Startups rely on growth for their livelihood as customer growth is a key indicator of a successful business model. But if no one is using a new business’s product or service, there’s a good chance it’s not on the right track.
There are a number of important metrics a startup can use to measure the health of its business.
For example, a Life Time Value (LTV) metric will give an idea of how much a startup can expect from customers over the lifetime of their involvement with the company.
However, if a LTV is low, it could be that many customers buy once and never return. This occurrence is measured by something called “churn”. Churn is the percentage of customers who abandon a brand. Of course, the lower the churn, the better.
Measuring churn rate shows how quickly customers are leaving or becoming inactive. A high churn rate could mean that customers are unhappy. It could also mean that a company will need to spend a lot more money to replace those customers who have jumped ship.
Though sources don’t agree on an exact figure, it could cost a business anywhere from 4 to 10 times more to acquire a new customer than to keep an existing one.
Startups must work harder to reduce churn
David Skok explains that as a new company grows, so does the number of subscribers, customers, and users who decide they no longer wish to do to business with the company.
The resulting loss in revenue requires more and more new sign ups from new customers to replace those who are lost each month. To ensure high profit you want your churn rate to be as low as possible.
That means once you acquire a new customer, you need to do everything reasonably possible to make sure they continue to come back again and again.
All businesses – and especially startups – experience a loss of customers. There is no getting around it. What a business must do (besides everything in its power to not lose them) is to figure out what a profitable level of loss is for the company.
How much churn can it live with?
There are several ways to measure customer churn:
- Total number of customers lost during a specific period.
- Percentage of customers lost during a specific period.
- Recurring business value lost.
- Percentage of recurring value lost.
A simplified churn formula would look something like this:
Churn rate = Number of customers who left / Total number of customers
If 50 customers discontinue doing business with a company, leaving the company with 500 customers, the churn rate would resemble this:
Churn rate = 50 / 500 = 10%
Focus on Customer Engagement
To better understand why customers leave, it’s necessary to measure customer engagement.
Measuring customer engagement for each customer will help you see why some customers don’t churn and what factors influence those who do. Once you have this information, you can begin to address the causes of churn.
To mitigate customer churn, put their experience front and center. Consider designing a survey in order to find out:
- Why your product or service isn’t providing enough value.
- What the main reason is for discontinuing to do business with you.
- How likely it is customers will recommend your product or service.
Remember: measuring customer satisfaction over the entire journey is much more effective than measuring isolated transactions. Mapping customer journeys will enable you to quickly identify problem areas and how you can better assist your customers, reducing any frustration they may experience while increasing their LTV.
Focus on ways to directly interact with your customers. By giving your customers a voice, your startup will more successfully create zealous advocates who will spread the word about your business more loudly and broadly than you can do on your own.