Customer churn

Hamish Mexted Increasing Profit

To grow your business you need to bring in more new clients than go out the door.  If the average lifespan of your clients is 5 years, you need to replace 20% of your client base per annum.

Take a company with 100 customers.  Each year, on average, 20 clients will leave.  If the company converts 50% of prospective clients into sales, the company needs to contact 40 prospects to replace the 20 clients that leave each year.  Going a step further, say from example that from every 100 cold-calls made, the client gets 10 prospects.  Based on this success rate, the company needs to cold-call 400 people to replace the 20 clients that leave each year.

This means the company needs to make on average 7 or 8 cold-calls per week to make its sales target.  Remember that those 7 or 8 calls are just to stand still.  To grow the business it will need to be considerably more.

The same concept applies to all businesses, whether it’s a retail, manufacturing or service business.  A retail business might measure the number of repeat customers it gets, whereas a manufacturing business might measure the length of the contract it signs with each of its customers.

So what’s your churn rate?  Are you managing to replace all the clients you lose?