Five Key Reasons Why Customers Churn
by Mark Adams, on 25-Jan-2019 11:56:04
Customers and subscribers stop buying from businesses because they are usually unhappy with the product or service on offer. The rate at which they leave is called customer churn.
A small improvement in churn can have a huge impact on revenue over time. If retention rates rise by 5%, profits can go up by as much as 25-95%, reveals a Harvard Business School study. Plus, the larger the company and the bigger the subscription base, the more impactful the final numbers will be. In the UK alone, avoidable customer churn (where customers have success potential, but leave anyway) costs businesses £25 billion per year (approx.US$32 billion) according to new survey findings.
A small reduction in churn can:
- Increase customer life-time value
- Promote more referrals
- Facilitate cross-sell and up-sell
“Retention is the core of your growth model and influences every other input to your model,” says Brian Balfour, CEO of Reforge and former VP of Growth at HubSpot. This is why it’s crucially important to identify why customers defect. Most of the time they cancel for a reason, and while some of these reasons may be beyond the organization’s control, a lot of them can be addressed.
Here are five of the main reasons why customers churn.
1. Customers Have a Negative Perception of the Company or Service
Customer expectations are being set and ramped up by the biggest brands. Aside from quality of product, customers want easy and effective solutions – fast. This means that clunky, bureaucratic, error-prone processes are rapidly becoming outmoded, and (understandably) unpopular. In fact, nearly 60% of all business processes in the UK and the US could be automated by 2022, say Redwood Software and Sapio Research.
Automated systems have transformed the buyer experience. Think of Amazon’s online marketplace and its ease-of-use. Customers search, view, buy and manage their products and services with minimal effort and optimum reward. An overwhelming 90% of customers now expect brands and organisations to offer them an online portal for self-service.
Automation and self-service work well for the financials of businesses too; freeing up staff, capital and time that can be better spent elsewhere, including, pertinently, optimizing the customer experience to make users happier and ‘stickier’.
Customers have a negative perception of a company or service if:
- There is a serious problem with the product or service.
- Business processes are too slow, error-prone or cumbersome.
- They receive what they see as sub-standard levels of support.
- They feel that they are not being treated fairly (e.g. prices are too high or have increased while the service remains the same).
- There is no reward for renewing/loyalty.
2. Lack of Engagement
Customers are unlikely to renew their subscriptions if they aren’t engaged with the products or services on offer. Across SaaS, for example, approximately one-third of software licenses go completely unused – this can amount to huge numbers in lost capital.
A four-year study conducted by software and services company,1E, found that companies lose approximately US$259 in unused software per desktop. The global average came to 37% waste per company. Education companies topped the chart as being the most wasteful at 47%. The least wasteful were pharmaceutical companies at 18%. Tracking who is using what and re-assigning unused licenses or subscriptions forms part of the solution. Selling the right products, services and support from the outset (rather than selling for selling’s sake) also keeps clients engaged from the beginning, and for longer.
Engagement is also of course promoted through upsells and cross-sells, and if you’re a recurring revenue business, most of your revenue comes afterthe sale. This means that the advantages are two-fold; the more your customers buy from you, the more reliant they become on your products and services, which translates to (1.) more revenue and (2.) less churn.
3. Inconsistent Organizational Behaviour
Every customer wants a good, predictable and dependable service. If they don’t get this, they’ll move to another provider.
As companies scale in size, managing the growing number of products and services and customers gets progressively harder. If we refer back to SaaS, and in this case the selling of a SaaS app as an analogy, each app comes with a contract, a fee, a renewal schedule, licenses and system requirements. Multiply this times every cloud service being sold and you can see why SaaS management can become extremely challenging.
If an organization isn’t able to keep tabs on what’s being bought, how much it cost, who is buying it, product usage/performance, and so on, the customer experience may suffer, and with it the business’s credibility.
4. Missed Renewals
Many users churn simply because they haven’t renewed their subscription or service. Implementing a system that can keep track of and communicate when a renewal is due to the sales team and to the customer can save a company a fortune in lost revenue.
Revenue is not just lost because the customer hasn’t renewed to extend their payment for a product or service. Often services continue being provisioned after the contract has elapsed. This is especially problematic for online resellers who have to pay a vendor or supplier every month. It’s not uncommon for companies to lose tens of thousands of US dollars for as few as two customers who continue receiving a service they haven’t paid for (for weeks (or more)) simply because the end-date wasn’t flagged. Moreover, companies often feel that they can’t go back to their customers to request monies owed since the failure is theirs.
Efficiently managing renewals, not only reduces churn – it also reinforces consistent organisational behaviour.
5. Pricing and Billing Mistakes.
Customers want billing to be flexible, easy and, very importantly, accurate. Customers’ faith, and therefore their loyalty to a company will be shaken if they receive invoices that list products and services they never ordered, or totals that are incorrect.
The recurring nature of a subscription business in particular (with its repeat billing cycles), makes invoicing, payments and revenue recognition almost impossible to achieve manually without error and this is why more businesses are choosing automated billing.
Pricing products fairly is also crucial to reducing churn. And, as mentioned earlier, customers want to be rewarded for renewing. Having a system that allows you to flexibly view and modify pricing, be it on an individual or bulk basis and according to customer preferences/needs, or according to their buying behaviour promotes user stickiness. The system, with a little input from sales perhaps, can recompense customer loyalty with offers that, either add value or discount price.