To grow your agency, you have to lose some clients.
While this sounds crazy at first, there is actually value in this thought.
Understanding why customers leave allows you to improve your approach to acquisition and retention.
So, if you’re an agency owner and don’t track your opt-out rate, this article is for you.
What is turnover rate? A simple definition
Abandonment rate refers to the rate at which customers or subscribers discontinue or cancel their subscription or service within a given period. It is often expressed as a percentage and used as a metric to measure customer attrition or turnover.
A high turnover rate indicates that a significant number of customers are leaving, which can have negative implications for businesses.
Turnover rate is a North Star KPI that all agencies should monitor closely.
Repeat purchase rate is different than churn rate, but when you think about it, it’s about looking at the glass half empty / half full (it describes the same situation). So just because your agency sells one-off projects doesn’t mean you shouldn’t pay attention.
The real question is: Are your customers leaving too soon? And those who make up a significant portion of your customer base?
If you answered yes to both questions, don’t panic, but get busy.
Instead, you should ask yourself how many customers you need to acquire (and how quickly) to meet your growth goals. If you can’t answer these questions, get busy too! 😀
For example, let’s say you start with 1,000 customers but also lose 100 customers over a period of time.
And that your growth goal is to reach 1,500 customers by the end of the next period. This means your customer acquisition goal should be 1,500 – 1,000 + 100 = 600 customers.
In this example, if your turnover (100 customers lost) and acquisition (600 customers acquired) are good, you will reach your goal. But if you start losing more than 100 customers… watch out!
The bounce rate trap falls into people too often
You need to better define your analysis period to calculate turnover rate.
For example, let’s say your average customer stays with your agency for two years. And say you set aside a two-month baseline to analyze churn. Would you trust your bounce rate? I know I wouldn’t.
Having a specific time frame (like a fiscal year) is more often a mistake. You actually need to incorporate customer lifetime information into your churn rate calculation.
Let’s say you’re a subscription-based agency. The longer a customer stays, the more likely they are to leave you. It’s like a law of nature. Of course, not all companies are the same in this regard:
Do not use a default fiscal year. While it may make sense for your business, you first want to have a somewhat clear idea of your customer’s average lifetime.
Basically, if your agency has been around for a while, you should have a solid idea of this average lifespan. Use it as a reference period, not a fiscal year.
How to calculate turnover rate
If you have an accurate figure for your average customer lifetime, you can use the following formula:
Bounce rate = 1/customer lifetime
If the customer lifetime isn’t clear enough (your agency doesn’t have data or is too young, etc.), I’d recommend using scenarios. Use the data you already have (either 6 months or 2 years) and use different customer retention periods (eg 1 year, 2 years and 5 years).
In either case, you’ll want to use the following formula:
Churn rate = customers lost during the analysis period/customers at the beginning of this same period
Does it sound simple? Is. Still, there are several things to say about the formula above.
To calculate the customers you lost during the analysis period, you want to subtract the number of customers you have at the end of the period from your customers at the beginning of the period.
This means you shouldn’t count the customers you acquired during that same period!
So, let’s use the example mentioned above: you lost 100 customers and started with 1,000 of them. This means your turnover rate is 100/1,000 = 10%.
And yes, you want to write it in percentages.
Get the daily search newsletter marketers trust.
How to read turnover rate?
The churn rate tells you how fast your customer base is shrinking. So with a turnover rate of 10%, it would take 10 analysis periods to lose all your customers.
So is 10% great or horrible? It really depends on your industry.
My recommendation is: don’t compare with other agencies. At best, your data about your competitors (or the industry averages we find online) is partially reliable. But most of the time, this data is complete garbage. Just ignore them.
Instead, you want to compare your current agency to your previous agency. Just use the previous analysis period. This data is 100% reliable – you check it (and you did a good job calculating it, didn’t you?).
If your churn rate is decreasing, you’re doing it right. Conversely, if it increases, you should have a red light flashing in your head.
So the only question is, can you reverse this course of action before it’s too late for your agency? And only you can answer that question (“is X amount of analysis periods enough to steer the ship away from the iceberg?”).
Ideally you should have something like this:
Period #1: 10% Period #2: 8.5% Period #3: 7.6% Period #4: 6.8%
Methodology and data to improve the turnover rate
Generally speaking, all agency owners take product/service quality levels very seriously. So turnover rate and pain points are already very much identified. It’s just hard (if not impossible) to solve this equation right now.
That said, I’ll share our methodology at my agency, it’s pretty simple: track customer lifecycle events. Like, everyone. It can be challenging if your organization is large and includes many layers of management, sub-products, etc. This will add grit to your wheels for sure.
When you have enough political power to prioritize this data collection effort, you can use it in a simple funnel-like dashboard. It should help you visualize the customer lifecycle and all the major steps.
Here’s a simplified example to get you started:
Onboarding: 100% of customers stay with us. That wasn’t hard! 😁 Setup complete: 98% of customers are still here. First Business Review: 92%… One Year Anniversary: 60%… Two Year Mark: 55%…
In this example, the main problem clearly comes after this first business review. Did you really identify what the customer was looking for? Or did you turn a blind eye to their needs?
Or maybe it has to do with the client’s goals – they weren’t a good fit in the first place.
Or maybe you change the client’s team too often and it happens before the one year anniversary. Etc.
Once you’ve created this dashboard, you can identify several potential areas for improvement. Simply collect more data to prioritize your efforts.
Top ideas for improving turnover rate
Everything I mentioned requires relatively heavy resources to make it happen. And sometimes, we just need some quick ideas to jumpstart our heads. So here are 10 ideas to improve your bounce rate:
Improve after-sales services (i.e. production), specifically their speed of execution. A customer faces a challenge, they should get an answer in less than 30 minutes. Less frustration, lower turnover rate. Reward your most profitable customers. It doesn’t apply to all of your customers, but some of them deserve extra recognition: exclusive information, semi-private events, etc. Show that you listen to your customers. Package it into a program to gather, process and communicate around customer feedback. People should feel listened to and listened to. Improve the quality of the service/product. And specifically work on the perceived value. Don’t be too “geeky” about it. Your customers need to feel that short-term boost, too. Stay in touch with your customers. This means working on content marketing. This way, you ensure that your customers don’t feel like the grass is greener on the other side. Personalize communications with your customers. This can be at the report, product, service or any other level. They need to feel a certain degree of uniqueness. That way, they won’t be able to get the same product/service elsewhere. Get your sales and after-sales teams talking. The latter team needs to understand what really drives sales… and salespeople need to understand what tensions exist after the initial contract is signed. Assess customer satisfaction. This means working on quantitative (repeat purchase, NPO, Customer Happiness Index, etc.) and qualitative (interviews, etc.) KPIs. Update your products. If a company does not evolve, it is bound to die. The same goes for products and services. Simple as that. Be transparent. About deadlines, works in progress, internal capacity and limits, ability to fix x, yiz, etc.
Got a leaky bucket?
Measuring churn rate helps you understand how quickly customers are leaving and why. Ideally, you can solve these first challenges easily.
The next step is to implement a system to reduce the turnover rate. This system should be in everyone’s hands… but HR and product people are usually first.
Bottom line: Your customers will love your products and services so much that they will pay more and for a longer period of time. And perhaps even better: they will become evangelists!
The views expressed in this article are those of the guest author and not necessarily Search Engine Land. Staff authors are listed here.
