Knowing your churn rate is essential because it tells you well you’re doing at retaining customers.
The churn rate metric helps measure how successful your company is at keeping its customers and can be used to identify areas where improvements need to be made.
In this blog post, we’ll answer the question, “What is churn rate?” so you can better manage customer expectations and optimize marketing efforts to reduce customer attrition. You’ll also have more insight into what strategies are working and which aren’t, so you can make informed decisions about how best to retain existing customers while attracting new ones.
- Churn rate, also known as customer attrition or customer churn, is the percentage of customers who cancel or don’t renew their subscriptions over a given period.
- To calculate customer churn rate, divide lost customers by the total number of customers at the start of the period. Next, multiple that number by 100.
- Knowing your customer churn rate can help you identify weak points in your business, improve your bottom line, and assist with goal-setting and forecasting.
- Customer churn rate varies by industry, with SaaS companies typically having higher rates than those in telecommunications or retail/e-commerce sectors.
- Strategies for reducing customer churn rate include understanding why customers are leaving, building stronger relationships, improving product/service offerings, providing exceptional customer support, and monitoring/optimizing customer success metrics.
- What Does Churn Rate Mean?
- How to Calculate Churn Rate
- What Is a Good Churn Rate?
- Importance of Measuring Churn Rate
- Challenges With Tracking Churn
- How Do You Track Churn Rate?
- Strategies for Reducing Churn Rate
What Does Churn Rate Mean?
Churn rate, also called customer attrition or customer churn rate, is the percentage of customers who cancel or don’t renew their subscriptions over a given period. Measuring this metric gives you insight into how successful your customer retention efforts are and whether your investments in acquiring new customers are paying off. It also allows you to identify potential areas for improvement and make
In subscription-based businesses, churn rate is often used to assess customer retention and satisfaction. A high churn rate typically indicates problems within the business — unhappy customers, poor product offering, or inadequate customer service — while a low churn rate means your customers are loyal and satisfied with your products or services.
Voluntary vs. Involuntary Churn
When evaluating churn rate, it’s also essential to differentiate between voluntary and involuntary churn.
- Voluntary churn happens when customers consciously decide to cancel or not renew their subscriptions.
- Involuntary churn occurs when customers inadvertently lose access to the service, such as when a credit card expires.
By distinguishing between the two, you can prioritize addressing the factors contributing to voluntary customer churn, such as quality issues or lack of customer engagement. Addressing involuntary customer churn may involve improving payment and account management systems.
Customer Churn Rate vs. Customer Retention Rate
Ideally, businesses should aim for both a low churn rate and a high retention rate. While churn rate measures the percentage of customers who leave your business, customer retention rate gauges your ability to keep them. Retention rate is the percentage of customers who remain with your business over a given period. It can help you determine your capacity to maintain customer loyalty, satisfaction, and recurring revenue.
Although seemingly opposing, churn rate and retention rate provide complementary insights into a company’s overall health. Understanding the relationship between these metrics can help assess a business’s ability to grow and sustain profits. In fact, concentrating on improving customer retention can help reduce churned customers, as focusing on cultivating long-term customer relationships and loyalty will often lead to fewer customers seeking alternative providers or canceling subscriptions.
How to Calculate Churn Rate
Calculating churn is a straightforward process that involves comparing the number of customers lost within a given period (usually a month or a year) to the total number of customers at the beginning of the same period. Though some businesses may also factor in new customer acquisitions, it’s essential to understand the basic churn rate formula before diving into modifications or additional considerations.
As you monitor and analyze customer churn over time, remember that it’s normal for this metric to fluctuate. It’s also valuable to compare your churn rate with industry benchmarks to gain insight into your company’s standing relative to competitors. By understanding industry norms, you can set realistic and attainable goals for reducing churned customers and improving retention.
Churn Rate Formula and Calculation
The basic churn rate formula is:
Number of Customers Lost During Time Period ÷ Total Number of Customers at Start of Period) x 100 = Churn Rate
To calculate churn rate using this formula, divide the number of customers lost during the time period by the total number of customers at the beginning of the period. Then, multiply the result by 100 to express the churn rate as a percentage.
Company ABC had 1,000 customers on Jan. 1. During the month of January, 50 customers cancel or fail to renew their subscriptions.
Churn Rate = (50 ÷ 1000) x 100 = 5%
In this example, Company ABC’s churn rate for January is 5%. This means that 5% of Company ABC’s customers stopped using their services during the month.
Monthly Churn Rate and Annual Churn Rate
There are two primary ways to measure churn rate: monthly churn rate and annual churn rate.
- Monthly churn rate: Divide the number of customers lost during a given month by the number of customers at the start of the month and multiply the number by 100. This metric is particularly helpful for businesses that operate on a subscription basis, like many SaaS companies.
- Annual churn rate: Divide the number of customers lost during the year by the total number of customers at the beginning of the year and multiply that number by 100. This metric provides a more comprehensive overview of customer retention and company performance.
Gross Revenue Churn Rate and Net MRR Churn Rate
Gross revenue churn rate involves looking at the total amount of revenue lost from customers who decided to stop using a service within a given period. Gross revenue churn shows how much the company is losing in revenue from customer attrition.
However, gross revenue churn doesn’t consider any additional revenue gained from existing customers during the same period. This is where the net monthly recurring revenue (MRR) churn rate comes into play. By calculating the difference between revenue churn and additional revenue from existing customers, the net MRR churn rate gives a clearer picture of a company’s overall growth trajectory.
A positive net MRR churn rate indicates that the organization is successfully increasing the value delivered to its customers. In contrast, a negative rate can suggest a need for improvement or strategic adjustments.
What Is a Good Churn Rate?
Churn rates can vary significantly by industry, making it essential to compare your rate to other companies in the same market. For instance, SaaS companies usually have higher churn rates than businesses in other industries due to their subscription-based models and the ease of trying out competing services.
Generally, a 2% to 8% churn rate is considered good or acceptable for businesses, including SaaS companies.
Meanwhile, companies in the telecommunications industry typically experience lower churn rates due to the costs and inconvenience of switching providers. In contrast, businesses in the retail or e-commerce sectors might face higher churn rates due to the competitive nature of these industries and the abundance of alternative providers.
Understanding industry-specific churn rate benchmarks is crucial in evaluating a company’s performance and implementing solutions.
Importance of Measuring Churn Rate
By understanding the reasons behind customer churn and revenue churn, companies can make necessary adjustments to their business strategies, improve customer retention, and increase revenue.
Identifies Weak Points in Your Business
Knowing your churn rate can help you pinpoint the areas in your business that need improvement. By analyzing why customers leave, you can identify weak points in your business, such as unsatisfactory products or services, lack of customer support, difficult-to-navigate websites or apps, and more. This information can then be used to make necessary changes and improvements to retain existing customers and attract new ones.
Impacts Your Bottom Line
Acquiring new customers can be expensive, and losing them can harm your bottom line. Knowing your churn rate helps you calculate the lifetime value of your customers and the potential revenue churn.
By reducing churned customers through improved satisfaction and experience, you can retain your target market and save money on customer acquisition costs.
Helps With Goal-Setting and Forecasting
Knowing your annual or monthly churn rate can also help set goals and forecast future revenue. By tracking churned customers and revenue churn over time, you can forecast potential revenue loss and set realistic growth goals for your business. This data can also help you identify trends and patterns that may impact your business in the future, allowing you to adjust your strategy accordingly.
Provides Insight for Customer Retention Strategies
Understanding why customers leave can help you develop effective customer retention strategies. By addressing the reasons customers leave, you can create programs or initiatives that eliminate those specific pain points. For example, if customers leave due to poor customer service, you can invest in training your staff and improving your customer service department. This, in turn, can improve customer loyalty and reduce churn.
Improves Overall Customer Experience
By monitoring your churn rate and actively working to reduce it, you can improve your overall customer experience. When customers are satisfied, they are more likely to remain loyal to your business, recommend you to others, and leave positive reviews. This reduces your annual and monthly churn rate, increases revenue from existing customers, and attracts new ones.
Challenges With Tracking Churn
Losing customers can be a major setback for any company, and identifying the root cause of churn is crucial for mitigating revenue loss. However, tracking churn rate can be a daunting task for sales professionals and business owners alike.
Below, we will highlight some challenges associated with tracking churn rate.
Hard to Collect Data Without Software
One of the biggest challenges with tracking churn rate is data collection and integration. To get an accurate picture of customer churn, you need data from multiple sources, such as CRM software, billing systems, customer support platforms, and more. Manually aggregating this data is time-consuming and prone to errors, especially if you don’t have a centralized system for monitoring customer interactions.
Moreover, integrating data from different software is challenging, as data can be generated in different formats and languages. To overcome these challenges, invest in a platform that allows for seamless data integration from multiple sources, like a customer data platform (CDP) that consolidates customer data across various touchpoints.
Tough to Identify the Right Metrics
The next challenge in tracking churn rate is determining the right metrics to measure. While calculating churn itself is relatively straightforward by using the churn rate formula, identifying the drivers is more complicated.
Knowing how many customers left is one thing, but understanding why they left is another. Gathering customer feedback on their experience with your products or services, analyzing customer behavior patterns, and monitoring key performance indicators (KPIs) can help you identify the factors that lead to churn. Remember, not all churn is equal, and understanding the root cause of churn can help you focus your efforts where they will be most effective.
Analyzing Data Can Be Confusing
Once you have collected and integrated the data and identified the right metrics, the next challenge is analyzing and interpreting the data. The amount of data generated by different software can be overwhelming, and making sense of it all can be challenging.
Visualizing the data can be helpful in this regard, making it easier to spot trends and patterns. Furthermore, using predictive analytics tools to forecast customer behaviors can help you identify at-risk customers and take proactive measures to prevent churn.
How Do You Track Churn Rate?
Fortunately, plenty of tools are available online to help calculate customer churn rate and track it over time. Below, we’ll explore the best tools for tracking churn rates, including revenue churn, and how they can help you stay on top of customer retention.
One way to track churn rate is to use analytics platforms like Google Analytics, Mixpanel, or Kissmetrics. These platforms offer user-friendly interfaces, which allow you to analyze your customer’s behavior and churn rate data.
You can see how many customers are signing up or canceling, which features they use, and how much time they spend on your website or app. By analyzing this data, you can identify patterns of customer behavior that affect your churn rate and take action.
Customer Success Platforms
Another way to track customer churn rate and revenue churn is to use customer success platforms like Intercom or Totango. These platforms offer tools like customer engagement tracking, user onboarding, and customer health scores.
By tracking customer engagement, you can assess your customers’ engagement with your product and identify those at risk of churning. You can also use customer health scores to segment customers based on their health status and take proactive measures to prevent churn.
Feedback tools like Delighted or Nicereply allow you to measure customer satisfaction and collect feedback. Regularly measuring customer satisfaction can reduce churn rate by identifying and resolving problems early. Feedback tools also help you understand why customers leave and what you need to improve to keep them engaged.
Finally, CRM systems like HubSpot or Salesforce can help you track your customer churn rate and identify trends and patterns that led to customer churn. CRM systems also help you manage customer relationships, automate sales and marketing processes, and track valuable customer data.
When combined with churn rate data, this data can help you improve your customer retention strategies.
Strategies for Reducing Churn Rate
Reducing churn rate is essential, as it is a key performance indicator for customer satisfaction, retention, and revenue growth. Below, learn some strategies for reducing your churn rate, keeping your customers happy, and improving your bottom line.
Understand Why Your Customers are Churning
The first step in reducing churn rate is to understand why customers are leaving. Customer feedback surveys and analytics data can help you identify common issues that lead to customer churn. For example, if customers consistently report difficulty using your website or app, it may be time to improve your user interface or offer additional support channels.
Identifying the root cause of customer churn early can help you develop targeted strategies to address the issue, improve customer retention, and reduce churn.
Build Strong Relationships With Customers
When customers feel valued and understood, they are more likely to remain loyal to your business. Build relationships with customers by offering personalized experiences, responding quickly to inquiries and issues, and soliciting customer feedback. You can also create loyalty programs and rewards for loyal customers to incentivize them to continue doing business with you.
Improve Your Product or Service Offerings
Poor quality or a lack of necessary features can lead customers to seek other options. Continually improving your product or service offerings can help you stay ahead of the competition and retain customers. Analyze customer feedback and market trends to identify areas of improvement, and then implement changes to improve your offerings continually.
Provide Exceptional Customer Support
Effective customer support is another crucial factor in reducing churn rate. Customers want to feel heard and supported when they have issues or concerns. Ensure customers have multiple channels to contact customer service, such as phone, email, or chat.
Train your customer service team to be empathetic, responsive, and efficient in resolving customer issues. Providing exceptional customer support can help build trust and loyalty with your customers, ultimately reducing churn rate.
Monitor and Optimize Customer Success Metrics
Finally, monitor and optimize your customer success metrics to identify areas of improvement and adjust your strategies accordingly. These metrics can include customer retention rate, customer satisfaction score, and customer lifetime value. By analyzing these metrics regularly, you can identify patterns of success and failure and adjust your strategies to help keep customers satisfied long-term.
Churn rate is an important metric for any business, as it measures how well you retain customers. Now that we’ve answered the question “What is churn rate?” you can figure out where your business stands and make any necessary improvements. Calculate churn rate regularly for the best results.
Whether you’re using spreadsheets or software, keep your data organized, up-to-date, and actionable. By staying proactive and responsive to your customers’ needs, you can build a loyal customer base that sticks around for the long haul.
Bradley Wood is a seasoned sales executive who has run sales teams for businesses of all sizes. He strives to set high sales goals and works hard to surpass them with a thinking outside-the-box approach. Bradley is based in Miami, where he enjoys exploring the city’s vibrant music scene.