Customer churn – the rate at which customers stop doing business with you – is a critical metric for Australian SMEs. It’s easy to focus on acquiring new customers, but overlooking churn is like trying to fill a leaky bucket. Understanding the *true* cost of churn isn’t just about lost revenue; it’s about the ripple effect on your marketing investment and long-term growth.

Many businesses only calculate churn cost as the lost revenue from that customer. That’s a significant underestimation. We need to look at it holistically. Here’s how we approach calculating the true cost:

• Lost Lifetime Value (LTV): This is the most important component. Don’t just think about what that customer spent *last* month. Estimate their potential value over the entire relationship you could have had. A simple calculation is average purchase value multiplied by average purchase frequency, multiplied by average customer lifespan.
• Customer Acquisition Cost (CAC) Recovery: You’ve already spent money acquiring this customer. Churn means you don’t recoup that investment. Factor in all marketing and sales costs associated with winning that customer – advertising, sales team time, promotions – and divide it by the number of customers acquired in that period.
• Reduced Referral Value: Happy customers are your best advocates. A churned customer isn’t referring new business. Estimate the value of referrals you’ve lost, considering the average LTV of a referred customer.
• Impact on Brand Reputation: While harder to quantify, negative word-of-mouth from dissatisfied customers can damage your brand and make future acquisition more difficult. Consider the potential cost of needing to invest more in brand building to counteract negative sentiment.

Let’s say, for example, a customer has an LTV of $500, your CAC is $100, and you estimate they would have referred a customer worth $250. The true cost of their churn isn’t just $500 in lost revenue, it’s $850. This figure provides a much clearer picture of the impact on your bottom line.

By accurately calculating the true cost of churn, you can justify investment in customer retention strategies. In 2026, we anticipate increased competition across most sectors, making retention even more vital. Don’t just track churn; understand its full financial impact. The next step is to analyse *why* customers are leaving and implement targeted strategies to improve retention rates and protect your marketing ROI.