The churn rate, also known as the rate of attrition or customer churn, is the rate at which customers stop doing business with an entity. It is most commonly expressed as the percentage of service subscribers who discontinue their subscriptions within a given time period. It is also the rate at which employees leave their jobs within a certain period. For a company to expand its clientele, its growth rate (measured by the number of new customers) must exceed its churn rate.
Understanding the Churn Rate
Churn rate reflects the rate at which a company loses customers or subscribers. A high churn rate could adversely affect profits and impede growth. What is considered a good or bad churn rate can vary from industry to industry.
The churn rate not only includes when customers switch providers but also includes when customers terminate service without switching. This measurement is most valuable in subscriber-based businesses in which subscription fees comprise most of the revenues.
Why is customer churn important?
Understanding your customer churn is essential to evaluating the effectiveness of your marketing efforts and the overall satisfaction of your customers. It’s also easier and cheaper to keep customers you already have versus acquiring new ones. Due to the popularity of subscription business models, it’s critical for many businesses to understand where, how, and why their customers may be churning.
Churn Rate vs. Growth Rate
While the churn rate tracks lost customers, the growth rate tracks new customers. A company can compare its new subscribers to its loss of subscribers to determine both its churn rate and growth rate. The difference between the two shows whether there was overall growth or loss in a specific time period.
If the growth rate was higher than the churn rate, the company experienced growth. If the churn rate was higher than the growth rate, the company experienced a loss in its customer base.
For example, if in one quarter a company added 100 new subscribers but lost 110 subscribers, the net loss would be 10. There was no growth for the company this quarter but rather a loss. This would be a negative growth rate and a positive churn rate.
It is critical for a company to ensure that its growth rate is higher than its churn rate otherwise it will experience declining revenues and profits with the eventual scenario of having to close the business.
Advantages and Disadvantages of the Churn Rate
Benefits of Using the Churn Rate
The advantage of calculating a company’s churn rate is that it provides clarity on how well the business is retaining customers, which is a reflection on the quality of the service the business is providing, as well as its usefulness.
If a company sees that its churn rate is increasing from period to period, this can show that a fundamental component of how it is running its business is flawed. This can indicate a few potential problems:
- Faulty product(s)
- Poor customer service
- Cost is higher than utility to customers
The churn rate will indicate to a company that it needs to understand why its clients are leaving and where to fix its business. The cost of acquiring new customers is much higher than it is to retain current customers, so working to lower the churn rate can save a business money in the long run.
Limitations of Using the Churn Rate
One of the limitations of the churn rate is that it does not take into consideration the types of customers that are leaving. Customer decay is primarily seen in the most recently acquired customers.
Perhaps your company had a recent promotion that attracted new customers. Once this promotion was over or even if the benefit of the promotion never ended, customers that were trying out the product may determine it’s not for them, canceling their subscription.
The impact of losing new customers versus long-term customers is critical. New customers are transient whereas old customers are entrenched and have enjoyed your product; if they leave, that is usually due to a significant reason. A high churn rate in one period may be indicative of a high growth rate from the previous period rather than a judgment on the quality of the business.
The churn rate also does not provide a true industry comparison of the types of companies within an industry. Most new companies will have a high acquisition rate as new people try the business, but they will also have a higher churn rate as these new clients leave.
A company that is mature and has been around for decades will have a low churn rate as its clients are established, but its acquisition rate will also be lower. Comparing the churn rates of both these companies will be like comparing apples and oranges.
Provides clarity on the quality of the business
Indicates whether customers are satisfied or dissatisfied with the product or service
Allows for comparison with competitors to gauge an acceptable level of churn
Easy to calculate
Does not provide clarity on the types of customers leaving (new vs. old)
Does not differentiate between startups, growing, and mature companies
FAQs
What Is the Meaning of Churn in Business?
Churn rate in business refers to the number of customers or subscribers that leave a provider in a given time period. This is the opposite of growth rate, which shows the number of new subscribers or customers in that time frame. Churn rate can also refer to the number of employees that leave a firm in a given period.
How do you calculate customer churn rate?
To determine the percentage of revenue that has churned, take all your monthly recurring revenue (MRR) at the beginning of the month and divide it by the monthly recurring revenue you lost that month — minus any upgrades or additional revenue from existing customers. Do not include new sales in the month, as you are looking for how much total revenue you lost. New revenue from existing customers is revenue you have gained.
For example, if Company ADG had 500 customers at the beginning of the month and only 450 customers at the end of the month, its customer churn rate would be 10%.
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