Churn — how many customers is it really costing you?

Last month, I created this poll on how a 1% pt. per month improvement would affect the total customer number in 3 years. In this thought exercise, 85% of the audience correctly identified that this would result in a 40% increase in customer numbers. How can this be? But it was only a 1% difference?

Comparison of customer numbers over three years Case 1 (3% churn) Case 2 (2% churn).

The best way to illustrate this is through a simple model. Let’s assume that we started with 1000 customers.

After one month, we gained 50 new customers (5% of 1000).

Case 1: At 3% churn, we lose 30 customers (3% of 1000). The closing customer number is 1020.

Case 2: At 2% churn, we lose 20 customers (2% of 1000). The closing customer number is 1030.

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In the subsequent month:

Case 1: gains 5% of 1020, or 51 customers, and loses 31 (3% of 1020) customers. Net customer at the end of the month is 1040.

Case 2: gains 5% of 1030, or 52 customers, and loses 21 (2% of 1030). The closing customer number is 1061.

Simple model projecting customer numbers at the end of each month for the first 12 months

This example demonstrates the two ways that lower churn can affect overall customer numbers:

a) losing fewer customers — this one is obvious

b) gaining more customers due to a great customer base.

The latter is less obvious but is extremely powerful. The difference is even more pronounced as time progresses.

By month 36:

Case 1 lost 59 customers, and Case 2 lost 55. The difference is only four customers.‍

However, Case 1 acquires 98 customers, whereas Case 2 acquires a whopping 137 customers.

This is all caused by the compounding effect of a higher customer base. Accumulate it over 36 months, and the difference is huge.

But why aren’t businesses paying more attention to retention? What can businesses do to keep more customers? Stay tuned for more posts on retention.