One way to get a handle on customer loss is to track the number of people who have abandoned your business over a specific period and then calculating that into a percentage rate.
By knowing this rate and finding out how large or small it is, you can then work to figure out why customers are leaving and how you can prevent this in the future.
This metric, called churn rate, is the percentage of customers who don't come back after purchasing with your company.
What is Customer Churn Rate?
Customer churn rate is a metric that shows the total percentage of customers who stop doing business with you over a certain period of time. For example, if you have 100 customers and 5 of them leave, your churn rate is 5 percent.
According to Growth Consultant Lincoln Murphy, an acceptable annual churn rate for SaaS companies is 5-7%.
Note that there’s voluntary churn where a customer ends their service because they’re not satisfied, and there’s involuntary churn where a subscription is canceled because of payment failure.
Also, note that there’s gross revenue churn that shows how much subscription value is lost during a particular period and net churn that reflects factors in upgrades and expansions during that period.
Regardless of the specific reason or circumstance, the result is the same with revenue churn, and a churned customer leads to a loss that negatively impacts your business.
Whether you’re in a B2C or B2B market, the revenue churn rate is a metric that tells you how effectively your organization is maintaining your current clients.
Phil Strazzulla, Founder & CEO of SelectSoftware Reviews, says, “Churn rate is one indicator of how well we’re performing in the marketplace. If we have people canceling subscriptions to our review site, we know we need to dig into our product offerings and figure out why we’re not keeping them.”
How Do You Calculate It?
The way businesses calculate churn depends on the company and its business model.
For example, some companies use simple averages, while others consider time since the last purchase or the number of purchases over a period of time.
Businesses can calculate churn rates monthly, quarterly, or annually.
“Calculating our churn rate monthly,” says Founder and Managing Director of Lolly Co, Daniel Cooper, “allows us to make decisions on how to retain customers before too many problems arise.
Doing it annually helps us to compare our customer retention strategies with those from previous years.”
One good way to calculate churn rate is by taking the number of customers who have either left your business or canceled their subscription, divided by the total number of customers at the beginning of one period, and then multiplied by one hundred.
This tells you what percentage of people are leaving your business in a certain time frame. The higher this percentage is, the more risk there is for your business to fail or lose clients.
Another way to calculate churn, which is more focused on revenue, is to take your monthly recurring revenue at the start of the month and then divide that by the revenue loss during the same month.
Exclude any new sales from this calculation as what you’re looking for is how much revenue you lost from the previous month.
Why Does Churn Rate Matter?
A low churn rate indicates high customer satisfaction, which means a longer average customer lifetime and more revenue for your business in the long run. Because it’s much easier to keep customers than gain new ones, this is exactly what your business needs to have.
A high churn rate is bad for any company, but it can be especially harmful to businesses like SaaS companies because they rely heavily on recurring revenue from their customers.
Also Read: Customer Retention Metrics
When customers leave, revenue dries up quickly, and it’s costly to replace them with new ones.
This leads to a downward spiral where more churn means less cash flow, making it harder to attract new customers and ultimately, putting the company on a trajectory to fail.
Reuben Yonatan, the founder and CEO of GetVoIP, says “Our growth is dependent on keeping our churn rate low. We know if it gets too high, it will cost us a lot more to bring in new customers. It just makes sense to retain the customers that we have.”
That’s why monitoring your monthly customer retention rates should be one of the most important things you do as an entrepreneur or manager — mainly if that business relies primarily on subscription-based pricing models like software-as-a-service.
How much money a business is making doesn’t matter much if all those profits are going right back out the door every month due to high customer attrition rates.
Retention vs Acquisition
According to the conversion optimization experts at Invesp, businesses spend about five times more to bring in new customers than to retain old ones.
Harvard Business Review contends that it could even be as high as twenty-five times more expensive in some industries.
For many businesses, managing and supporting their current clients is key to their success.
Noting the benefits of tracking churn rate, Mark Varnas, Founder and Principal SQL Server Consultant of Red9, says, “Since we’ve focused on our churn rate more, our customer retention rate has increased substantially.
Instead of trying to put out major fires, we’re able to focus on small adjustments that bring that number down and keep more and more of our customers with us for the long term.”
This is the power of tracking churn rate and keeping up with churn metrics. By finely tuning your customer retention, profits go up with less work.
That’s a much better plan than realizing further down the road your business was making mistakes that consequently eroded your customer base over time and forced you to overspend on new customer acquisition.
Seeing the results in churn rate each month also helps you determine if your fine-tuning is making a difference or not. Because if you’re doing it right, you’ll see that rate lower.
Otherwise, identifying a high churn rate should put you on the path to improvements to decrease the likelihood that you make the same mistakes over and over.
Churn Rate vs Retention Rate
As we mentioned before, churn rate is the percentage of customers that stop using your product during a given time period.
The most common formula for calculating churn rate is as follows:
Number of churned customers during a time period / Total number of customers at the beginning of that same period x 100
If, for example, you started with 1,000 customers and 40 stopped using your product, the formula would look like this.
(40 / 1,000) x 100 = 4% customer churn rate
Note that time periods can differ. And again, you can measure monthly churn rate, quarterly churn rate, annual churn rate, or a customized time frame.
Retention rate, on the other hand, is the percentage of customers who continue to use your product over a particular period of time.
The formula for calculating retention rate is as follows:
((Number of customers at the end of a period - Number of new customers gained during the same period) / Number of customers at the start of the period) x 100
Let’s say you started with 1,000 customers, gained 50 new ones, and ended with 950.
The formula would look like this.
((950 - 50) / 1,000) x 100 = 90%
In this case, you would have a customer retention rate of 90%.
The bottom line is that customer success largely hinges upon keeping your customer churn rate low and your retention rate high. What Is a Good Churn Rate? What’s considered a good customer churn rate will vary by industry.
But for SaaS companies, 3% - 8% is about the average monthly customer churn rate you can expect.
As for what’s considered a good SaaS churn rate, most experts will say that it’s anything 5% or lower. This means that only 5% of customers cancel their subscriptions each month.
However, really successful SaaS companies will often keep it at 3% or lower.
As for established eCommerce companies with recurring revenue through subscriptions, 5% is also about the average churn rate.
However, that number is often higher for newer startups who are just getting their feet wet, and the customer churn rate may be closer to 10% or 15%.
But across the board, 5% is a pretty good number to shoot for, as it usually indicates a generally positive customer experience and solid customer loyalty.
It also usually means stable average revenue and a reasonable monthly recurring revenue (MRR churn). And at the very least, you likely have acceptable customer service, if not great customer service.
Some companies even achieve negative churn where the amount of revenue generated from existing customers exceeds the revenue lost from ended subscriptions.
If, however, your customer churn is significantly higher than what it should be (barring extenuating circumstances), there are likely one or more issues that need to be addressed. And it could be a potential threat to your existing customer lifetime value, overall revenue, and more.
Because of the impact that excessive revenue churn can have, it’s essential to make churn calculation part of your core business practices.
Ideally, you’ll track it for multiple time periods, looking at your monthly churn rate, quarterly churn, and annual churn rate to gain a comprehensive understanding.
How Can You Reduce Your Churn Rate?
Figure Out Why Customers Are Leaving
First, you need to figure out why people are leaving so you can fix the problem before it gets worse and costs even more money in lost revenue and support costs.
But figuring out what causes churn isn't easy. There's no single reason why someone would stop using your app or cancel their subscription. Often, they won't tell you.
That way, you can take action on those insights to prevent other customers from leaving for the same reasons.
Customer analytics can be helpful in attempting to understand churn, but the answer isn’t always direct.
What you’re looking for are clues as to what might be going on.
It’s also helpful to conduct an exit survey of people that are either no longer buying from your brand or have canceled their subscription to your service.
Not everyone will want to respond, but even just getting information from a part of your disgruntled or disaffected customers is invaluable.
Hone-in on Your True Customers
It’s important to understand who your business can best serve.
Developing user personas through in-depth surveys of your customers can give you an idea of what your customers value and why they’re buying from you.
Feedback through recorded interactions with customer service and online reviews is also important.
As stated above, monitoring the actions of your customers through analytics can help you better understand why customers might be leaving you, but also provide insight into their broader interests and actions online.
The goal is to work toward those things that make your customers happy and limit those things that don’t.
If you want to retain your customers, you also need to make sure that you are offering the right products and services.
For example, an airline that has traveling families as their main customer base might offer a tailored service like free meals for children.
Because of this, they might experience less attrition than if they just marketed themselves as a budget airline.
The key is to know what your customers need and how they interact with your brand so you can deliver on those requirements.
Use Marketing Tactics and Retention Hacks
Demand Generation is just as good for retaining customers as it is for creating a buzz around your product.
Showing your customers that you value them and want to keep engaging with them is one of the best ways to retain them.
Providing them with unexpected bonuses to your original product offerings creates an element of surprise that keeps them engaged and waiting expectantly for the next bout of value from your company.
Intentionally creating and fostering a community can go a long way in establishing your brand.
Creating groups on social media such as Facebook so customers feel a part of a movement can help lengthen their time with you and dissuade them from leaving.
These communities are powerful because when customers have developed relationships with others that share your product as a common interest, it’s much harder to break these bonds that have formed over time.
According to Gilad Ron, the Founder of Huan, a smart pet tag company, his company works hard to build community and a solid support network around his brand to both understand his customers and serve them better.
“Being in a market niche where we just offer a single product, we’ve found people come back to us when we radically seek to understand their needs. Many of our customers are multiple pet owners that keep buying our products because of our success in this area.”
Emphasizing the uniqueness of your brand is also important. What makes your product, service, or offering different from competitors?
Marketing to emotions first so that customers feel an affinity for your business is primary. The features of your product are important, but they are only as important as they serve your customers’ offering.
People tend to fall in love with a product or service first and then rationalize it afterward. Keep them falling in love with you.
Go above and beyond the call of duty for your customers. This is self-explanatory and should be the primary focus for anyone wanting to keep their customers.
Look at model companies like Zappos Shoes that empower their customer representatives to do whatever it takes to provide for the needs of their customer base.
Constantly Test and Pivot and Then Test Again
Assessment of churn rate is important, but it’s just as important to run ongoing tests to figure out how you can make churn lower.
As you assess your churn rate and find ways to integrate some of the above tactics to lower churn, you’ll find that you’ll keep your customers even more content with your business.
This will retain many of them for the long haul.
If a test doesn’t work and you find your churn increasing, keep testing. The quest to lower churn is an iterative game. The more you test and pivot, the better.
By doing this over and over again, you’ll figure out what your customers want, what they love about your product, and how to keep them as happy, engaged purchasers and promoters of your product.