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How to Calculate Churn Rate: Definition, Formulas, and 4 Examples

You can’t fill a bucket if there are leaks. Trying to grow a business without addressing churn is the same concept.

 

This guide covers churn rate basics and how to fix common problems so that you can grow your business without worrying about a leaky bucket.

 

To learn more about other terms commonly used in venture capital, check out our complete VC Glossary.

 

Table of Contents

Churn - Confluence.VC

What is customer churn rate?

Customer churn rate is a measure of the number of customers or subscribers who stop doing business with an organization within a given period.

 

It is sometimes referred to as customer turnover rate or customer attrition rate.

 

In other words, the customer churn rate definition is the percentage of customers who have stopped using a company’s product or service during a specific time frame.

 

Why should you care about churn?

Customer churn rate is an extremely important metric for any business to measure, as it can provide invaluable insight into how effectively the business is retaining customers.

 

A high churn rate typically indicates that the company has an underlying problem in its customer service, product quality, or pricing. It also suggests that the company may need to take proactive steps to address customer dissatisfaction.

 

How to calculate churn rate

The customer churn rate calculation is typically done by taking the total number of customers that have canceled or churned within a specific period of time and dividing it by the total number of customers at the start of the period.

 

This will give you the percentage of customers who have left in that time frame. For example, if a company starts with 100 customers and five leave during a month, the customer churn rate for that month would be 5%.

 

Customer churn rate can also be calculated by taking the average revenue generated from lost customers divided by average revenue generated from all customers. This gives you an idea of how much potential revenue is being lost due to customer attrition.

 

For example, if 10 out of 100 customers cancel their subscription, but they accounted for 20% of total revenue, then the customer churn rate would be 20%.

 

However, customer churn rate and revenue churn rate, are not the same although they are closely tied together. Revenue churn, or MRR (monthly recurring revenue), is the percentage of revenue lost per month. Customer churn rate is the percentage of customers lost per month.

 

The churn ratio can vary greatly between businesses, depending on factors such as industry, customer segmentation, product complexity and lifecycle stage.

 

For example, businesses in different industries may experience different rates of churn; B2C companies tend to experience higher rates than B2B companies because consumers are less likely to stick with one company over another unless they’re highly satisfied with their product or service.

 

Furthermore, businesses that target small or medium-sized enterprises (SMEs) may encounter lower retention rates than those targeting large enterprises due to SMEs being more likely to switch vendors in search of better pricing or features.

 

Also, companies offering complex products may struggle with high customer churn rates as some users may find it difficult to use the product or do not understand its full value.

 

Businesses in later stages of growth may experience higher customer churn rates due to increased competition and customer acquisition costs.

 

By understanding each component contributing to its current customer churn rate and addressing any underlying issues causing dissatisfaction amongst its customers, a business can start improving its overall retention rate and grow sustainably over time.

 

When is the churn rate calculated?

The churn rate formula used will vary depending on the type of business model but typically, a monthly churn rate is calculated but daily churn, quarterly churn and an annual churn rate are also used. The type of churn rate equation or formula and the timing of the churn rates may depend on the type of business involved.

 

Companies may choose to measure or calculate churn rate at different intervals depending on their business needs and customer demographics. Generally speaking, the shorter the time frame measured, the more accurate the churn rate calculations will be; however, a longer time period can provide a better overall view of customer attrition.

 

To get the most out of a churn rate calculation, businesses should strive to calculate an annual churn rate and compare it against industry benchmarks. This will give them a better indication of how their retention efforts are faring against other players in their sector and provide valuable insight into what more they can do to keep existing customers and reduce lost customers.

 

What does a high churn rate mean?

A high churn rate means that the company is losing customers at a rapid rate over a given time period. This can be caused by factors such as customer dissatisfaction, higher competition levels, or increased customer acquisition costs.

 

A company with a high churn rate needs to address the underlying issues causing their customers to leave and take steps to improve their overall customer retention rate if they want to grow sustainably over time.

 

What are the different types of churn?

The different types of churn can be broadly classified into three categories: customer churn, revenue churn and usage churn. Two lesser used terms, gross churn and net churn, can also provide valuable insight for the company.

 

Customer churn

Customer churn is the NUMBER of customers that stop using a company’s product or service. They may do this because they are not happy with it, they want to switch to another provider for better pricing or features, or they just don’t find the product useful anymore.

 

When you service a large amount of customers, customer churn matters less because you are less reliant on a single customer to keep your business afloat.

 

Revenue churn

Revenue churn is the amount of money a company loses when customers stop using their product or service. Revenue churn is a more important indicator than customer churn because it is a more direct approach to calculating the impact on the business.

 

Usage churn

Usage churn measures how often existing customers are using a product or service over a given time period. This can provide insight into usefulness of the product and whether customers are finding value in it.

 

If usage churn is increasing, this could indicate that customers are not finding the value they expect from the product or service.

 

Companies can use usage churn to identify which features are not being used, or if customers are dropping off at certain points in the customer journey. This can help them improve their product or services and increase retention rates.

 

Gross churn

Gross churn is a measure of the total revenue lost due to customers lost. It takes into account all types of churn, including customer churn, revenue churn and usage churn.

 

This allows companies to better understand how much revenue they are losing from customers who are no longer using their product or service.

 

Gross churn can also provide insights into factors that are causing customers to leave, such as high prices or lack of features.

 

Net churn

Net churn is a measure of the total revenue lost due to customer attrition, taking into account all types of churn. It is calculated by subtracting the total revenue gained from new customers in a given time period, from the total revenue lost due to customer attrition.

 

This allows companies to better understand how much revenue they are losing from customers who are no longer using their product or service.

 

Net churn can also provide insights into factors that are causing customers to leave, such as high prices or lack of features.

 

As you read above, there are many effective ways to analyze churn, depending on your particular business. Whatever churn rate formula is used, significant knowledge can be obtained to help safeguard the company’s success.

 

Examples of churn

A few examples of churn for a company can include customers terminating their contract, customers reducing or completely ending their subscription, customers upgrading to a smaller plan, and customers simply not finding the product or service useful anymore.

 

Companies that experience high usage churn likely have customers who are not finding value in their product or services. This type of customer churn can be a sign that the company needs to reevaluate its products and services, and make changes to better meet customer needs.

 

Churn is an important metric for all companies, as it can provide valuable insight into how customers perceive their product or service and how loyal they are to the company.

 

There are several different types of churn, each of which can provide different insights into the customer experience and how customers interact with a product or service.

 

Calculating churn and understanding the results can help companies identify opportunities for improvement, and ensure that they are providing the best possible product or service to their customers.

 

What are churn indicators?

Churn indicators are key markers or metrics that can help identify when a customer is at risk of leaving a company’s product or service. These indicators can provide valuable insight into customer loyalty and retention, as well as help determine how customers are using the company’s products and services.

 

Common churn indicators include: customer lifetime value, customer engagement, usage patterns, customer sentiment and retention rates. Companies should track these indicators over time to identify potential problems as early as possible.

 

The goal of churn prevention is to maximize customer retention and satisfaction. Companies should focus on providing a superior customer experience through personalized products and services, competitive pricing, effective marketing campaigns, and efficient customer support. 


All of these methods will help reduce customer churn rate.

 

Companies should always be calculating churn rate to track trends and identify areas for improvement. By addressing customer feedback and understanding their needs, companies can ensure that they are providing the best possible product or service to their customers.

 

Ways to fix churn rate

One of the most important ways for a company to address the customer churn rate is by dedicating resources to customer retention. This involves focusing on providing customers with an excellent customer experience, personalized products and services, competitive pricing, effective marketing campaigns, and efficient customer support.

 

Companies should also track churn indicators such as customer lifetime value, customer engagement, usage patterns, customer sentiment and retention rates over time to identify potential risks and areas for improvement.

 

Companies should use data-driven insights to better understand their customers’ needs and preferences, as well as develop targeted marketing campaigns to increase customer loyalty.

 

Finally, companies should establish processes for continuous feedback from their customers in order to provide them with the best possible experience.

 

By addressing customer feedback and understanding their needs, companies can reduce their churned customers and ensure that they are providing the best possible product or service to their customers.

 

What can churn teach you about your business?

Businesses that calculate their churn rate can learn a great deal about their customer base and how to create a better user experience. By tracking key metrics such as customer lifetime value, customer engagement, usage patterns, customer sentiment and retention rates over time, companies can identify potential problems early on. This helps them gain valuable insight into how their existing customers are using their product or service, and how to make changes to better meet their needs.

 

The churn rate can also provides businesses with the opportunity to identify areas of improvement in their product or service offerings. Companies can use this data to develop more targeted marketing campaigns, create personalized experiences for their customers, and ensure that they are providing the best possible products and services to retain existing customers and keep them satisfied.

 

Analyzing churn can help businesses understand how their competitors are performing, where they are outperforming them, and what areas of improvement they need to focus on in order to stay ahead of the competition.

 

Overall, tracking churn is a great tool for companies to gain a better understanding of their customer base and how to best meet their needs. It can help them identify areas for improvement in order to maximize customer satisfaction, loyalty, and retention rates.

 

By tracking churn indicators over time and using the insights gained from analyzing them, companies can create a better user experience that will lead to greater success in the long run.

 

Should all companies calculate churn rate?

While not all companies measure or calculate churn, it is an important metric for companies that rely on customer loyalty as part of their business model. But for companies that don’t rely on customer retention, chasing a low churn rate may not be the best approach.

 

For example, if a company focuses primarily on making one-time sales of physical goods rather than subscriptions, measuring customer attrition may not be necessary since customers are unlikely to return after purchasing.

 

However, even if customer loyalty is not a major factor in the success of a business, tracking churn can still provide valuable insights. It can give businesses a better understanding of how their products and services are performing in the market and help them identify areas for improvement or gaps in their offerings.

 

Companies can also use churn rate to compare customer retention between different products or services offered by the same company. By comparing long-term trends over time, businesses can gain insight into which products are doing well and which could use some extra attention when it comes to engaging customers and improving satisfaction levels.

 

Tracking churn is also beneficial for understanding consumer trends in general. As consumers’ behavior changes due to external factors like new technology or economic conditions, so do purchasing habits; understanding these trends can help businesses stay ahead of the competition and ensure they are offering products and services that meet the needs of their target audience.

 

Overall, while measuring customer churn rate isn’t critical for every type of business, it provides valuable insights into customer satisfaction levels and engagement with a product or service which can be used to inform future strategy decisions and drive growth within the organization.

 

Bottom line

Churn rate is a metric that measures the percentage of customers or subscribers who stop using a service or product over a given period of time. There are several ways to calculate churn rate, and it’s important for businesses to understand because it can help them assess customer satisfaction, pinpoint areas where they may be losing customers, and make changes accordingly.

 

All businesses want to retain customers and gain new customers. Understanding its churn rate and how to reduce it will the company make the needed changes to ensure its success.

 

FAQs

What is the definition of churn?

Churn is a measure of customer attrition, or the rate at which customers are leaving a service or product.

 

What is the formula for churn?

The formula for churn rate is typically calculated as the percentage of customers or subscribers who have stopped using a service or product over a given period of time. It is calculated by taking the number of customers that have left a business during a specific period and dividing it by the total number of customers at the beginning of that same period. To get an accurate representation, this calculation should be done multiple times over various periods such as quarterly, annually, or monthly in order to get an average rate of churn.

 

Churn rate can also be used to compare customer retention between different services and products offered by the same company. By comparing churn rates for each service or product offered by a company, businesses can identify which ones are performing well and which need improvement in order to keep up customer engagement and loyalty.

 

Other formulas used for churn are revenue churn, usage churn, gross and net churn.

 

Which type of churn is most important?

The type of churn that is most important to consider depends on the nature of the product or service being offered, as well as the goals of the business. Generally, customer churn is the most important metric to track, as it measures how well a company is retaining its customers and indicates customer satisfaction. Other types of churn, such as revenue or subscription churn, can also be important to consider.

 

What types of companies measure churn?

Many different types of companies measure churn, but those most likely to pay close attention to their customer churn metrics are subscription-based businesses such as streaming video services and online retail stores.

 

Such companies typically rely on customer loyalty to remain profitable, so they must be proactive in understanding their churn rate and addressing customer feedback.

 

Is churn a good KPI?

Yes, churn rate is a good KPI for companies that rely on customer loyalty as part of their business model.

 

By tracking churn indicators such as customer lifetime value, customer engagement, usage patterns, customer sentiment and retention rates over time, businesses can gain valuable insights into how well they are retaining customers and make changes accordingly.

 

What is a good churn rate?

A good churn rate is generally considered to be below 5%, although this number can vary depending on the type of product or service being offered. Every industry faces churn and the average churn rate will vary by industry, with some rates as high as 56% (wholesale industries) and others as low as 11% (energy/utilities). Comparing your business churn rate to its industry average will help measure its performance and see where improvement is needed.

 

This post by Lenny Rachitsky does a good job at providing churn benchmarks.

 

 

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