What is the Churn Rate?
The Churn rate is a broad term referring to the action of people leaving a specific group in a given amount of time. So it can be applied to employees leaving a company or customers that end their subscriptions to s service (for example.)
In this entry, we’ll address the customer churn rate, particularly as the measure of the number of customers that stop their interaction with a company.
The churning customers might have been involved in a subscription type of service (think SaaS, cable, and phone companies), or they just repeat buyers that don’t have a fixed frequency (think eCommerce stores).
To that end, think of customer churn as the rate at which customers stop doing business with your company.
Benefits and Drawbacks of the Churn Rate
Customer churn is a critical metric for businesses across various (if not all) industries.
Measuring why, when, and how many customers lost interest in your brand will help you understand customer behavior and make informed decisions to improve customer retention and generate recurring revenue.
However, as it’s the case with most metrics, the Churn Rate comes with both benefits and drawbacks.
Let’s explore the advantages and disadvantages of tracking the churn rate and understanding average customer churn.
Benefits of Churn Rate
Firstly, tracking the churn rate enables you to understand the overall satisfaction levels of your customer base.
We all assume customers love us, yet we must back up the assumption with complex, objective data.
A high churn rate indicates underlying issues such as poor product quality, inadequate customer service, or uncompetitive pricing.
But not all hope is lost since identifying these issues allows you to take proactive steps to address them, enhance the customer experience, and retain customers.
Churn rate analysis also provides insights into customer behavior patterns, enabling you to orchestrate effective customer retention strategies.
Identifying the common reasons for churn reveals what you need to do better and where you must intervene to meet customers’ expectations.
You can tailor your pricing, customer support, and marketing efforts to satisfy your customers through relevance, convenience, and fairness. These small optimizations will increase customer loyalty and reduce churn over time.
Moreover, you can use churn rate analysis to allocate your resources more efficiently.
When tracking the churn rate for your customer segments, you can pinpoint and isolate customers most likely to leave, then intervene with prevention campaigns.
This targeted approach allows for a more effective allocation of resources, both in terms of time and budget, resulting in improved retention rates and profitability.
And there’s more.
The churn rate can be used as a comparative metric against your peers or competitors playing in the same industry as you.
Benchmarking your churn rates gives you the power to assess your performance relative to competitors in the market objectively.
Yes, the comparison is the thief of joy – but you aren’t operating in a vacuum and should be aware of how your competitors are doing.
Seeing where you stand compared to your competitors provides insights into whether your business faces unique challenges or whether its churn rate is aligned with industry standards.
This clarity also helps identify areas for improvement and potential competitive advantages you can leverage into acquiring new and better customers.
Last but not least, a benefit truly appreciated by customer support teams – people who have issues demonstrating their impact on the company’s financial performance.
Churn rate analysis provides a clear understanding of the financial impact of customer churn.
Showcasing how much revenue is lost when you lose customers helps customer success professionals gain the eyes of their managers. Quantifying customer churn in real money highlights the magnitude of the problem and the urgency with which it needs to be addressed.
Drawbacks of Churn Rate
While churn rate is a valuable metric, it is essential to consider its limitations.
Let’s start with the lack of context. The churn rate doesn’t always provide the complete picture.
It’s important to consider the context surrounding the churn rate, such as industry norms, seasonal fluctuations, or external factors that may influence customer behavior.
Focusing solely on the churn rate without considering these factors may lead to misguided conclusions or ineffective strategies.
At the same time, churn rate analysis alone can’t uncover why customers are leaving.
This lack of deeper insights is the reason why best-in-class companies complement churn rate tracking with qualitative research methods such as:
- customer surveys
- feedback analysis
These insights can uncover the reasons for churn, allowing you to address root causes more effectively.
You might find it challenging to determine the specific reasons behind churn. Besides a natural churn, which is normal for any business, customers may leave for various reasons.
Think of a lack of product progress, poor customer service, or competitive offerings. While all viable reasons, none of which is a universally accepted reason for churn.
In fact, identifying the primary churn driver requires sophisticated data analysis and modeling techniques, which can be time-consuming and resource-intensive.
Moreover, the churn rate can exhibit volatility.
Businesses with a smaller customer base, in particular, are prone to market fluctuations.
Additionally, churn rate calculations often involve time lags due to the need for historical data, meaning that changes made to improve retention may take some time to reflect in the churn rate.
Reducing churn is essential, yet solely focusing on retention can lead to tunnel vision.
You must find the balance between retaining existing customers and acquiring new ones, as overemphasizing retention may result in missed opportunities for growth and expansion.
How to Calculate the Churn Rate
The frequency at which you calculate the churn rate varies depending on your needs and characteristics.
Let’s explore different ways to calculate churn rate, focusing on monthly, quarterly, and annually frequencies, and discuss each approach’s benefits and drawbacks.
Monthly Churn Rate Calculation
A common approach is calculating the churn rate each month.
Tracking your monthly churn offers a more granular view of customer attrition, allowing you to identify short-term trends and patterns.
With this approach, you can intervene quickly and address any issues before it’s too late, leading to a more effective retention strategy.
For example, you can act quickly to implement prevention marketing campaigns, enhanced customer support, or better product features based on recent customer feedback.
However, there are some drawbacks to calculating the churn every month.
For example, the monthly churn rate can be volatile, depending on the season, special events, or market fluctuations. One month’s churn rate might not resemble the other.
This volatility will make it challenging to accurately identify meaningful trends or evaluate short-term strategies’ impact.
At the same time, monthly churn rate calculations don’t provide a real understanding of customer churn over longer periods.
Quarterly Churn Rate Calculation
Another approach would be to calculate the churn rate on a quarterly basis and identify more stable trends.
Quarterly churn rate calculations help smooth out short-term fluctuations and provide a more accurate view of churn trends. This view allows you to analyze longer-term patterns, identify seasonality, or monitor the impact of strategic initiatives over a reasonable time frame.
Evaluating the churn rate quarterly gives you sufficient time to implement and evaluate retention strategies. You have a few months to observe customer behavior and respond with appropriate actions to reduce churn effectively.
However, waiting for a quarter to end before calculating the churn rate often results in delayed insights.
You might miss out on identifying and addressing emerging issues promptly and also suffer from an inability to measure the immediate impact of recently implemented retention strategies.
Lastly, with quarterly analysis comes poor precision.
Your aggregated data might not capture fluctuations within the quarter, making pinpointing specific causes of churn challenging.
Annual Churn Rate Calculation
Lastly, you can decide to calculate the annual churn and check this metric once a year.
The annual churn provides a long-term perspective helping you:
- identify persistent trends and predict churn
- evaluate the effectiveness of retention strategies implemented throughout the year,
- make informed decisions for future initiatives
At the same time, annual churn can inform your strategic planning and resource allocation for the upcoming year.
It helps you set realistic goals, forecast revenue, and allocate resources to improve customer retention based on long-term customer behavior patterns.
But annual churn doesn’t help with quickly adapting to immediate changes in customer behavior.
Relying on the annual churn exclusively leads to missed opportunities to implement proactive retention and prevention measures.
At the same time, annual churn rate calculations may smooth out short-term fluctuations. In theory, it sounds good, but it will become a challenge to identify seasonality or capture the impact of specific initiatives implemented during specific periods.
Is there an ideal churn calculation?
Carefully evaluate the trade-offs associated with each frequency to determine the most appropriate approach.
Churn Rate Formula
The churn represents the percentage of customers that have stopped their subscription from the total customers, so it can easily be calculated like this:
(number of lost customers / total amount of customers) * 100
SaaS churn rate formula & calculation
Churn rate is one of the most important KPIs for SaaS (software as a service) companies since it can predict a company’s growth.
The period it’s usually calculated for is either a month or a year.
For example, if we have a company that loses 10 customers from a 1500 customer base, the churn rate would be (10/1500)*100 = 0.66%
eCommerce churn rate formula & calculation
Calculating the churn rate for eCommerce stores is equally important.
However, it’s not easy to make this calculation unless you’re running a subscription-based site.
Because, in the case of regular eCommerce stores, there is no definite action that a customer can take to be clear that they are churned, we need to implement an arbitrary cutoff date to be able to make this calculation.
For example, this cutoff date can be set by analyzing the trends of previous transactions. In the case of repeat buyers, for example, there’s an average period between purchases.
Depending on the industry, it may be 1 week, several weeks, several months, or even more than one year.
For example, using this data as a cutoff time enables e-commerce owners to calculate churn rates using the same formula stated above.
Customer churn analysis
Tracking the churn rate is the first important step, but interpreting and analyzing the data is what makes this effort worthwhile for business owners.
A clear direction of the business can be seen by tracking the number of churning customers together with the amount of income generated by them.
In the analyzing stage, one of the most important tasks is discovering patterns to quickly address major problems before they negatively impact the business.
This is why tracking the churn rate evolution for several important customer segments can be very useful. Some of them might be:
- Demographics (age, gender, location)
- Cohorts (customers from a specific month or year)
- Customer Industry
- Customer size according to the amount of revenue generated
What is a Good Churn Rate?
Churn rate benchmarks can vary across industries and business models, so it’s important to consider industry-specific data and factors that may influence churn rates.
To obtain the most accurate and up-to-date benchmarks for churn rate in your specific industry, you can refer to industry reports, studies, and consulting firms that research customer churn and retention metrics.
How to reduce the churn rate (aka churn rate optimization)
After tracking and seeing the current state of the churn rate overall or for specific customer groups, a business owner might decide to invest resources to decrease it.
Depending on where the main problem lies, some different strategies and techniques can help lower your churn rate, such as:
- Having a responsive client support team
- Implementing personalized messages that get sent at key moments in time (for example, right before customers are going to churn)
- Activating promotions and deals to make the renewal decision much easier
- Improving the website usability to that visitors can easily find their way
- Running customer satisfaction surveys to discover the users’ unmet needs
- Investing in branding and brand loyalty
- Creating an RFM model
- Implementing advanced ad campaigns (such as remarketing according to the user behavior)
- Under-promising and over-delivering
- Tracking your company’s NPS score
- Implementing up-selling, down-selling, and cross-selling
Churn Rate Examples – Customer churn rate by industry
The churn rate varies greatly from industry to industry and according to the company’s size.
Companies with a smaller client base tend to have higher churn rates, while those with large client bases tend to have lower churn rates, but this is not always the case.
It’s very difficult to make generalizations, especially because churn rates are not usually made public.
For SaaS companies, an acceptable churn rate is around 5%.
But depending on their vertical, it can vary with about +/- 2%. Other known average churn rate values include:
- Energy/ Utilities – 11%
- Telecommunications – 31%
- Wholesale – 56%
But even within a single industry, the churn rate can vary greatly.
Ideally, you should set the target churn rate according to your KPIs, such as customer lifetime value, average order value, monthly recurring revenue, etc.
While on the subject, let’s also discuss the negative churn rate concept.
A negative churn rate refers to a situation where the expansion and retention of existing customers outweigh the loss of customers.
In other words, it occurs when the increased spending or upselling from current customers exceeds the revenue lost due to churn.
A negative churn rate is one examples of churn rate you want. It’s a positive indicator for businesses, demonstrating the ability to generate growth from existing customer relationships. Monitoring and striving for a negative churn rate can be a valuable goal for businesses seeking sustainable growth and profitability.
Frequently Asked Questions about the Churn Rate
The churn rate is a metric that measures the percentage of customers or subscribers who stop using a product or service within a given period. It indicates the rate of customer attrition or loss.
A 5% churn rate means that 5% of the total customer base or subscriber base has discontinued their usage or subscription within a specific period. It suggests that 5 out of every 100 customers have stopped doing business with the company.
The churn rate is calculated by dividing the number of customers lost during a particular period by the total number of customers at the beginning of that period. The result is multiplied by 100 to express the churn rate as a percentage.
In the context of key performance indicators (KPIs), churn refers to the metric that measures customer attrition or loss. It helps businesses assess their ability to retain customers and maintain long-term relationships, which is essential for sustainable growth and profitability.
A good churn rate can vary across industries and business models. Generally, a lower churn rate is desirable as it indicates higher customer retention.
However, what constitutes a good churn rate depends on industry-specific benchmarks and factors such as customer acquisition costs and customer lifetime value. It is recommended to consult industry reports and research to determine the ideal churn rate for your specific industry.