How is Custom Churn Calculated?
Why is Customer Churn Important?
How does Customer Churn Differ Across Various Industries?
What are Some Customer Churn Benchmarks Across Industries?
Advantages and Disadvantages of Churn Rate
Customer Churn, commonly referred to as the Churn Rate or simply "Churn", is the percentage of customers who stopped using a company's product or service over a specific period of time. One can think of the Churn Rate as the percentage of customers a company "lost" within a period of time and also sometimes referred to as the "Attrition Rate". Churn is a metric that allows companies, especially those with subscription-based business models, to measure how efficient they are at retaining customers, and can be used to track the success of a company's efforts to extend the length and value of their customer relationships.
Churn is most commonly calculated as percentage of customers lost, but can also refer to the amount of revenue lost that those customers represented, which is known as "Revenue Churn". Revenue Churn is important to understand in contrast to Customer Churn because Customer Churn cannot be a negative number - you can't lose less than zero customers. However, a business can have a negative Revenue Churn, because it's possible for a company to generate more revenue from the customers it retains than the it revenue it lost from "churned" customers, over a given period of time. This is known as "net negative churn", and is a fairly common scenario that happens when a company is able to upsell their existing customers to produce "expansion revenue" that in total is worth more than the revenue the company expected to receive from the customers who churned.
We include this important but somewhat confusing distinction because these terms are often used interchangeably and the form in which Churn is measured is vital to its meaning. If you're still confused, the next section should help clear things up.
Customer Churn is calculated using the following formula:
Customer Churn = (Total Customers at Start of Period - Total Customers at End of Period) / Total Customers at Start of Period
For example, let's say your going to measure your business's churn for the past 6 months, where we will assume that we had 100 customers at the beginning of the period, and 95 of those customers remain at the end of the period:
Customer Churn = (100 starting customers - 95 remaining customers) / 100 starting customers
Customer Churn= 5 churned customers / starting 100 customers
Customer Churn = 5%
As you can see, calculating churn is actually quite a simple process. However, it's important to keep in mind the period over which you're making the measurement. For example, you might calculate churn on a yearly basis, see that it's within the benchmark range in your industry, and consider that the extent of the metric's value. But what if you then calculated churn on a monthly basis within the same year and find out that most of the annual churn actually occurs in the first month of subscription. This would be an excellent signal that there are hiccups early in the customer lifecycle that alienate some users, and that you should focus efforts on understanding why those customers are churning and how to better retain them
Now let's have a look at Revenue Churn to help contrast the two. ******We will use example that produces a negative revenue churn rate to demonstrate the differences. Revenue Churn can be calculated using the following formula:
Revenue Churn = ((MRR at Start of the Month - MRR at End of Month) - Expansion Revenue from Existing Customers) / MRR at Start of the Month
For example, lets say a SaaS company has $10,000 in MRR at the start of the month, $9,900 MRR at the end of the month, and $2,000 in expansion revenue from existing customers that the company was able to generate by releasing a new paid feature that is popular among existing customers. Our calculation would then take the following form:
Revenue Churn = (($10,000 - $9,000) - $2,000) / $10,000
Revenue Churn = ($1,000 - $2,000) / $10,000
Revenue Churn = -$1000 / $10,000
Revenue Churn = -10%
In this example we can see that due to the expansion revenue, we actually ended the month with a higher MRR than we started, producing a negative net revenue churn rate.
Subscription-based business models, like streaming services such as Netflix or Hulu, are examples of businesses that can experience high churn rates. When many customers cancel their subscriptions in a single month, the churn rate for that month will be high.
Retail and e-commerce businesses also experience churn rate. High rates of product returns or a lack of repeat purchases can lead to a high churn rate, indicating that customers are not satisfied with the product or service offered. In industries like these, businesses may focus on improving the quality of their products, customer service, and marketing strategies to reduce churn rate and retain customers.
Churn is a key measure of a company's ability to retain and generate revenue from customers over longer periods of time. Churn can be a major factor in investment decisions and is often scrutinized by business leaders because it can be indicative of future business performance and a company's ability to grow revenue and market share. For example, if an investor were assessing a B2B SaaS company in a massive market, they may look past a higher than average churn rate if the company is growing rapidly despite the churn - in a massive market, you can afford to churn a bunch of customers in the beginning. However, the same investor looking at a B2B auto parts manufacturer may be very concerned by high churn because there aren't millions of car companies to sell to - each customer represents a major piece of the market.
Churn also differs in importance across different types of business based on the amount of data companies can collect about their customer journey. For example, a SaaS company has nearly infinite access to data about their customer journey, from targeted marketing data all the way through to user behavior while users engage with the product. This allows the SaaS company to build a very complete understanding of the user journey, and make much more targeted improvements later in the customer lifecycle. To measure their success in retaining customers, Churn would be their primary KPI. In contrast, a local sporting goods store has much less data about their customers in between direct contact, and less data about why a customer may choose to end their relationship.
Churn is a core focus in some industries and less in others. Churn is generally considered a vital metric in subscription businesses with recurring revenue, such as most SaaS companies and subscription box businesses like Dollar Shave Club. The reason for this is that it’s much easier to measure the lifespan of a subscription customer because you know exactly when they stop being a customer – when they cancel their subscription. In contrast, a grocery store will have more difficulty calculating churn because it’s harder to pinpoint when a customer relationship has ended – a customer may not return to a grocery store for 3 months due a temporary change in taste, but the grocery store might wrongly consider that customer relationship finished when calculating Churn.
Below we’ve aggregated benchmarks for Churn across a variety of industries that are known to use it.
One of the benefits of churn rate is that it gives businesses a clear picture of how many customers they are losing over time. This data is critical for developing growth strategies and new marketing plans. The churn rate also assists businesses in identifying potential issues with their products or services, allowing them to improve and retain customers.
However, one disadvantage of churn rate is that it can be influenced by factors outside of the business's control, such as market or economic changes. Furthermore, focusing too much on churn rate can lead to ignoring other critical aspects of the business, such as employee retention and customer acquisition.
The definition of a good churn rate varies by industry and business type. In general, however, a lower churn rate is preferable. For subscription-based businesses, a churn rate of less than 5% per month is considered good.
A high churn rate can indicate problems with the product or service's quality, poor customer service, or a lack of competitive pricing. A high churn rate can also indicate that the company is not communicating the value of its offerings to customers effectively. A high churn rate, in any case, indicates that the company needs to make changes to improve customer retention and satisfaction.
The churn rate is an important metric for businesses to monitor in order to better understand customer retention and loyalty. While there are benefits and drawbacks to using churn rate as a measure of success, businesses can use this data to identify areas for improvement and develop growth strategies.
Our favorite free Customer Churn resources:
