Customer churn is the ongoing process whereby individual customers abandon the purchase of a company's products or services. Customer churn is characterized by the churn rate, which is defined as the ratio between the number of customers who churn in a given period and the number of customers who use the company's services in the same period.
Since customer churn is a negative phenomenon that can cause significant financial damage, companies consider, monitor and analyze the customer churn rate as one of their key business indicators. This is especially true for companies with a contractual and transactional business model that involves regular payments from customers. These include banks, telecommunications and cable TV operators, car service providers, insurance companies, retail chains, etc.
Since the cost of retaining an existing customer is much lower than that of acquiring a new one, companies in these sectors often set up customer service departments tasked with retaining existing customers and bringing back churning customers. To this end, companies develop special "retention" contract forms, which, for example, provide for additional costs for early termination or, conversely, rewards for long-term cooperation.
Three types of customer churn can be distinguished.
- Change of residence;
- Change in needs (e.g., children's stuff becomes irrelevant as the child grows up).
Dissatisfaction with the level of service provided or the quality of products;
Found a company where the cost of similar goods or services is lower for the same quality;
Found a company which provides a higher quality of service at the same cost;
Customer has stopped using the products or services offered by the company altogether (e.g., quit smoking).
A gradual decrease in the volume and regularity of consumption of the company's products:
- parallel use of competitors' services;
- use of substitute products.
Considered strictly, latent churn is not churn in the actual sense, since the person is still a customer of the company. However, most churn customers first reduce the proportion and regularity of their consumption before eventually ending their relationship with the company.
The reasons for customer churn vary by industry and company specifics. However, a number of reasons for customer churn are common across all industries.