In today’s highly competitive business environment, retaining existing customers is perhaps more important than looking for new customers. While adding new customers is of course vital and critical for continuing growth of any business, this cannot happen if there is large-scale attrition of existing customers.
Rapid attrition of existing customers will be akin to opening the tap to fill your bucket to see that the bucket never gets filled because of a big leak in it. Hence, there is a need to understand as many ways and means by which attrition or loss of valuable customers is brought down substantially. Churn rate is often considered to be a good method to identify the rate of attrition of existing customers. Once the attrition rate has been identified, it would be possible to fix issues that are leading to the loss of customers and subscriptions.
At its simplest churn rate is a measure for how retaining existing customers and is expressed as a percentage of all your customers how are leaving. A churn rate under 5 % is generally accepted as a good number where over 10 % is worrisome.
Simpel churn rate:
[ customers lost or not renewed ] / [total number of customers ]
However, we need to understand the basics of the churn rate and also find the right answers to the question as to how to calculate the churn rate. We also will be looking at a few more things such as simple churn rate and share some churn rate examples so that the readers and other interested stakeholders will be in a position to understand the whole thing better.
Exsample: ABC Corp has lost 6 costumes this month and the month started out with 132 paying subscribers.
This gives a churn rate calculation: 6 / 132 = 0,045 (equal to 4,5 %)
Elements in the churn rate
A specific time period
When we talk about the loss of customers or employees we have to define a specific time period as this will vary over time. Generally, you should choose a time period for your churn rate similar to your other KPIs, and for most business this is will be one month.
If you have a fast-moving business one week might be better. On the other hand, if you mostly have yearly subscriptions, that are renewed around the same time every year, one year might be better for you.
The time period must be short enough to make corrections in time if something happens, but long enough for you to have meaningful data.
Put in simple words, the churn rate is expressed in percentage. It is the rate at which certain customers stop transacting with an entity or business house. It also could be the percentage of subscribers who do not continue with their subscription within a specified period.
It also could be the percentage of employees who quit jobs with a specific period from a company. In today’s competitive market and in a market that is expanding any company must be in a position to expand its clientele. Yes, there will be some attrition in any organization but it becomes a cause of concern when it crosses the normally accepted levels. Hence, the organization needs to take corrective action. This can be done only by understanding the finer points of the churn rate.
ABC Corp has a subscribtion model where customers ussally stay 2-4 month so selecting ONE MONTH instead of a quarter seems best for measuring. Other KPIs as revenew numbers and new subscribers are also updated monthly.
How many costumers have you lost?
The churn rate measures how many costumers have you lost, this is of course the next number you’ll need to find.
This might seem as simple as the number of pay costumers at the beginning of the month minus the number of customers at the end of the month.
Hopefully, you will gain new costumers in that same period as well and that should NOT be counted in your churn rate.
The simpel churn rate has [ customers lost or not renewed ] and not [ customers at the beggining of time period MINUS the number at the end ] becourse getting a bounch of new costumers in will hide how many are leaving.
Churn rate impacts almost all industries and businesses but it is highly critical in industries that depend almost totally on subscription and memberships. Telecommunication is perhaps an important area where the subscription of customers is the main driver of business. Hence, they should do what it takes to understand churn rate and also be in the know about the churn rate formula amongst other things.
It might seem simpler to just do this:
[ customers at the beginning of time period ] – [ customers at the end of time period ] = [ number for calculation ]
…but if you had a big launch and get as many costumers in as you lose, you will hide the fact that your costumers are leaving.
ABC Corp have implemented a new e-mail funnel that seems to be working as it on average gives 5 new costumers a week, and the last month 23 new subscribers has come in.
ABC Corp started the month with 132 members. They lost 6, and gained 23. Tey therefore end the month at a whooping 149 recuring paying memebers.
A wrong churn rate calculation will hide the fact that they have lost 6 members:
( 132 – 149 ) / 132 = -17 / 132 = – 0,128 (The indicate thay have “lost” -12,8 % – nonsense!)
(The correct calculation is STILL 6 / 132 = 0,045 )
How many customers do you have?
The last piece in the churn rate formula how many customers you have. Loosing 100 costumers in a business with 1500 costumers is of course not nearly as bad as in a business with 132.
Here again, this might be a source of confusion as you have two options. You will have one number of costumers at the beginning of the month and another at the end. Hopefully, the later is the bigger number.
As the churn rate formula is designed to show you the lose of customers we want to use our starting point for the formula. That the customers at the beginning of your time period.
Using the number of costumers at the end of the month will contain both new and lost costumers, and if your subscriber base is growing, it will also keep the churn rate number artificially down.
[total number of customers ] = [total number of customers at the beginning of your selected time period]
ABC Corp’s new intern is a very nice guy. He’s a people-person. Unfortunatly he’s not good with numbers, and when he is mistakenly put in charge of presenting the KPIs he chooses the number he thinks will impress he’s new boss the most.
He therefore miscalculate the churn rate as: 6 / 149 = 0,040 = 4,0 %
The CEO is impressed until she finds out that the real churn rate is still 4,5 % ( = 6 / 132 )
What is the churn rate formula?
Different formulas are used for determining the actual churn rates. The simplest formula is to divide the number of churned customers or subscribers by the total number of customers. Several customers are those who have left the service of a particular service provider when compared to the total number of customers that the subscriber had during a specific period. Let us try and have a look at the commonly used formulas that help in finding out the churn rate of a company or business entity.
The churn rate formula:
[ customers lost or not renewed over a time period] / [total number of customers at the start of you time period]
- Decide what time period you will be looking at. Often times it one month
- Use “customers lost or not renewed” – NOT “customers at the start” minus “costumers at the end”
- Dived by the total number at the start of you your time period. Not the end.
- As mentioned above, the simplest and the most common approach is to divide the number of customers who have left or discontinued the services of a service provider with the number of customers that the service providers had during the starting of the period under consideration. This is known as a simple churn rate.
This is a simple way of calculating the churn rate and that is the reason why it continues to be extremely popular and commonly used. You need only two numbers to figure out the rate for a particular period. It can be used to churn out figures for a day, a week, for a month, or for any time period that you may have in mind. It is therefore considered to be highly flexible.
- The adjusted way is another commonly used method of calculating the churn rate of enterprises and businesses. This is a method by which a midpoint of the customer count is considered for a particular period (mostly a month) instead of using the value as it was during the beginning of the 1st day of the month. The churn numbers are divided by the midpoint number to arrive at the churn rate percentage.
Many believe that this could be a more reliable way of finding out churn rates over a time window. But the problem with this method is that you may not be able to get a stable churn rate number because it could vary based on the midpoints that you take into account.
- The average of each day of a particular month is taken as the total number and the churn numbers are divided by this average to give the churn rate percentage. This method takes into account highs and lows and then arrives at an average figure based on which the churn percentages are worked out.
How do you calculate the annual churn rate?
Calculating the annual churn rate should not be a big problem at all. One can use any of the above three formulas to arrive at the annual churn rate for a particular year.
Annual churn rate: [ customers lost or not renewed ] / [total number of customers in the begging of the year ]
…just take care not to count in new costumers you have gotten over the year, but only count the costumers you have lost.
For example, they could take the number of subscribers or customers at the beginning of a year and the number of those who have churned during the entire year. The numbers of churned can be divided by the number of subscribers that existed during the beginning of the year. This number can also be a midpoint number or the average number of subscribers for the entire year in question. A resultant percentile figure will give you a reasonably accurate idea about the churn rate.
This figure is certainly extremely important because it helps to identify and find out whether the churn rate is acceptable or whether they are beyond normally accepted numbers. It helps in taking corrective and preventive steps to stem the slide before it becomes too difficult to control.
What is a good churn rate?
Though there cannot be any straight-jacketing of churn rate percentages, according to market experts, anything in the range of 5% to 7% during a given period is acceptable.
However, this may again vary from industry to industry and from market to vary and therefore it cannot be generalized across all industries, businesses and markets.
ABC Corp has a subscribtion membership based on quick and healthy recipeis for busy families with young children. It makes sense customers stay for a couple of months as they need inspiration every week. A churn rate under 5 % is healthy.
XYZ Corp helps entrepreneurs plan, market and give their first webinar with a “60 days to success” plan. After 2-3 month with a succesfull webinar in the portfolio costumers don’t have much insentive to hang around. This essentially gives XYZ Corp a churn rate of a 100 % – as expected.
To conclude, no doubt retaining as many existing customers is one of the most important objectives for any organization. Retaining an old customer is much more cost-effective when compared to getting hold of a new one in today’s world of cut-throat competition.
Any churn rate figure that is above normally accepted levels should be addressed as soon as possible before things turn out of control.
Bonus: How to reduce customer churn rate
As a bonus, I’d like to list a couple of things you can do to reduce your churn rate. That means getting costumers to stick around for longer.
- A good onboarding sequence – If your costumers can’t find the things they are looking for in your product or they don’t know how to get the most value out of it, they are more likely to leave.
- Good customer support – If people are getting frustrated with your product and feel that can’t get any help, some will leave instead of trying to solve the technical issues them selfs.
- Pre-qualified leads – Unqualified costumers who are just somewhat interested are more likely to leave early. A targeted audience that gets you and trusts you are more likely to stick around and reducing your churn rate. This is done by getting your sales messages in e-mails and sales pages to actually reflect your product and value proporsition.
- Have a down-sell available – If the only option for costumers leaving is to cancel, they will increase your churn. If you have a down-sell available with a lower price for access to less, you might keep some costumes around.
- Identify at-risk customers – If someone has a lowered interaction or product usage, or the responsiveness to your communications is going down you need to step in. One of the most effective ways to reduce customer churn rate is to stop a churn from happening in the first place.