Updated on 22/12/2022
The Churn rate in the free market
One of the biggest challenges for utilities and energy companies in the new liberalized and hyper-competitive market is to lower the Churn rate. But what is customer Churn? Here’s what it is and what its causes are.
According to a widely known and cited analysis by Bain & Company, winning a new customer costs a company 6 to 7 more than retaining one. It’s a fact that marketing and customer care departments in the Utility Industry can no longer ignore.
Until a few years ago, suppliers of electricity, gas, water, internet and telephony did not place the user at the center of their business. At the time, market conditions were such that the large companies who dominated the sector faced little competition, and so they could afford to be perceived as distant from the customer. Today, however, everything has changed. And in a radical way.
The Utilities and Energy market has opened up, the players have multiplied, and competition is not over small price margins, but on the ability to involve and retain its users through customer retention and strategies designed to improve loyalty.
It’s a real revolution that has impacted the brand identities of all the companies in the sector, from industry giants with decades of history behind them to the youngest and most innovative players. And it places customers at the very center of focus. Today’s customer is no longer one among many, but an informed customer with unique characteristics and needs, who can easily switch from one operator to another in just a few clicks.
What is customer churn?
First of all, let’s answer a question what is customer churn? Also known as customer attrition, it is very simple to define: it is the moment when a customer leaves the company and takes its business elsewhere.
The competitive nature of the market that has made these steps simple and immediate for customers, has created a major challenge for companies. Winning new customers is expensive and complex: it means putting complex marketing strategies in place (where results aren’t always guaranteed), investing time and resources, and working hard on all possible leads in your sales funnel.
Instead, working on building customer loyalty brings more solid results; it is a more focused strategy that is more controllable and less costly.
A loyal customer becomes a marketing vehicle for a company through word of mouth. And, it is around this type of customer that companies can queue up actions such as upselling and cross-selling, multi-channel and personalization that result in increased revenue per user.
Therefore, keeping customer churn under control is an absolute urgency for companies in the Utilities and Energy sector.
The number of people changing their gas, electricity or water supplier is increasing year on year, in Italy and abroad. This kind of attitude from users is not surprising at all. With the advent of the free market and also the proliferation of utilities that use platforms where you can have all the necessary information, changing operator has become increasingly simple and convenient. In addition, competition leads to a much wider range of offers and thus, therefore, more and more attractive.
How to calculate churn rate
In business (and in life itself) the way to solve a problem is to look it in the face, analyze it, and measure the causes and consequences. Next, you need to find effective solutions.
There are several ways to calculate churn rate. You can consider the total number of customers lost during a year, the percentage of customers lost in relation to the total number of customers, or calculate the value of recurring revenue (the portion of stable revenue) lost.
Some companies calculate the churn rate for the duration of the fiscal year, others prefer to focus on quarters or semesters. One of the most commonly used methods is to divide the total number of customers at the beginning of a given time period by the number of customers lost in the same time period. Each company has its method according to its structure, objectives, and needs.
Regardless of how you calculate it, one thing is valid for any company: customer churn doesn’t necessarily happen overnight. It is not a phenomenon triggered by chance, without precise causes. And, last but not least, it is not inevitable. Monitoring is the first step. The second step is to investigate the causes.
What is customer churn: main causes
Essential services such as water, electricity, gas, internet and telephony have a daily and intimate impact on people’s lives; for this reason, there are many things that can serve to push a customer away.
The causes range from a simple rise in prices to a change in brand identity (now increasingly important; and it’s no surprise that companies in the sector are increasingly careful to portray an image that is green, transparent, responsible and smart). Then there are the normal dynamics of competition (often unpredictable), where expectations are betrayed.
At the heart of everything is the quality of customer care services. It is on this point that companies in the Utility sector can lose or gain customers and lose or gain market positioning. A study by Groove showed that 9 out of 10 customers left one company for another because of unsatisfactory customer experience.
This figure – which leaves very little room for doubt – is echoed by the Customer Experience Impact Report, which found that 89% of users leave for a competitor due to problems in the customer experience. In addition, 86% of customers say they are willing to pay more for a better service experience and dialogue with the company. And 65% say that a positive experience with a brand is much more important and influential than any type of advertising campaign.
The customer must be at the center of the business, and if you think about the causes of customer churn, you can see that the heart of the problem is right here.
How to minimize the effects of churn
Customers are the Utility companies’ most valuable asset. To lose them is to weaken one’s image, and to lose revenue, turnover, and market share. To avoid it requires a global strategy based on long-term planning.
First of all, we must use the most advanced analytical tools wisely. These tools allow you to better know your audience of users, to organize it into segments and clusters according to metrics that take into account personal, geographical, and socio-psychological characteristics.
The best and most advanced strategies are those that push towards personalization. They are those offered by companies such as Doxee, which has been working for with industry giants such as Enel or Engie for many years, and which has been included by CIOReview in the list of the 20 most promising technologies for the world of Utilities.
Through these solutions, customer care services can be tailored to the individual, in a complete one-to-one dialogue.
In doing so, we must pay attention to dangerous touchpoints, such as the old bill. Today, the traditional “bill” has new requirements: it must become interactive, personalized, and – ultimately – a real opportunity for dialogue with the customer.
Companies will need to build a coherent multi-channel, even omnichannel image, which will require effective communication across all channels, from email campaigns to mobile apps, to the presence on social networks. This last point is also important if we consider how individual complaints and negative experiences can be amplified and transformed into real storms in the social media arena.
In short: everything turns on the dialogue with the user, how well you know him, and your effectiveness in taking care of him. Learning how to do this in the best possible way is the key to reducing churn, and to strengthening your company’s profits and position.