What is Churn: How to Calculate Churn Rate (with formula)
February 8, 2022 Edwin Kooistra
Acquiring customers requires a lot of effort along with financial costs as well. But what impacts and hurts marketing and sales effort the most is when a customer becomes churn and remains no longer profitable.
- What is Churn?
- Why Does Churn Rate Matter?
- How To Measure Churn Rate?
- Why Do Users Churn?
- How to Improve Churn Rate for your Product
What is Churn?
When it comes to measuring the success of a growing business, especially technology startups, churn rate is a very important quantitative measure. While it may not be the most comfortable number to look at especially when it does not give out a positive message, of course, it cannot be ignored because it reveals a lot about your customer retention and how happy your customers are, happy enough to stay with you in the long run.
As a business owner, you cannot only focus on these success metrics only because success must be measured as a net effect of both the positive qualitative and quantitative metrics as well as the numbers in feedback that do not reflect customer retention or growth.
Churn is the percentage of customers or clients that have stopped using your product or your service in a certain specified time frame.
You can find out this number by dividing the number of customers that have left your organization as a client by the total number of customers you had when that period was a month, quarter, or year.
For example, you started a particular quarter of the year with 350 customers and by the end of that quarter, you had only 330 customers left.
This places your churn or churn rate at 5.7%. Of course, the most ideal scenario would be to have a churn rate of 0%, but of course to achieve that not only does your sales and marketing team along with the customer care department must be on their toes all the time but in the real corporate sense it is not even feasible to achieve. The term is used to refer to customers lost.
Here we have calculated the churn in the terms of percentage of customers last, whereas it can also be calculated as or represented as the number of customers lost, amount of recurring business lost, or even as the percentage of recurring value lost.
Why Does Churn Rate Matter?
The importance of churn rate needs to be understood in any business context because the number itself has long impacting consequences. Firstly, the churn rate is very important because as we know that the cost to acquire a customer is always higher than the cost of retaining one.
Therefore, when you lose a customer and subsequently gain try to gain a customer as a replacement for the lost customer, you end up adding operational costs. Secondly, the search has proven that returning customers are more likely to spend over 67% more than first-time customers. Therefore, an increase of just 5.7% in the customer retention rate can translate to up to 28% more profit.
These percentages might not seem a lot but given the scope and value of a business but in terms of returns, for a business, a reduction in churn rate by 2% to 3% can translate as over of $50,000 revenue stream across a particular quarter.
How To Measure Churn Rate?
Churn can be calculated using a lot of different approaches towards this metric. we shall discuss a few of them here. Always remember that in all these cases the churn is based on losses incurred during a fixed and specified time that could be a month, quarter, or a year.
Gross Revenue Churn
Gross revenue churn is focused on the amount of lost revenue that you experience across customers. Its calculation formula is :
Gross Revenue Churn = Revenue Lost in Period/Revenue at Start of Period
By revenue at the start of the period, we mean the recurring revenue that you have projected for that particular time frame. Always remember to include a reduction of revenue per customer, especially in the cases of choosing lower-priced products or services by the same set of customers.
Subscription churn calculates loss in terms of the number of customers that leave the system during a particular time frame.
Subscription Churn = Cancellations in Period/Subscriptions at Start of Period
Net Revenue Churn
Net revenue churn might seem like gross revenue churn, but it also accounts for the upsells that you were projecting to receive from existing customers during the set time.
Net Revenue Churn = (Revenue Lost in Period – Upsells in Period)/Revenue at Start of Period
Why Do Users Churn?
Let us now look at some of the causes behind users leaving the system and becoming churn.
- Customers are feeling that the competitors are doing a better job at catering to their needs.
- You are lacking in your customer support initiatives.
- You were targeting these wrong customer segments from the get-go.
- The customers are not able to satisfy their needs with your value proposition.
- You’re not incorporating your customer feedback into the product or service.
- You might have priced your product too expensive (or maybe too cheap) for your target segment.
- Customers find your product too complex to understand or operate.
How to Improve Churn Rate for your Product?
We will now present some steps that can be taken to improve the churn rate for your product or service.
- Always ask for your customer’s feedback regularly and try your best to incorporate it.
- Stay competitive and adapt to market changes especially in terms of technology as soon as possible.
- Provide excellent customer support and service to your clients and appoint specified managers to handle customer satisfaction.
- Try developing incentive plans for your customers to ensure a longer retention period.
- Critically analyze your churn and try to derive market insights from the analysis that will help you in improving your product or service.
- Try relying on your best customers to learn more about the target segment as well as increase revenue streams via upselling.
- Develop a community around your customers and engage with them to predict churn before it happens.