what is churn rate

What is Churn Rate?

Churn rate is an important business metric that has to do with the number of customers or employees who leave a company during a given period. The term can also refer to the amount of revenue lost as a result of the loss of customers or employees.

To understand if your business is growing, you need to pay attention to churn and churn rates. These metrics are important because business growth isn’t only about how many new customers or how many new employees you acquire: it’s about how many you can retain. Last thing you want to do is also waste money on customer acquisition and 90% of your customers leave after a month or two.

Churn vs Churn Rate

Churn and churn rate can get a little confusing. Churn refers to the rate at which customers or subscribers cancel or discontinue their relationship with a company over a certain period of time. Churn can occur for various reasons, such as dissatisfaction with the product or service, better offers from competitors, or changes in the customer’s circumstances.

Churn rate, on the other hand, is the percentage of customers or subscribers who have discontinued their relationship with the company over a given period, usually measured on a monthly or annual basis. For example, if a company has 1,000 customers at the beginning of the month and 50 of them cancel their subscription during the month, the churn rate for that month would be 5%.

Churn rate is an important metric for businesses, especially for those that rely on recurring revenue from subscribers, such as subscription-based services, software-as-a-service (SaaS) companies, and telecommunications providers. 

A high churn rate can indicate underlying problems with the product or service, customer service, or marketing strategy, and can ultimately lead to a decline in revenue and profitability. Therefore, reducing churn rate is a key goal for many businesses, and they may employ various tactics to improve customer retention and satisfaction.

Why Is Calculating Customer Churn Rate Important?

Business owners need to calculate their churn rate in order to understand how much revenue they are losing to churn. Losing customers means losing revenue.

Calculating customer churn helps businesses to:

  • Grow and adapt to meet their customers’ needs
  • Evaluate the overall satisfaction of their customers
  • Manage long-term relationships with customers
  • Evaluate the effectiveness of their marketing efforts
  • Understand why customers may be churning
  • Understand customers’ acceptance or rejection of new pricing, products, or other initiatives

The churn rate can be a key indicator of the success and growth of a business. It is common knowledge that acquiring new customers is more expensive than retaining existing ones. For real growth to happen, customer retention must be improved and churn must be minimized.

Customer churn translates into a loss of revenue in two respects: loss of income from those customers, while having to spend money to acquire new ones.

The same goes for high employee churn rates. When employees leave a company it is stuck with reduced revenue due to lost production, plus the expense of training new staff.

How Do You Calculate Customer Churn Rate?

Churn rate = (Number of customers lost during a period / Total number of customers at the beginning of the period) x 100%

For example, let’s say a company had 1,000 customers at the beginning of the month, and 50 of them canceled their subscription during the month. The churn rate for that month would be:

Churn rate = (50 / 1,000) x 100% = 5%

This means that 5% of the company’s customers churned or discontinued their subscription during that month.

It’s important to note that the time period used to calculate churn rate can vary depending on the company’s business model and customer lifecycle. For example, a SaaS company may calculate churn rate on a monthly basis, while a telecommunications provider may calculate churn rate on a quarterly or annual basis.

Calculating churn rate can help businesses identify potential issues and take actions to reduce customer churn and improve customer retention.

What Is a Good Churn Rate?

The lower the churn rate, the better. However, to really know if your churn rate is good, it needs to be compared with your industry’s average churn rate. Comparing your industry’s churn rate with that of your business is the only way to know if your churn rate is good or poor.

A good churn rate is between 5 and 7%, but it can vary from industry to industry. Anything below 5% is good. But few companies reach that goal.

According to Statista, the financial industry’s churn rate was 25%, and that of online retail was 22% in 2020.

Why Calculate Churn Rate?

Churn rate provides business insights. Churn rate shows how well a business is retaining customers. A low churn rate is an indication of quality products and excellent customer service.

A high churn rate or one that keeps increasing is a symptom of a business in trouble. Customers may be leaving the company because of a problem with its product(s), poor customer service, or for some other reason.

A high churn rate is a signal for a business to do some self-examination to understand what is causing the situation and how to fix it.

Why a High Churn Rate Is Not Always an Indication of Low Growth

Churn rate does not differentiate between established and newly acquired customers, which can make matters look worse than really they are.

Customer churn mainly happens among recently acquired customers, in fact, the newest clients.

For example, when a business arranges a promotion to attract new customers, many may try the product if it’s not going to cost them anything. While these people are registered as customers, they may actually leave as soon as the promotion is over. They tried the product and decided not to keep using it. In the case of a SaaS company, these consumers may cancel their subscriptions after one or two months.

In the meantime, existing customers are happy with the product, and are not leaving. While new customers are fickle and will try out other options, old customers stay loyal.

The numbers of new customers leaving after the promotion give a false impression of a high churn rate. The new customers are not churning – you are not losing them because they were never yours to begin with.

A high churn rate may be due to a high growth rate in that period.

Why Do Customers Decide to Abandon a Business?

There are several possible answers to this question. We list the most common ones below.

  • The price: As can be expected, price is one of the most common reasons customers churn. The moment they see that the product or service doesn’t offer value for money, most people will look for another solution.
  • The product: If a product doesn’t live up to expectations, the disappointment may lead customers to churn. For instance, if a product doesn’t perform as expected, lacks features, keeps breaking, or has other issues, customers will look for a similar product elsewhere.
  • Poor customer experience: This is one of the main reasons consumers terminate their relationship with a company. PWC has found that 32% of all customers would stop doing business with a brand they loved after one bad experience.
  • Poor customer service: Consumers want their issues to be handled efficiently and quickly. If not, they’re bound to leave. According to Bain and Company, a customer is four times more likely to switch to a competitor if the problem they’re having is service-based.
  • Lost value: The product or service has lost its value for the customer. There can be different reasons for this – the customer simply doesn’t value such a product anymore, or the company has changed something about the product and it’s no longer what the customer initially signed up for.
  • The reason for using the product no longer exists: A customer may only have needed the product for a while – it served a purpose for a time and is no longer needed.
  • The product or service is not straightforward to use: It’s easy to abandon a business if a product is not user-friendly or requires training before it can be used.
  • The competition: The competition has lured your customer away. Many markets are saturated with competing providers vying for the same customers. If the competition becomes too appealing, you might lose customers.
  • Loss of company reputation: Customers will be reluctant to do business with a company that has lost its reputation due to poor acts by its leaders, a cyber-attack, or poor customer service.

There may be many other reasons for customer churn. To find out why customers are abandoning them, many companies use surveys and exit interviews.

How to Reduce Churn Rate?

If you work out your churn rate and find that it is too high, you need to take steps to turn the situation around. To do that successfully, you need to understand the reasons for the churn.

In most cases, a customer will have a good reason for leaving. Only one in 26 customers will lay a complaint when they are unhappy, the rest leave without saying a word or providing customer feedback. This means companies don’t find out why they lose customers.

It’s imperative to try to get feedback from every client that leaves. Provide a survey, or a feedback form, or do an interview and ask directly. If many people are churning and you get feedback from them all you be able to spot a general trend and that can be the beginning of finding a solution.

In addition to understanding why churn happens, the following steps may help to minimize churn.

  • Identify Customers Who Look Like They Will Churn and Try to Stop Them

It may not be easy to do, but there are tell-tale signs of a customer that’s not 100% happy with things. Look out for customers who:

  • Don’t get along with people at the company
  • Always complain and give negative feedback
  • Often return products
  • Are often late with payments

When you have identified the customers who are about to churn, make them an offer that makes it worthwhile to stay with your company.

  • Reward Customer Loyalty

Consider implementing a customer loyalty program. Research shows companies that offer loyalty marketing programs can grow 2.5 times faster than companies that don’t offer loyalty incentives.

You can base your customer rewards on factors like customer referrals, frequent purchases, or purchase sizes.

  • Prioritize Customer Service

According to a PWC survey, a quick response, convenience, helpful employees, and friendly service matter the most to consumers.

In addition, Khoros found 83% of consumers say good customer service is the most important factor, apart from price, when deciding what to buy.

What constitutes as good customer service experience?

According to statistics gathered by Zendesk, good customer experience include:

  • The ability to solve an issue quickly
  • 24/7 support
  • Friendly support agent
  • Support through the customer’s preferred method
  • Customers don’t need to repeat their information

Technology in the form of a help desk or customer relationship management software can go a long way toward fast and personalized customer service.

  • Know Who Your Best Customers Are

It’s crucial to identify and take care of your best customers. Loyal customers are gold, and they cost less than acquiring new ones. Loyal customers can become your brand champions and bring invaluable benefits to your business.

Find a way to offer special privileges to these customers so they stay enthralled with your business.

Final thoughts

Churn rate is an important metric for businesses: a low one is evidence of a business that is growing and a high one can be a signal that it’s time for some changes at the company.

A low churn rate is proof of customer satisfaction, and customer satisfaction leads to greater customer retention, which helps to build a strong brand reputation.