How to Identify and Prevent Customer Churn

How to Identify and Prevent Customer Churn

For companies, there is nothing worse than Customer Churn. If an e-mail with the subject “Cancellation” appears in your mailbox, then alarm bells should ring immediately. Many companies have already developed and successfully apply effective measures for Customer Recovery. But by then it is often too late, as the customer has already issued their notice of termination. Although companies can still react to them by e-mail in the event of termination and, in the best case, win the customer back, companies rarely receive a letter of termination of this kind. It becomes problematic when customers move away wordlessly – for example, with a regular e-commerce provider that does not have a subscription or contract model. Therefore, it is important to take appropriate precautions in advance to prevent the exodus of customers.

Customer Churn: Definition

What does Customer Churn mean? The term refers to the fact that customers who have purchased a product or used a service from a company at least once turn away and reorient themselves. This can be due to a competitor’s more attractive orientation (e.g. better value for money) or more effective marketing by the competition.

A very central aspect in this context is the Churn Rate. The artificial word “Churn” consists of the English words “Change” and “Turn” and describes this customer exodus. The Churn rate is about changing and turning away in the economic context. Formulated as a question it looks like this: How many customers have jumped in a period of time X in relation to the customer base? In this way, the migration of customers becomes an essential variable of customer loyalty.

5 Warning Signals for Customer Churn

Customers come and go. Although the figures vary, it is nevertheless said that business-to-business companies lose on average about 11% of their customers each year as a result of emigration. What options do companies still have the potential for improvement? You need to identify specific warning signs for Customer Churn.

“If a seller pays enough attention to his customers, he can notice [Customer Churn] in time and address it on his own”

– Oliver Schumacher (sales trainer)

What you don’t know won’t hurt you? On the contrary: Rather, the motto for entrepreneurs is: Keep your eyes open and recognize the following signals.

  1. Complaints pile up
    Customers who complain more often, such as product quality or service, typically have a problem with the company. A complementary indication is a way in which they are dealt with: the tone makes all the difference. Has the first complaint been communicated in a largely friendly manner, or does the customer now sound more annoyed, and is he making threats?
  2. Buying behavior is changing
    There may be many reasons why regular customers are less likely to be seen in an analog or digital business relationship. Customers who buy or order less may be dissatisfied and willing to switch providers.
  3. Payments are delayed
    In the past, your invoices were settled within a few days, but now the customer doesn’t even keep to the due dates. If reminders go unanswered and there is no corresponding reaction, the mood may have hardened. If there are reminders, negative development will result and the customer relationship will suffer.
  4. Competitive orientation increases
    When customers compare offers and services with those of competitors, companies should listen. Reviews of this kind suggest that the customer is more in tune with the competition. This, in turn, can mean that they have doubts about the quality, price development, or service of your company.
  5. Communication is reduced
    A growing distance is usually a bad sign. Does no-one answer the phone when you try to call the customer? Especially in professional environments, the following rules apply: time is precious, so depending on the value it is used for business or for one’s own interests.

Reasons for Customer Churn

If you want to make a difference, you first have to understand. If companies want to convert a negative fact to a positive, they need to know the reasons that led to the deterioration. An example from everyday life: if one part of a friendship distances itself, the other side usually tries to get to the bottom of the causes in order to understand the behavior and react to it in a solution-oriented manner. It is also comparable in the relationship between the company and the customer.

Where are the reasons for Customer Churn based? Are they at the…

  • affected company?
  • the customers themselves?
  • or is it about a better offer from the competition?

Examples for reasons within the company

Anything that makes and conveys the company forms an impression. The three classic components are certainly the price structure, product or service quality, and customer service: Customers expect good solutions at reasonable prices, as well as appreciation and competence when they get in touch. It is not only in Germany that the issue of data protection is becoming increasingly important. Even little things that have no direct effect can be decisive. For example, if a company changes its external appearance by presenting a new website design, the perception of this change depends on the accuracy of the previous target group. Or perhaps marketing will be strategically reoriented and the company’s presence on social networks such as Twitter and Facebook or on portals like XING and LinkedIn increased by posts and articles. Changes like these always carry the risk of pushing their effect in the wrong direction. A well-founded customer analysis is therefore highly advisable.

Examples of business reasons:

  • Unfriendly or incompetent service
  • Weak value for money
  • Unprofessional or inappropriate image
  • Lack of appreciation, e.g. in data protection

Customer reasons

Even satisfied customers who like to shop at a particular company have to adjust their consumption with changes in their living conditions. A specific need can expire or products and services may no longer be used for private, spatial, or financial reasons. The reasons for churn are not necessarily due to the lack of corporate strategy.

Examples of customer reasons:

  • Moving to another city
  • Financial reorganization through family growth
  • Personal reorientation due to a partnership
  • Higher income after a promotion

Competition based reasons

Companies that are transforming themselves digitally should be a strong target for customer satisfaction. The Internet offers a whole range of ways of expressing both positive and negative experiences. Apart from social media, there are a number of websites that focus precisely on evaluating and comparing providers, including in the form of longer articles. In this way, competition is brought closer together and everything becomes more transparent. Customer opinions gain weight and influence the behavior of others. In short: If a customer finds a better offer or more resonance with the competition, the idea of emigration is not far away.

Examples of competition reasons:

  • More attractive prices for the same product category
  • Special offers for those who change providers
  • Target group-oriented and charming marketing
  • Better ratings on the net

Hidden Revenue Drivers: Stop Customer Churn, Optimize Profits

The calculation is simple: Companies generate their sales not just through successful advertising, but primarily through paying customers. If these customers migrate, sales are missing and competition may be strengthened. A downward spiral is on the rise, which becomes stronger the worse former customers talk about the company with their friends, family, and social networks. The reverse case also applies: If the customer value is increased, customer loyalty is strengthened and there are no other significant reasons for churn, companies strengthen their own market position. Multipliers are thus expanding, expanding the customer base, optimizing profit, and achieving or even exceeding the company’s goals.

Customer management is a multidimensional aspect of 2019. It’s not just about customer acquisition, it’s also important to keep the churn rate as low as possible. In spite of everything, these customers should not be written off directly by the company but should be prevented from overflowing with competition by means of Customer Recovery measures. It is precisely these customers that can be revenue drivers that are often overlooked or forgotten because the focus is too much on building new and loyal customers.

Prevent Customer Churn: 5 Tips

According to the differences between non-contractual business relationships and, for example, subscriptions, as set out in the introduction, there are two approaches to Customer Recovery:

  • A reduced or completely terminated business relationship is to be strengthened or re-established.
  • An outspoken termination is to be prevented by convincing the customer afterward that his decision was not correct.

If the attempt to turn buyers into loyal customers has failed, recovery measures should be stepped up to ensure that potential sources of revenue do not dry up. Customers who leave are not necessarily permanently lost. The recovery process is divided into five steps:

  1. Emigrating customers are identified.
  2. Causes for migration are analyzed.
  3. Recovery measures are planned and implemented.
  4. Their effect is observed and, if necessary, optimized.
  5. The exodus is understood and, if possible, prevented.

How to Recover Individual Customers

  • Customer Analysis: All available information should be examined in detail in order to determine the reasons for churn and, based on that, the appropriate measures.
  • Planning: whether by phone or in person, it is important to plan small goals for the upcoming conversation in addition to the main goal (recovering customers) in case the recovery fails: defending against negative assessments and identifying the reasons for emigration.
  • Contact: When is a good time to make contact with the lost customer? The conversation is intended to initiate recovery. Optimal preparation is therefore essential, especially if the customer reacts negatively.
  • Communication: The customer should have enough time to express himself instead of feeling distressed. An incentive for recovery is fundamental, and the conditions should be clarified and appreciation conveyed.
  • Service: If the action was successful, the recovered customer should be granted some kind of special status for a period of time. There should be no problems and no new frustration, instead, the conviction that it was the right decision to return. The contact with the customer is maintained and the gratitude for the return is expressed.

Recover Larger Customer Groups:

  • Customer Analysis: Lost customers should not be written off – but the larger the group, the more difficult the overarching “return action”. Focusing on customers who have brought more revenue or prestige to the company in the past can, therefore, be useful. Who should be brought back and why have these customers left?
  • First Contact: The contact to the selected customer group should be made in writing – ideally with a personal signature and designed in such a way that it does not sound like a standard letter. The incentive to return to the fold should be integrated into this step.
  • Supplement: The second step should then take place by telephone. Two goals are at the top of the list: recovery and gathering information about the reasons for emigration. Staff should be perfectly prepared and have a well-prepared discussion guide.
  • Service: The first orders or purchases of returning customers should be completely trouble-free. All promises conveyed in the previous conversation must be consistently implemented, and the customer must always feel respected and welcome.
  • Evaluation: You can always learn something to make it even better next time. An analysis of the results is therefore essential.

How to Detect Customer Churn at an Early Stage

There are several reasons why customers turn away from a business. According to a study from November 2018 entitled „High Performance in the Age of Customer Centricity“, in which customers from Germany were also involved, poor service is well ahead of price reasons as reasons for Customer Churn.

In principle, the following applies: With regard to company-related reasons, it is quite possible to detect Customer Churn at an early stage through analytical methods and to take preventive action:

Big Data: Meet Expectations, Prevent Negative Intentions

Those who collect data receive important information that contributes to their company’s success. When companies know about their customers’ behavior, expectations, and intentions, they can use this data to identify churn potential and intervene accordingly. For this, it is necessary to take a close look at all channels that are used to interact with the customer.

“We ask for NPS feedback at five contact points. The surveys can be customized and achieve extremely high response rates”

– Daniel Lang (Head of Marketing at Parfumdreams)

Of course, the collected data must be processed and converted into instructions for action in order to integrate it into the ongoing processes. This is the only way to avoid something that has not yet happened but is instead currently taking place. Today, intelligent technologies such as “machine learning” are a useful tool in evaluation. But first, customer satisfaction should be analyzed – for example, with the Net Promoter Score® (NPS®).

NPS Helps Stop Customer Churn

How likely is it that a customer recommends a product, company, or service? The NPS poses this question and categorizes customers into promoters, passively satisfied, and detractors (critics). The conclusions are simple: If the number of passives or critics grows and the number of promoters decreases, this is a sign of increased dissatisfaction and an indication that Customer Churn may occur. On the basis of this data, customer management should research the reasons to define measures that are then implemented and evaluated to avert the churn.

Customer Churn and Artificial Intelligence

Can the use of AI technologies increase customer satisfaction and thus corporate revenue? Anyone who deals with the question will inevitably come across the term “machine learning” (ML). This sub-sector of artificial intelligence is designed to identify patterns and laws based on large amounts of data (Big Data). For the use of ML systems, customers must be fully monitored in order to obtain as much data as possible that is presented to the algorithm. Insufficient amounts of data lead to erroneous conclusions, and this false artificial knowledge results in instructions for action that may do more harm than good to the company.

This means: AI technologies, such as chatbots, can help if used correctly. This does not work if it is half-heartedly implemented, as data collection must be able to cover the entire life cycle of customers – more data, more experience, more (artificial) knowledge.

“On the basis of AI technologies, completely new applications, new products, and business models can be developed”

– Jörg Bienert (co-founder and chairman of the German Association of Artificial Intelligence)

Conclusion: Even Emigrated Customers Are Part of Customer Relationship Management

The customer is and remains king. As old as the saying sounds in 2019, it is becoming more and more important. Many companies, therefore, underestimate the power of their emigrated customers. Even more fatal: they read the chapter “recovery” in the company strategy and leave their former customers to the competition, thereby strengthening competition and ignoring an additional source of revenue. Customer Management should therefore also deal with the lost customers and the Churn rate. Analyze their motives, learn from them, get them back at best, and ultimately understand them. This allows Customer Churn to be detected at an early stage and to start thinking about what technical aids are available and what optimizations are needed to ensure a smooth customer journey.


Susan Pfundt

Senior Content Marketing Specialist