A Reminder of the Cost of Customer Churn
by M. Eric Furlow
There are several detrimental effects customer churn has on a company. One is when it’s time to sell the company, the greater the churn the lower value of the company. Another effect is the negative impact churn has on referrals and up-selling additional products and services. The longer a customer is with a company the greater chance the customer will refer the hosting company, hence the cost of acquiring the new customer is almost zero. The same applies to the chance of up-selling … the more time a customer is with a company the greater the chance of up-selling.
Over the past 12 years I have been fascinated by the common economic patterns of recurring revenue industries such as paging, two-way radio, local phone, long distance, ISP’s, cellular, PCS, and web hosting. A specific pattern is customer churn in an environment of declining prices and how companies handle it. Replacing a $20/month customer with a $16/month customer comes at an obvious cost. I have seen companies increase their total customer counts by 30-50% over a period of time only to see their monthly recurring revenue increase by only 5-10% . Luckily at this point in the evolution of the hosting industry one of the most concerning problems has not been getting new customers, it has been keeping them. If the growth in the size of the market slows down considerably the competitive environment will become much more difficult as getting new customers will be more challenging.
Why do customers leave? Ok, while the list of reasons customers leave is an easy one to compile … the reasons most customers leave a specific company is not. Imagine the value of knowing why most customers leave your company. What about a question placed somewhere in the disconnect procedure?
Losing a customer and at the same time gaining one is a value destroying proposition. I would recommend putting as much thought into why customers leave, as one does in how to attract more.