The Compounding Cost of Customer Churn

This article answers the question: Why is churn so costly to a business?

Answer: Customer churn becomes costly because even small, preventable losses due to bad customer service or CX can compound over time, forcing a company to acquire more new customers just to stay even.

Would you rather have $1 million today or a penny that doubles every day for 30 days? 

You may have heard this question before. It’s sometimes called The Magic Penny. 

On day one, you have one penny. On day two, you have two pennies. Then four, eight, 16, and so on. After 10 days, you’ve accumulated $10.24 worth of pennies. Not very impressive. 

But keep doubling. 

After 20 days, you have more than $10,000, and after 30 days, that penny has turned into a whopping $10,737,418.23! 

That’s the power of compounding. 

Now, let’s turn The Magic Penny upside down. Instead of doubling the pennies you gain, imagine doubling the customers you lose. Lose one customer today. Two tomorrow. Four the next day. Then eight, 16, 32, and so on. Suddenly, we’re not talking about the power of compounding. We’re talking about the danger of customer churn. And while that’s an extreme example, it makes the point. Losing a few customers regularly may not seem like a big deal – until it is.  

Consider one of my favorite companies, Costco. According to its SEC filing, Costco has 84.1 million paid members. Its renewal rate is an impressive 89.8% worldwide. Of course, not every member who doesn’t renew is an unhappy customer. People move, their circumstances change, or they simply may not use the membership enough to justify renewing. Even though not every member renews, Costco continues to grow.  

That’s an important point, and you don’t have to be a big company like Costco for this lesson to matter. A company can lose customers and still grow if it brings in more new customers than it loses. But that doesn’t mean those lost customers don’t matter. The more customers who leave, the more new customers you need to keep growing.  

So, what happens if the number of customers you lose starts growing faster than the number you can replace? That’s when churn becomes a problem. No company keeps customers forever, and not all churn is preventable. But some of it is.

A bad experience, poor service, an unresolved complaint, an employee who didn’t seem to care, or a difficult process can all keep customers from coming back, and these are often within our control. 

And that’s the real lesson of The Magic Penny.  

Don’t just measure how many customers are leaving. Understand why they are leaving. Look for patterns. Pay attention to the reasons you can control, and fix them.   

You may not notice one lost customer. Or two. Or four. But small numbers have a way of becoming big numbers.

Don’t let customer churn become your Magic Penny.