith is an author, speaker and executive coach. Her weekly column explores issues that impact the bottom line of firms with fewer than 100 employees. She can be reached at 219-508-2859.