Churn Rate vs. Retention Rate: Two Sides of the Customer Coin (But One Might Be Shinier)

Hey there! Ever heard of “churn rate” and “client retention rate“? These metrics are like ketchup and fries in the business world, especially for marketing agencies like yours. Churn rate vs retention rate.

But guess what? 

They actually measure opposite KPIs, even though they sound like peas in a pod. 

Today, we’ll break down these very important terms.

Imagine your client is a burger joint. They want to know how many customers are loving their juicy creations and coming back for more. That’s where client retention rate comes in. It’s like a thumbs-up meter showing the percentage of customers who stick with the burger joint over a specific time, like a month. A high retention rate means more happy customers returning for another satisfying bite, which is obviously good for business!

But what about the customers who don’t come back for that second helping? 

That’s where churn rate kicks in. It’s basically the opposite side of the coin, showing the percentage of customers who stop frequenting the burger joint within that same period. A low churn rate means the burger joint isn’t losing many customers, which is generally a good thing.  

If your marketing agency is built on Monthly Recurring Revenue (MRR) then you MUST manage your churn rate and your target monthly churn rate is 3% or less.  If you exceed this then scaling your marketing agency is going to be really difficult. 

Churn Rate vs Retention Rate (client)

Before diving into the benefits of focusing on churn rate, let’s solidify our understanding of what it actually is. Churn rate, in simple terms, measures the percentage of customers your client loses over a specific period, typically a month. It serves as a crucial indicator of customer satisfaction and how good we are at delivering results for our customers.

Calculating churn rate is a straightforward process. 

Here’s the formula:

Churn Rate (%) = (Number of Customers Lost / Number of Customers at the Start of the Period) x 100

For example, if your client had 100 customers at the beginning of a month and lost 10 customers by the end, their churn rate would be:

(10 Customers Lost / 100 Customers) x 100 = 10%

A lower churn rate indicates a higher percentage of customers are staying with you and that you’re getting them results.  While a higher churn rate signifies that you aren’t doing a great job for your clients and they don’t see value in your services. 

By monitoring and analyzing churn rate over time, you can identify trends and take action to address potential issues before they significantly impact your client’s business.

While churn rate focuses on lost customers, client retention rate sheds light on the positive side of the coin, measuring the percentage of customers your client retains over a specific period. It serves as an indicator of customer satisfaction, loyalty, and brand advocacy.

Calculating client retention rate is also straightforward:

Client Retention Rate (%) = ((Number of Customers at the End of the Period – Number of New Customers Acquired) / Number of Customers at the Start of the Period) x 100

For instance, if your client started the month with 100 customers, gained 15 new customers, LOST 10 existing customer, and ended the month with 105 customers, their client retention rate would be:

((105 Number of customers at the end of the period – 15 new customers) / 100 customers) x 100 = 90%

A higher client retention rate indicates a larger portion of customers are staying with you, which is generally positive. However, it’s important to consider it alongside churn rate for a complete picture.

Here’s where the shine starts to come off client retention rate:

• Limited scope: It only shows one side of the story – how many customers are staying. It doesn’t tell you how many new customers you’re acquiring, which is crucial for sustainable growth.
• Can be misleading: A high retention rate might look good on paper, but it could be masking underlying issues like stagnant customer acquisition. This can lull you into a false sense of security, neglecting the need for growth strategies.
• Doesn’t offer actionable insights: Knowing you have a high retention rate is great, but it doesn’t tell you why your customers are happy. This makes it difficult to develop targeted strategies to further improve customer satisfaction and loyalty.

MOST PEOPLE have it all wrong when they say that their retention rate is more important than their Churn Rate and here is why:  

Let’s say that you have 100 clients right now and you are losing 20 clients a month.  

But you also have an amazing salesperson who is selling 25 new clients a month. 

You have a net gain of 5 new clients but is most alarming is why you’re churning 20% of your clients!!!

It’s like if you lost 20% of your blood in your body but they replaced it with 20% new blood so you didn’t die. 

Wouldn’t you want to figure out why you have so much blood falling out of your body first??

And this is why I think that the churn rate is so much more important than the retention rate.  But here are a few MORE reasons why churn rate is so important: 

• Early warning system: Churn rate acts as a red flag, alerting you to potential problems before they become significant. A sudden rise in churn signals issues with your client’s product, service, or marketing strategies. This allows for proactive intervention and course correction, preventing further customer losses.
• Actionable insights: Unlike client retention rate, which only tells you who’s staying, analyzing churn data provides deeper insights. You can identify specific customer segments or regions experiencing high churn. This allows you to tailor strategies to address their concerns and win them back.
• Continuous Improvement: Churn rate encourages a data-driven approach to improvement. By understanding why customers leave, you can identify areas needing improvement across various aspects of your client’s business. This leads to better customer experiences and ultimately, higher retention in the long run.
• Client Focus: Focusing on churn aligns your agency’s goals with your client’s. By minimizing customer losses, you directly contribute to your client’s financial health and growth. This fosters a stronger client-agency relationship built on mutual success.

However, it’s crucial to remember:

While both churn rate and client retention rate offer valuable insights, focusing primarily on churn rate provides actionable data for identifying problems, tailoring solutions, and driving continuous improvement. This data-driven approach can help your agency proactively address customer concerns and minimize churn, ultimately contributing to your client’s financial health and growth.

If you are interested in learning more about our prioritization of churn rate and how this approach can benefit your business, we encourage you to join our Facebook group NON-SEXY MARKETING AGENCY GROWTH ESSENTIALS  for insightful discussions and industry trends. Alternatively, you can schedule a FREE call to explore how we’ve helped hundreds of high-performing agency owners like yourself achieve sustainable success. We look forward to partnering with you on your journey towards maximizing customer satisfaction and achieving long-term growth!