Churn in small businesses: Causes, early warnings and 13 strategies to reduce it

Dealing with customers leaving is one of the biggest challenges your small business faces today.

According to a study conducted by Recurly, the average monthly churn rate for subscription businesses is around 4% (How Your Customer Retention Rate Compare by Industry | Recurly.com). That means for every 100 customers you acquire, you're losing four every month!

Moreover, if left unchecked, this churn can seriously hurt your growth trajectory and profits. So what can you do to stay resilient and keep those customers from jumping ship?

Churn is an inevitable truth of subscription businesses. What is in your control, however, is reducing it. This article covers proven strategies to help you mitigate customer churn.

But first, let's go over the basics: what churn is exactly, why it occurs, the different types that impact small businesses, and how to identify churn risks before it's too late. Oh and if you don't have the time to go through this entire piece, you can scroll down for a TL;DR! 

Understanding churn

Simply put, churn is the number of customers who end their relationship with your business over a given period. It's the rate at which you're losing existing customers compared to the new ones you're bringing in.

Churn is an inevitable reality for any business with a customer base. Even the most successful companies with fantastic products or services experience some level of churn. However, high churn rates can severely hinder growth and profitability.

There are two distinct categories of churn:
 

Customer churn

Customer churn is the most common churn metric businesses use. It refers to the percentage of customers who stop using your company's product or service during a specific time frame. You can calculate customer churn by dividing the number of customers you lost in a specific time period by the number of customers you had at the beginning of that time period.

Formula:

Revenue churn

The second type of metric looks at churn from a revenue perspective. It calculates the percentage of revenue your business lost from customers leaving, downgrading, or canceling their paid subscriptions. To calculate revenue churn, you need to divide the total amount of revenue lost in a period by the total monthly recurring revenue at the beginning of that period.

Formula:

What are the different factors that cause churn?

Customers can leave for a variety of reasons, some of which are within your control, and some of which aren't. Let's look at some of the most common causes.

Unhappy customers

One of the most common causes of churn involves customers being dissatisfied with the product in question, which often happens when businesses over-promise and under-deliver. Other times, businesses sign up the wrong kind of customers, which leads to a complete mismatch.

Remember, it's inevitable that some customers will be unhappy and leave despite your best efforts to satisfy them with your product. What is in your control is to reduce the number of people unhappy with your product. We'll explore ways to do this later in the article.

Competitors

Losing customers to your competitor is another brutal reality of running a business. Your product might be of the highest quality, but if your customers pay more attention to affordability, a competitor could in theory cut prices and nab your customers.

Alternatively, if your competitor has a better product, your customers won't hesitate to switch and leave you behind. That's why it's important to keep a close eye on your competitors. More on this later.

Changes in customer needs

While there are often areas you can improve to reduce churn, sometimes attrition happens due to factors beyond your control.

For instance, if a customer's business shuts down or gets acquired, they'll inevitably cancel their subscriptions and churn—regardless of how satisfied they were with your offering.

Shifts in their industry, business model, target markets, or internal processes can also eliminate their initial use case for your solution. Even individual consumers undergo life changes that impact their product needs. A project management app may be invaluable for a freelancer juggling multiple clients, but becomes redundant if they get a full-time job.

While unfortunate, this type of unavoidable churn is simply the nature of serving a dynamic customer base with evolving needs.

Scalability

When customers evolve and outgrow your product or service offerings, scalability issues can cause churn. As their needs expand, they may no longer find your solutions flexible enough to accommodate their increased scale.

For example, a small business may initially find your basic marketing automation tool perfectly suitable. However, as they experience rapid growth, they'll require more advanced capabilities around complex workflows, robust analytics, enhanced integrations, and so on.

If your product roadmap doesn't keep up with their scaling requirements, they'll have to switch to a more robust enterprise-grade solution.

Poor experience

Poor customer support can really frustrate customers. No amount of features can compensate for poor service.

If you drop the ball on customer support, churn is definitely going to increase. You must constantly make efforts to ensure you provide a best-in-class customer experience.

Also, it's your responsibility to check in regularly with staff that are in direct contact with your customers. You can gather vital feedback this way and provide them with support where necessary.

You have the power to influence this situation, so make every effort to minimize churn due to poor experiences.

How to spot the likelihood of churn before it's too late

The best way to get ahead of churn is to keep a close eye on early signs.

Drops in product usage or engagement

A significant dip in product usage is a clear indication that a user is likely to churn. There are tools in the market that track product usage. Set up these tools to track the relevant usage metrics for your product.

For example, let's assume you have a customer who uses the bulk email feature on your platform. They've been sending emails to over 1,000 customers every week for five months. Now imagine they suddenly stop; that would be odd, right? This sudden stop is unusual and requires investigation.

Without visibility into such data, you wouldn't even notice red flags like these.

Decline in service requests or inquiries

For service-based businesses, watch out for a decline in the number of service requests or inquiries from a customer. This could be an early warning sign of potential churn.

When a customer who used to engage with your services frequently starts to show a noticeable drop in their requests or inquiries, it could indicate a decrease in their interest or satisfaction with your offerings.

For example, if a law firm's client—one who previously sought their legal expertise regularly for various matters—suddenly stops initiating new engagements, the firm should take proactive measures to investigate the sudden drop in engagement before it's too late.

Increase in complaints or support requests

Let's say you have a long-term user who has had no complaints about your product. But suddenly, you notice that in one quarter, the same user has raised numerous support tickets, and there's a steady stream of complaints coming in. This is a concerning sign.

While it's not guaranteed that this user will churn, the increase in support requests and complaints is a red flag you need to address. There's a strong chance that if the complaints continue to come in during the following quarter, their patience will run out.

To avoid reaching that stage, proactively make appropriate changes that will put a halt to the influx of support requests.

Negative reviews on social media and review platforms

Negative online reviews are not only indicative of poor user experience but also harm your brand in more ways than one. The ramifications are three-fold:

• The customer who writes the review is likely to churn.

• Existing customers who read those reviews are now going to start doubting your product's capabilities.

• Such reviews may deter prospects who were considering you from signing up.

By addressing these reviews promptly, you can identify and address customer dissatisfaction, reduce the likelihood of churn, and thereby preserve customer loyalty.

Failure to renew or update payment information

When a customer fails to renew their subscription or update their payment information, it's a clear sign that they may be considering terminating their relationship with your product or service.

This could be due to several reasons, such as dissatisfaction with the offering, financial constraints, or simply forgetting to update their payment details.

It's crucial to have systems in place that notify you when a customer's payment method is about to expire or when a payment fails.

This enables you to reach out to the customer proactively and understand the reason behind their inaction.

By addressing their concerns or offering alternative payment options, you may be able to prevent them from churning.

How to reduce customer churn for your small business

Once you've identified risks of customers leaving, it's time to take action! In this section we'll cover some proven strategies, proven strategies. We have summarized these strategies at the end of the section if you would like a quick overview.

Strive to nurture strong customer relationships by providing best-in-class customer service

Go the extra mile to understand your customers' needs and provide amazing service. Simple gestures like checking in regularly or celebrating milestones can go a long way.

It shouldn't appear as though you're doing a checkbox activity; make a genuine effort to delight your customers at every step of the way.

When customers feel like they can reach out at any given time to ask the simplest questions, you know you have won their trust. But don't rest on your laurels if a great system is in place. Always find ways to improve your relationship with your customers.

Continuously gather feedback from customers and act on their suggestions. Implement new processes or tools that can enhance the customer experience further.

Stay ahead of the curve by anticipating customer needs and addressing them proactively. When customers feel truly valued and appreciated, they'll have no reason to look elsewhere.

Offer incentives for loyalty

Explore ways to reward long-term customers, whether that's via discounts, exclusive access, or other perks.

Researchers have conducted a significant amount of research on the psychology of discounts, and it's evident that people have a strong affinity for freebies. Use that to your benefit by offering loyalty programs.

Let your customers know that the longer they stay with you, the more they stand to benefit from discount vouchers, gifts, and a host of other perks.

Alternatively, let's say a customer is approaching the end of their contract and you sense there's a chance they won't renew. That would be a signal for you to offer them a renewal discount and get them to continue using your product.

There are different ways of using freebies to boost loyalty and reduce churn. You need to identify what works best for your small business.

Attract the right customers

While it's important to acquire new customers for growth, what's even more critical is attracting the right kind of customers: those who are the perfect fit for your product.

Customers that don't align with your product/service are more likely to be dissatisfied and churn.

On the other hand, customers who see tremendous value in your product are likely to stick with you even during the tough times. These are the customers you should be looking to meet.

Remember, focusing on quality over quantity breeds a sustainable model of growth. For example, let's say Company A brings in 50 new customers that aren't the right fit for their product, while Company B brings in 30 customers that are mostly all good fits.

On the surface, it may look like Company A did a much better job and is growing faster, but the real picture emerges at the end of the billing cycles when more than half of Company A's customers churn due to dissatisfaction.

On the other hand, Company B's well-qualified customers are more likely to stick around, deriving value from the product and becoming loyal, long-term advocates.

While Company B's growth numbers may appear smaller initially, their focus on acquiring ideal customers leads to a higher customer lifetime value and a more sustainable revenue stream in the long run.

The effort spent hand-picking the right fits pays off through lower churn rates and higher overall profitability.

Attracting mismatched customers may pump up acquisition metrics temporarily, but it's a leaky bucket that requires constant refilling. Prioritizing quality over quantity ensures you build a solid base of satisfied customers, and it's the wiser strategy for long-term success.

Analyze your churn metrics in-depth

While it's impossible to eliminate churn entirely, it's crucial to reduce its impact on your small business. Rather than waiting for churn to occur, it's essential to proactively analyze your churn metrics to identify patterns and trends.

This data-driven approach enables you to make informed decisions and implement targeted strategies to minimize customer loss.

To begin, ensure you have the necessary tools and systems in place to automatically collect all churn data in a centralized space. There are numerous tools available in the market that can assist with this task.

Once you have your data, conduct a thorough analysis. One effective approach is to segregate your churned customers based on the timeframe in which they left your business.

Are they churning after a month, a quarter, six months, or a year? Identifying patterns and trends can provide valuable insights into the reasons behind their departure.

For instance, you may find that a significant portion of your churned customers are leaving within the first 30 days. This could indicate a problem with onboarding or initial customer experience.

Alternatively, you may discover that customers who churn after six months are often those who have reached the end of their contract or have found a better alternative.

You can use this information to refine your retention strategies and allocate resources more effectively.

By analyzing your churn metrics, you can identify specific customer segments that are more likely to churn and develop targeted interventions to address their needs. This data-driven approach enables you to make informed decisions, reduce customer loss, and ultimately drive business growth.

Keep an eye out for new market trends

As times change, so do tastes and preferences. And that's why businesses must adapt to stay relevant. By keeping an eye on new market trends, you can stay ahead of the curve and retain customers who might have otherwise left.

Getting with the times may sound cliche, but you have to be cognizant of changing market trends. It's the nature of the beast.

From the language you use to communicate with your customers to what sort of requirements they have, everything is subject to change.

While predicting such changes is difficult, what you can control is your preparation and your response. Build systems that can accommodate sudden changes in customer preferences. Conduct periodic market research and collect feedback to see if you're in sync with your customer's evolving needs. Don't get married to your ideas; be open to pivoting and shelving plans.

Remember, your customers keep you alive; hence, keep them on your side by creating an ecosystem that enables them to explore new trends without having to change products.

Study your competitors regularly

As you keep a close eye on your competitors, think hard about the following questions:

• What customer success initiatives have they implemented?

• How do they interact with customers on different channels?

• Are there potential gaps in your product/service vis-à-vis your competitor?

• Do you think your customer could switch to a competitor soon?

• Are there tweaks you can make in your strategies that are inspired by your competitors?

Proactively thinking about these pertinent questions will put you in a good position to identify gaps in your customer experience. For instance, if a competitor offers 24/7 live chat support and you don't, customers who need that level of responsiveness may be at risk of churning.

Remember, consistently benchmarking yourself against alternatives and analyzing customer pain points will reveal vulnerabilities. Additionally, studying what competitors do well can inspire improvements to your own strategies.

This will help you predict churn before it happens and then minimize it to the best of your abilities.

Own up to mistakes, service breakdowns, technical issues, and such

Mishaps happen—sometimes for reasons totally out of your control. It's part of life. What is in your control is owning up to them and being proactive with your communication.

Customers are understanding of brands who own up to their mistakes. Brands that apologize sincerely are more likely to retain their customers in difficult times than those that try to deflect, make excuses, or cover up.

You might not be at fault; your systems might be top class; but if there's a service breakdown (whatever the reason is) and your customers are affected, apologize to them and keep them updated. It really makes a difference.

For example: Take a look at how Sainsbury's handled a technical issue that impacted their online grocery deliveries and in-store services with transparency and accountability. It was a masterclass in customer relationship management:


 

• They promptly informed customers about the issue and its impact.

• The CEO personally apologized for the inconvenience caused.

• Clear updates were provided on the systems being restored and stores becoming operational again.

• Customers affected by undelivered orders were offered vouchers as compensation.

• The company appreciated customers' patience and thanked employees for their hard work in resolving the challenges.

I know what you're thinking: Sainsbury's isn't a small business. But the fundamental principle of accountability and transparency on display here doesn't depend on the size of your business.

Check in with your customers regularly

Don't wait for your customers to reach out with feedback and questions. Instruct your customer success team to check in with your customers regularly.

You can do this via emails, surveys, feedback forms, monthly check-in calls, or whatever medium your customers are comfortable with.

The important thing is to be proactive in identifying and clearing any roadblocks your customers may face instead of waiting for them to reach out to your support team.

This also shows that you care. Many customers prefer to be heard, but they don't want to go through the process of waiting in the queue to speak to a live agent. By eliminating that step in the middle, you make their lives easier.

Here's a short and sweet example:


(Image via Userlist.com)
 

Notice how they've added an incentive at the end. Adding incentives for offering feedback is a good way to increase the amount of feedback you get from customers.

Here's another example:


(Image via Userlist.com)

Act on feedback given

Yes, collecting regular feedback is important. But it counts for nothing if customers don't see any effort on the brand's end to incorporate said feedback.

You need to be responsive to your customer's pain points. Do whatever is in your control to address the feedback provided. We understand it's impossible to act on every single customer's feedback—but the least we can do is offer them an explanation, right?

If a customer has unrealistic expectations, don't shun them. Our duty is to explain to them politely why it's difficult to incorporate their feedback at present.

If there are plans to introduce some of the features they need later, mention that in your response. Be honest and transparent. Customers really appreciate that.

These are the tiny factors they'll remember during difficult times, and that could make the difference between them churning versus staying on with you for longer.

Track product usage statistics

One way to predict churn is to study how your customers are using your product. In a SaaS context, analyze data to see how often your customers use the features they paid for.

A sudden dip in usage could indicate that the user is considering stopping their paid subscription at the end of the billing period.

This is a signal to step in and provide users with content. You could ask them why they aren't using the product, offer them product tours, or show them what they're missing out on—whatever you think is the right play. Here's an email template we made that you can follow:



A more direct option would be to give them a call and investigate the sudden dip in usage. But be careful not to break any local privacy regulations in the process.

Use a CRM built for small businesses

A solid customer relationship management (CRM) tool built for small businesses can be a total game-changer when it comes to preventing customers from churning. It gives you a central place to track all your interactions, spot any dips in engagement, and systematically nurture those customer relationships before it's too late.

Look for CRM features like contact and activity logging so you can see a complete timeline of your conversations. Automated follow-up reminders and notifications help make sure no one falls through the cracks. And you'll want strong analytical capabilities to identify exactly when a customer's usage starts dropping off.

Having integrated communications like email, chat, and calls all linked up with your CRM data makes a big difference, too. That way, you can easily pick up context about where things left off with a customer, regardless of what channel you're talking to them on.

The right small business CRM acts as an early warning system, enabling you to be proactive about customer success instead of scrambling once someone's already out the door.

One CRM option custom-built for small businesses is Bigin by Zoho CRM. It has a host of those core features mentioned above, all wrapped together in an affordable, easy-to-use solution.

Upskill your team

Train everyone in your team who interacts with customers to deliver exceptional and consistent customer service.

Encourage them to check in with the product team regularly to understand the product inside and out. Give them access to all relevant information about your customers so they have the right context to offer support.

Moreover, ensure this information is readily accessible on the go, so they don't have to scramble for it while interacting with a customer.

Moreover, remember to gather feedback from your team on areas of improvement and provide ongoing training to enhance their skills and knowledge.

13 ways small businesses can stay resilient in times of heavy churn (Summarised)

1. Nurture strong customer relationships by providing excellent service - Strive to delight customers at every touchpoint through personalized interactions and by going the extra mile.

2. Continuously gather feedback and improve customer experience - Actively seek feedback, implement suggestions, and stay ahead of customer needs to enhance their experience.

3. Offer incentives for loyalty - Reward long-term customers with discounts, exclusive perks, or loyalty programs to encourage retention.

4. Attract the right customers - Focus on acquiring customers who are the perfect fit for your product/service to minimize churn and foster sustainable growth.

5. Analyze your churn metrics in depth - Conduct thorough data analysis to identify patterns, segment churned customers, and develop targeted retention strategies.

6. Keep an eye out for new market trends - Adapt to changing customer preferences and market trends to stay relevant and retain customers.

7. Study your competitors regularly - Monitor competitors' strategies, identify gaps, and make improvements to minimize customer churn.

8. Own up to mistakes, service breakdowns, and technical issues - Acknowledge and transparently communicate issues, apologize sincerely, and provide updates to maintain customer trust.

9. Check in with your customers regularly - Proactively reach out to customers, gather feedback, and address any roadblocks before they escalate.

10. Act on feedback given - Respond to customer feedback, address pain points, and communicate plans to incorporate suggestions.

11. Track product and service usage statistics - Monitor usage patterns to identify potential churn risks and proactively engage with customers showing a dip in activity.

12. Use a CRM built for small businesses - Leverage a CRM solution to centralize customer data, track interactions, and identify engagement dips for proactive retention efforts.

13. Upskill your team - Train and equip customer-facing teams with product knowledge, customer context, and exceptional service skills.

Wrapping up - Staying ahead of churn for long-term success

The bottom line? Some churn is inevitable, but being proactive about customer retention and implementing strategies that promote strong customer relationships can help small businesses reduce the impact of churn.

Here's the deal: Churn isn't just a matter of numbers but a reflection of your ability to consistently meet and exceed customer expectations. By prioritizing customer satisfaction, staying ahead of market trends, and continuously improving your offerings, you can create a loyal customer base that will remain with you for years to come.

Remember to use a data-driven approach to identify and address churn risks, and don't hesitate to adjust your strategies as needed. Constantly seek feedback from your customers and act upon their suggestions to demonstrate your commitment to their success.

By promoting a culture of continuous improvement, you can build a resilient small business that not only survives but thrives in the face of challenges.

Bigin by Zoho CRM - A small business CRM that will help you stay resilient

Did you know 20,000+ small business across the world (The Easiest Small Business CRM | Bigin.com) are using  Bigin to manage their customer relationships? It's a software tool tailored specifically for the needs and challenges of small business. And the best part? It's super intuitive and easy to use. You can get set up in 30 minutes without any technical support. A no-brainer for small business owners who have 100 different things on their plates at once.

Start a free trial and experience the beauty of Bigin for yourself!

References 

How Your Customer Retention Rate Compare by Industry | Recurly. (n.d.). Retrieved 05 27, 2024, from https://recurly.com/research/churn-rate-benchmarks/

The Easiest Small business CRM. (n.d.). Bigin. Retrieved 05 27, 2024, from https://www.bigin.com/