Customer churn

ByMaki Pa 2022-09-122022-09-13

How mamy of you are fiercely fighting for customers and then loosing them. That is annoying.

Churn rate

Churn rate is how many people are removed or suppressed from your email list (includes unsubscribes, bounces, manual removals, or even unengaged subscribers).
Churn rate = (monthly churned subscribers / list size at beginning of month) x 100

Chur rate is how mamy customers discontinue purchase from you or stop other activity you are controlling or you are set up business on it, e.g.: reading your blog.

An example of customer churn calculation. Company started with 3,839 customers on board in the end of January 2022 and then continue with 2,492 in end of February. This means they are running with churn rate 35%. During the month they acquired 1,487 new customers, what means acquisition rate 37%.

Acquisition cost

Regardless of your monthly revenue, if your typical customer doesn’t stick around long enough for you to recoup money you spend on customer acquisition then you unprofitable. That is why you have to know average acquisition cost in your business.

Customer Acquisition Cost (CAC) measures the cost spend on converting a contact (potential customer, lead) into a customer. CAC is the total costs spent for sales and marketing activity required to start a new customer buying in your company, or your offer, e.g. reading your blog.

If your marketing spending works efficient, you don’t have to dedicate as many resources or add spend to generate new customers. When your blog content is high in organic search all day you win customers without paid adds. If your offer, your products, loke e.g. coca-cola is constantly on demand, you don’t need to hire additional marketers to leverage you customer win rate. This is the secret of great brands.

Any how, you have to know how much you are spending for prospecting and how mamy customers this activity brings? If you spend $10,000 and this gives you 100 new customers, then your CAC is $100. This also means that minimum sales you have to generate on this customer is $100 / your margin. So, if you have 20% margin, then minimum sales is $500 in one or several transaction. If it is long that is worse for you and customer is going to be unprofitable.

If you can retain and cultivate relationships with your happy customers, they will help generate new customers by writing marketing content, reviews, serving as case studies, telling their opinions to friends and family. They become your external resources earning new customers free of charge. Like coca-cola lovers, they share their passion to friends during party, pizza days etc. which is lowering your customer acquisition cost. This lead us to customer lifetime value (LTV)

LTV – Customer lifetime value

To analyze the relation of customer acquisition cost in terms of customer retention in time period for profitable business with the customer is a customer’s lifetime value (LTV). LTV is the predicted revenue that the customer will generate throughout their relationship with a company.

To calculate LTV, you’ll need a few variables to plug into the formula: Average purchase value * Average purchase frequency (= what gives you customer value in time period) * Average customer lifespan (= a predicted number of years a customer will continue purchasing from your business).

Thus, if your business’s LTV to CAC ratio is low, like 1:1 or something that you are running unprofitable. It depend on industry and your average margin, but generally speaking 5:1 is absolute minimum. It means then you will got from this customer a 5 times more turnover than your spend on acquisition. So, if you have 20% margin then give you pay back, but still not extra earning. That is why the LTV to CAC ration have to be greater then that.