How to calculate and improve your agency’s churn rate

To grow your agency, you need to lose some clients.

While it sounds crazy at first, there is actually value in that thought.

Understanding why clients leave enables you to improve your acquisition and retention approach. 

So if you’re an agency owner and you don’t track churn rate, this article is for you.

What is churn rate? A simple definition

Churn rate refers to the rate at which customers or subscribers discontinue or cancel their subscription or service within a specific period. It is often expressed as a percentage and is used as a metric to measure customer attrition or turnover. 

A high churn rate indicates that a significant number of customers are leaving, which can have negative implications for businesses.

Churn rate is a North Star KPI that every agency should closely monitor.

Repeat purchase rate is different from churn rate but when you think about it, it is about looking at a half-empty / half-full glass (it describes the same situation). So because your agency sells one-time projects doesn’t mean you should not pay attention.

The real question is: are your clients leaving too soon? And are those representing a significant share of your client base?

If you answered yes to both questions, don’t panic but get busy.

Conversely, you should ask yourself how many clients you need to acquire (and how fast you should do so) to reach your growth targets. If you can’t answer such questions, then get busy too! ?

For example, say you start with 1,000 clients but also lost 100 of them over a certain period of time.

And that your growth goal is to reach 1,500 clients by the end of the next period. That means your client acquisition goal should be 1,500 – 1,000 + 100 = 600 clients.

In that example, if your churn (100 clients lost) and your acquisition (600 clients acquired) are OK, you’ll hit your target. But if you start losing more than 100 clients… careful!

The churn rate trap people fall into way too often

You need to define your analysis period better to calculate churn rate.

For example, let’s say your average client stays with your agency for two years. And say that you take a two-month reference period to analyze churn. Would you trust your churn rate? I know I would not.

Having a fixed period of time (like a fiscal year) is more often than not a mistake. You actually need to incorporate client lifetime information into your churn rate calculation.

Say you’re a subscription-based agency. The longer a client stays, the higher the probability is that he or she leaves you. It’s like a law of nature. Naturally, not all businesses are made equal in that sense:

Don’t use a fiscal year by default. While it might make sense for your business, you first want to have a somewhat clear idea of your average client lifespan. 

Basically, if your agency has been around for some time, you should have a solid idea of that average lifespan. Use that as your reference period, not a fiscal year.

How to calculate churn rate

If you have a precise figure for your average client lifespan, you can use the below formula:

Churn rate = 1 / average customer lifespan

If client lifespan is not clear enough (your agency lacks the data or is too young, etc.), then I’d recommend using scenarios. Use whatever data you already have (be it 6 months or 2 years) and use different client retention windows (say 1 year, 2 years and 5 years).

In any case, you’ll want to use the below formula:

Churn rate = clients lost during the analysis period/clients at the beginning of that same period

Sounds simple? It is. Still, there are several things to say about the above formula.

To calculate the clients you lost during the analysis period, you want to subtract the number of clients you have at the end of the period from your clients at the beginning of the period. 

That means you should not consider the clients you acquired during that same period!

So let’s use the example mentioned above: you lost 100 clients and started with 1,000 of them. That means your churn rate is 100 / 1,000 = 10%.

And yes, you want to write it in percentages. 

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How to read churn rate?

Churn rate tells you how fast your client base is getting thinner. So with a 10% churn rate, you’ll need 10 analysis periods to lose all your clients.

So is 10% great or horrendous? It really depends on your industry.

My recommendation is: do not compare with other agencies. At best, your data on your competitors (or those industry averages we find online) is partially reliable. But most of the time, that data is complete garbage. Just ignore them.

Instead, you want to compare your present agency with your past agency. Just use the previous analysis period. That data is 100% reliable: you control it (and you did a good job at calculating it right?).

If your churn rate is decreasing, you are doing good. Conversely, if it increases, you should have a red light flashing in your head.

The only question then becomes: can you reverse that 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 turn the ship away from the iceberg?”).

Ideally, you have something that looks like that:

• Period #1 : 10%
• Period #2 : 8.5%
• Period #3 : 7.6%
• Period #4 : 6.8%

Methodology and data to improve churn rate

Generally speaking, all agency owners take product / service quality levels very seriously. So churn rate and pain points are very much identified already. It simply is tough (if not impossible) to solve that equation right now.

That being said, I’ll share our methodology at my agency, it is fairly simple: track client lifecycle events. Like, all of them. It can be a challenge if your organization is big and includes many managerial layers, subproducts, etc. That will add sand to your wheels for sure.

When you have enough political power to prioritize that data collection effort, you can use it in a simple funnel-like dashboard. It should help you visualize the client lifecycle and all major steps. 

Here is a simplified example to get you started:

• Onboarding: 100% of clients are still with us. That one wasn’t hard! ?
• Setup completed: 98% of clients are still here.
• First business review: 92%…
• One-year anniversary: 60%…
• Two-year mark: 55%…

In that example, the main pain point clearly comes after that first business review. Did you actually identify what the client was looking for? Or did you turn a blind eye to her needs?

Or maybe it has to do with client goals: they were not a good fit in the first place.

Or maybe you switch client’s teams too often and that happens before the one-year anniversary. And so on.

Once you have built that dashboard, you can pinpoint several potential areas of improvement. Simply gather more data to prioritize your efforts.

Top ideas to improve churn rate

Everything I mentioned requires relatively heavy resources to become reality. And sometimes, we only need some quick ideas to get our heads going. So here are 10 ideas to improve churn rate:

• Improve after-sale (i.e., production) services, specifically its speed of execution. A client faces a challenge, he or she should get an answer in less than 30 minutes. Less frustration, lower churn rate.
• Reward your most profitable clients. It doesn’t apply to all of your clients but some of them deserve extra recognition: exclusive info, semi-private events, etc.
• Show that you listen to your clients. Package that into a program to gather, process and communicate around client feedback. People should feel they’re heard and listened to.
• Improve service / product quality. And specifically work on perceived value. Don’t be too “geeky” about it. Your clients also need to feel that increase in the short term.
• Keep in touch with your clients. That means working on your content marketing. That way, you make sure your clients don’t feel like the grass is greener on the other side.
• Personalize your client communications. This can be at the report, product, service or whatever level. They need to feel some degree of uniqueness. That way, they won’t be able to get the same product / service elsewhere.
• Have sales and after-sales teams talk. The latter team needs to understand what actually drives sales… and salespeople need to understand what tensions exist after the initial contract is signed.
• Evaluate client satisfaction. That means working on quantitative KPIs (repeat purchase, NPO, Customer Happiness Index, etc.) and qualitative ones (interviews, etc.).
• Update your products. If a company doesn’t evolve, it is bound to die. The same goes for products and services. Simple as that.
• Be transparent. On deadlines, works in progress, internal capacity and limits, ability to fix x, y and z, etc.

Do you have a leaky bucket?

Measuring churn rate helps you understand how fast clients go and why. Ideally, you can solve those first challenges easily.

The next step is to implement a system to reduce churn rate. That system should be in everybody’s hands… but HR and product people are usually first in line.

End vision: your clients will love your products and services so much that they will pay more and for a longer period of time. And maybe even better: they will turn into evangelists!