What is churn?
Churn is the rate at which customers leave your business. It is the opposite of growth, the rate at which customers join your business. Comparing the two tells you whether your business is expanding, shrinking, or stable. (Read more)
How to calculate your churn rate
To calculate your churn rate, divide the number of customers who have left your business by the number of customers that you had at the start of a given period. For example, if you have lost 1,000 customers in the past 12 months, but you had 10,000 at the start of that period your churn rate would be 0.1 which expressed as a percentage would be 10%.
This same formula can be used to calculate churn over any period – a week, month, year, etc. – as long as you know the customers you had at the start and end of it. (Read more about calculating churn)
Churn is a problem
A small number of customers will buy another product or leave your service for unknown reasons, which is anticipated. However, that number is generally so low that it’s imperceptible and is commonly known as “evaporation” because the customers leave quietly without providing feedback. As a general rule, a business will consider a standard evaporation rate to be around 1‒2% of their customers. However, when the number is higher or customers leave suddenly, it’s an immediate indication that there is a problem. This is “churn.”
The acceptable/survivable rate of churn varies from business to business but in general, a 3‒5% churn rate is considered typical. When it reaches 5‒7%, it’s considered threatening. Your business may not be comparable to a household name like Netflix (2‒3% churn in 2020), but how do you compare to your peers? Studies of the Payments Industry indicate that the average churn rate is between 10 and 30%.
These numbers are alarming and are an indication that something is missing from your business model. Even if your business can keep profits stable, your team is working exponentially harder to find new customers to constantly replace those that are leaving.
Though it is possible to offset high churn with high growth, acquiring a new customer is approximately five times more expensive than retaining an existing one.
This means that, at best, you are working hard as you can simply to stay in place. More likely, you are experiencing a slow bleed as larger competitors pick off your customers one by one.
Why you are losing customers to companies that charge more
In recent years, many ISOs have noticed a strange and troubling pattern emerge: merchants who switch to competitors who charge more to process payments. And merchants it’s not as if merchants don’t know what they’re agreeing to. All of these companies advertise their card-not-present pricing clearly on their websites; pricing models that do not account for volume or other factors and do not provide discounts.
Some charge as much as 3.4% + $0.25 per transaction. How do your rates compare? Likely, they are significantly less and yet your customers have transitioned some or all of their payment processing to them. Why is that?
It’s because your competition isn’t competing on price. They are winning because they provide additional value to their customers through the features they have bundled with their software, such as:
- Email reminders
- Payment portal
- Subscription management
- Invoice reconciliation
Businesses use these to speed the collection of funds and automate essential processes. The convenience offsets the higher costs. Do you have similar products or services to offer your customers?
How to lower your churn rate
Companies retain customers by improving their stickiness, the tendency for customers to use a company’s products because of a key benefit they cannot obtain elsewhere. Truly sticky products become so ingrained that the customer depends on them for everyday life.
Smartphones have achieved this level of stickiness. Your competition has as well. Millions of businesses could not function without their software. Or so they imagine.
Chargezoom offers the same benefits: email reminders, payment portals, subscription management, automatic reconciliation. When paired with the merchant rates that your business offers, the combined package could mean a significant increase in value to your customers.
ISOs who partner with us now have a product stickier than anything being offered by the competition. With us, business owners save time, effort, and money. This is an opportunity to ingrain ourselves to an even greater extent than your competition.
Small and medium businesses succeed by carefully budgeting resources. Once they have re-allocated the time, labor, and money freed by our product, they won’t be able to revert to their old software without harming their business. Greater stickiness means less churn and greater profits.