How to Calculate Customer Churn Rate (Formula + KPI Example)

Customer churn costs businesses billions of dollars each year. In fact, reducing customer churn by just five percent can double the revenue. Given the high cost of customer churn, it’s no wonder that companies are constantly looking for ways to improve their churn rates and increase customer retention.

 

Some strategies for reducing customer churn include investing in better product offerings, improving the user experience, and offering superior customer service. Additionally, many businesses are turning to big data analytics tools to better understand customer behavior and find patterns in their online activity. Ultimately, by taking steps to reduce customer churn and improve customer retention, companies can boost their bottom line and ensure their long-term success.

So what exactly is customer churn? And why is it so important for businesses to keep track of this metric? 

 

In this article, we’ll examine the definition of churn rate, explore its impact on business performance, and discuss some strategies for reducing customer churn. Are you ready to learn more about this important business metric? 

 

Let’s dive in!

 

 

What Is Customer Churn Rate?

Customer churn is also called defection, attrition, or turnover and is the opposite of a business’s ability to retain customers. Churn occurs when customers stop using a product or service, e.g., cancel their subscription or close their account. 

 

A high customer churn rate eventually undermines the business’s ability to make a profit and affects its return on investment. To prevent such a scenario, a business should gain more customers than it loses in a specific period. 

 

Churn Rate Formula

The moment of churn is defined in two ways: when the subscription ends and the customer doesn’t renew it, or at the moment of the cancellation. The latter scenario is more favorable since customers usually cancel shortly before the time their subscription ends. Therefore, as long as they are still using the product or a service, there is time and opportunity to reach and win them back. 

 

The annual rate is typically viewed as a goal and the monthly rate as a benchmark or contribution to an annual goal. Although both use the same formula, they represent different data. 

 

Seasonal churn fluctuations may occur, especially if a business depends on the season. To understand seasonal churn rates, the managers need to collect them throughout several cycles. 

 

The churn rate shows how a business’s growth is slowed down. Imagine a bucket that has a hole that you are not aware of. When you’re trying to fill a bucket with water, it will never be full because the bucket continues to leak. To keep your business afloat, you have to work harder and harder. If you want your business to grow, you’ll need to detect the leak, measure it, and repair it.

 

 

Knowing your customer churn rate helps understand a number of factors about a business’s performance and sales:

 

1. Insights on why customers might leave are important since they can explain why revenue is decreasing. Churn rates can reveal patterns in when customers leave and the reasons behind it. Comparing the number of churned and acquired customers may show the business’ overall performance.

 

2. Knowing the churn rate will help to understand customer satisfaction and test solutions for improving it. Usually, this is done through improving the product and customer journey and analyzing the impact of the changes. 

 

3. Customer churn shows whether customer retention is improved on a period-to-period basis.

 

Customer Churn Rate in SaaS and Other Key Metrics 

Customer churn rate affects several financial metrics of a business:

 

1. Monthly recurring revenue (MRR). Customer churn directly affects revenue churn: if a SaaS business loses an existing customer, it also loses future revenues. Revenue reflects a business’s long-term viability, so it is important to control it.

 

2. Net negative MRR churn. This indicator means that revenue generated by a business from month to month exceeds the revenue that is lost due to customer attrition. When the customer churn rate is low, it is easier to achieve net negative MRR churn.

 

3. Customer lifetime value (CLV) or lifetime value (LTV). CLV is the total dollar amount a business gets from a single customer over the lifetime of their account. It is a marker of business profitability and longevity. The most valuable customers are the ones that stay long or indefinitely. Customer churn lowers the CLV: when a customer leaves, the revenue that could have been earned decreases. Find more about SaaS components.

4. Customer acquisition cost (CAC). Every business spends money to attract new customers. It is much cheaper to retain existing customers than to get new ones. If they leave before the business recoups the money spent on getting them, its CAC increases. SaaS businesses need to reduce CAC by all means, and one way to do it is to reduce customer attrition.

 

The optimal monthly customer churn rate is 2-5%; a 5-7% annual churn is considered acceptable, so it is possible to compare and see how good or bad the situation is. The rule of thumb is: the lower the customer churn, the better.

 

What Is Revenue Churn Rate?

The revenue churn rate is the percentage of recurring revenue that is lost each month. A high churn rate indicates that a company is losing a lot of its customers and is having difficulty retaining them. To calculate the revenue churn rate, you need to start by tracking your monthly recurring revenue (MRR) beginning of the month, MRR end of the month, and MRR upgrades during the month. Then, you can divide this figure by the MRR at the beginning of the month. MRR represents the total revenue that a company can expect to receive on a monthly basis. 

 

To calculate MRR, you first need to calculate the average customer lifetime value (CLV). This can be done by taking the total revenue for all customers and dividing it by the number of customers. Next, take the customer churn rate and divide it into 1. This will give you the average number of months that a customer will stay with the company. Finally, take the average customer lifetime value and divide it by the average number of months that a customer will stay with the company. This will give you the monthly recurring revenue.

 

The detailed formula for Revenue Churn Rate is below. The result will give you an indication of how much revenue is being lost through customer turnover, and you can use this information to evaluate your marketing and retention strategies.

 

Customer Churn vs Revenue Churn

Customer churn and revenue churn are two important metrics that can help businesses gain valuable insights into their performance. Customer churn refers to the number of customers who leave a business in a given time period, while revenue churn is the percentage difference between what a company brings in during a certain period and what it has brought in over the same period in the past. Businesses should pay attention to both of these metrics in order to gauge their health and identify areas for improvement.

 

Customer churn can have a major impact on business performance, as it represents a loss of revenue. When customers leave, they take their business elsewhere and may never come back. This can lead to a major hit to the company’s bottom line and can make it difficult for businesses to grow or even maintain their position in their market.

On the other hand, revenue churn is just as important because it shows whether a business is increasing its profits over time. If a company's revenues are shrinking over time while its costs remain stable, then it is slowly bleeding money and will eventually go out of business. Therefore, businesses need to focus on both customer churn and revenue churn in order to ensure their long-term success.

 

Churn Rate vs Retention Rate

Customer churn rate impacts both retention and acquisition. A high churn rate indicates that customers are not happy with the product or service. This can lead to a decrease in sales and overall revenue. A low churn rate, on the other hand, means that customers are happy with the product or service and are sticking around. This can lead to increased sales and decreased acquisition costs.

 

Customer retention has been shown to be a strong predictor of business success. In fact, this study found that increasing retention rates by just 5% can boost profits by 25-95%. Meanwhile, poor customer service is also a key factor in driving people to switch to competitors. For example, one study found that 68% of respondents said they would change banks if their current bank failed to meet their requirements for speedy and helpful customer service.

 

So how can businesses reduce churn rate and improve retention? One powerful strategy is through the use of targeted customer loyalty programs. These programs offer customers incentives for continued use of the product or service, such as points for purchases or discounts on future products. Another strategy is to improve customer experience through faster and more efficient service, which has been shown to reduce churn rates by up to 30%. Providing targeted support to specific groups of high-churn customers can also be effective in reducing the overall churn rate.

 

Businesses need to be aware of their customer churn rate and work to reduce it if they want to improve retention and boost profits. By using strategies like customer loyalty programs and improved customer service, businesses can keep customers happy and reduce the likelihood that they will switch to a competitor.

 

How to Calculate Customer Churn Rate and Track It?

Calculating and tracking customer attrition will help you understand your business’ effectiveness at retaining existing customers and reducing churn. Here are some ways for businesses to learn their customer churn rate:

 

1. Basic churn rate. It is usually expressed as a percentage. The basic churn rate formula includes only two variables: the total number of customers and the number of churned customers:

So if at the beginning of the year business had 10,000 customers and 500 of them churned during the year, the annual churn rate is going to be 5%.

Established businesses with stable growth can use this simple formula and get correct results. However, new businesses with substantial new customers each month may end up with more customers lost per month, but the rate will be better.

2. Monthly and annual churn rates are calculated using a similar formula:

Churn rates for specific periods are useful for monitoring trends and comparing business success over time. Usually, businesses calculate and track monthly, annual, and quarterly rates, and share the results with all the departments to collect data and identify a possible correlation between the customer churn and their actions, e.g., bug fixing, updates, changes in pricing, etc.

 

3. Probability or predictive churn rate. It is based on the idea that if a customer keeps using a product or service, the customer hasn’t churned, but they had ten chances to do so. This is called ‘a customer day,’ one day that a user remains active.

So, if at the beginning of August the product or service had 10,000 users and 10,513 at the end, the net new user gain will be 513. There are 31 days in August. Thus, the customer days in August made:

Let the total churn in August be 500. Thus, churn per day can be calculated:

And per month:

This method factors in probabilities and is useful to account for rapid growth that may be twisted by any formula mentioned earlier. 

 

Knowing these numbers will help to control your business and provide you with a clear picture of the business's achievements. With customer churn calculations, it is easier to attach value to efforts and assign resources to get rid of the reasons that make customers churn.

 

Finally, a thoroughly calculated churn rate helps prevent time and money waste.

 

Negative Revenue Churn: What It Is And Its Role

Negative churn is a situation where a company's customer base is shrinking, but its revenue is growing. To measure negative churn, businesses need to track both their customer acquisition rate and their customer attrition rate. The former measures how many new customers are being added, while the latter measures how many existing customers are leaving. If the customer acquisition rate is greater than the customer churn rate, then it is a sign of negative churn.

In order to achieve negative churn, businesses need to focus on customer retention and acquisition. This means that you will need to have a system in place for attracting new customers while also keeping the ones that you already have. There are a number of ways to do this, but some of the most effective methods include offering discounts to customers who refer their friends and family, creating loyalty programs to encourage repeat business, and using targeted marketing campaigns that focus on your most loyal customers.

 

Another key factor in achieving negative churn is the quality of the products or services that you are offering. If you have a poor product or service with limited appeal, it will be difficult to achieve negative churn, as you will likely have a high rate of customer turnover. Instead, businesses should focus on creating products or services that are unique and in-demand, and then work to market them effectively to potential customers.

 

Overall, there is no guaranteed method for achieving negative churn, and every business will have its own unique challenges when it comes to customer retention. However, by focusing on the factors mentioned above - including customer acquisition, retention, and product quality - businesses can put themselves in a better position to achieve negative churn and, ultimately, increased profitability over time.

 

Three Leading Reasons for Customer Churn

Customers can churn at the beginning or somewhere along the way, but first and foremost, a quick reduction of the customer base signals a business’s inability to retain customers. For subscription-based businesses, depending on recurring revenue, it may prove fatal. 

 

The three primary reasons a customer leaves may be:

 

1. Poor onboarding. Churn may happen because customers need something else, but often, they may be confused about how to use the product or service due to a lack of proper guidelines or instructions.

 

2. Weak relationships with the customers. Maintaining healthy relationships with the customer base should be an ongoing process. According to CustomerThermometer, 56% of users churned because of the poor treatment they’ve received. Poor customer treatment happens when a company’s policy is prioritized above customer needs. Thus, companies make decisions beneficial to them, but roadblocks for customers. Another way relationships with customers can be compromised is through feedback, namely ignoring it or keeping customers on hold for too long. Ultimately, customers are not very pleased when their personal privacy gets compromised.

 

3. Poor customer service. Customer service can make or break a SaaS business: according to Zendesk, 82% of customers churn due to poor customer service. It is important to maintain customer support at the proper level and safeguard customers’ happiness.

The issues that lead to significant churn should be fixed without delay: they may gain a snowball effect and become harder to deal with, if not too late. The goal lies in preventing customer churn from becoming a problem. Creating a healthy customer culture is the first step to making customers feel happy with the product or service.

 

How to Reduce Customer Churn Rate

Once customer attrition is calculated and analyzed, it is time for devising a long-term churn prevention strategy. The following steps may be beneficial:

 

1. Create and encourage yearly subscriptions.

A yearly subscription plan usually offers a significant discount, which keeps customers hooked for a longer period. This means higher revenue and gives your product or service time to grow into the perfection that users won’t be able to abandon. According to ProfitWell, businesses without a yearly contract plan have an average annual churn rate of 9% while the ones with 75%-100% annual contracts have this rate down to 3%.

 

2. Create and maintain a FAQ page.

Customers need support when dealing with a new product or service, so a FAQ page is a good way to help them understand how to use it or deal with any emerging issues. This page might include an easy-to-read manual and a section with answers to frequently asked questions. As the product or service strengthens, the FAQ page should be updated, e.g., to include new questions and answers, so that its content remains relevant.

 

3. Collect feedback.

Customer dissatisfaction is one of the major factors behind customer attrition. Feedback is an excellent tool to find out its reasons and determine the changes that might solve customers’ problems. Reaching back to customers and thanking them for their feedback will help to get them on your side.

 

4. Enable customers to request a feature.

Customers may write something that they want in feedback, but they will be more likely to do so when you encourage them specifically. It is possible to find out what they cannot get from your product or service through surveys or emails. As a bonus, this explicit attention to your customers’ opinions and needs may also contribute to reducing customer churn.

 

As an option, it is also possible to use feature request software that lets customers “upvote” the features that they need most. Such software shows requests and makes it possible to prioritize them easily. 

 

Remember that everything a business does can affect its customer attrition. Establishing ways to prevent or reduce customer attrition will empower you to concentrate on growing your business rather than on ways to save it. Thus, it is crucial to pay attention to churn ups and downs and fix the situation without a delay.

 

Wrapping Up

Customer churn rate is one of the paramount metrics for tracking business performance over time. No matter how good a product or service is, a zero rate is virtually impossible. However, it’s feasible to set realistic goals, monitor the metric consistently, and control or even lower your customer churn. 

 

Customers will eventually churn. This is inevitable. Focus your customer churn prevention strategy on keeping your core groups of customers -- the most loyal ones. These customers spend more and gladly share their satisfaction on social media, helping you win more customers.

 

Since customer dissatisfaction is one of the major reasons behind customer attrition, knowing the customers’ thoughts and impressions is key to reducing customer churn. An effective process of gathering and analyzing feedback will be extremely helpful to this end.

 

Using data garnered from your customers, you can understand their needs and problems better, and thus optimize your product, service, and customer experience. Consistent product improvement should help mitigate, control, and even prevent the loss of users.

 

 

If you need help, please don’t hesitate to contact Onix. Our experienced UX/UI designers, software engineers, and flexible development process will facilitate the implementation of changes and help to keep your project on budget and on time..

 

Frequently Asked Questions

 

What is the customer churn rate?

Customer churn rate is the percentage of customers who stop doing business with a company over a given period of time. Churn rates vary by industry, but they typically range from 5% to 20%.

 

Why is customer churn rate important?

The churn rate is important because it directly impacts a company's bottom line. A high churn rate means that the company is losing money, and a low churn rate translates to higher profits.

 

What are some key factors that can impact customer churn?

There are several key factors that can influence customer churn, including poor product quality and service, lack of competitive pricing or promotions, insufficient communications with customers, and frequent changes in management or business goals.

 

How can businesses reduce customer churn?

There are a number of ways that businesses can reduce customer churn, including implementing policies to improve product quality and service, offering competitive pricing or promotions, communicating regularly with customers about company news and updates, and providing employees with training on effective sales techniques. Additionally, businesses can also implement customer retention programs that are designed to retain existing customers. These programs may include loyalty rewards, discounts on future purchases, exclusive invitations to special events or promotions, and the ability to earn points toward free products or services.

 

When it comes to reducing customer churn, one of the most effective strategies is to identify and address the factors that are causing customers to leave. Companies can gather this information by using customer surveys, conducting focus groups with existing and past customers, or analyzing sales data to identify common trends or patterns among those who have stopped doing business with the company. Armed with this information, businesses can then work to implement changes that will help them retain more of their customers.

 

What are some common consequences of high customer churn?

High customer churn can have a number of negative consequences for businesses, including decreased profits, lower customer satisfaction levels, and reduced brand loyalty. Additionally, high churn rates can also lead to higher costs associated with acquiring new customers, as well as decreased employee morale.