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What is Churn?
4 mins read

Churn

What is Churn?

Churn rate is one of the most important metrics that a company with recurring payment customers can calculate, and is most often expressed as a percentage of subscribers that have canceled their recurring payment plans.

Who uses churn rates?

Just as we stated above, companies with customers that pay via recurring payment benefit greatly from calculating churn rate. However, churn can be used by any company in any industry.

As long as you have recurring customers and are seeking to acquire new ones, you can calculate and benefit from churn rates.

How to calculate churn

Calculating churn rate is very simple. All you need to do is designate a period of time. Next, calculate how many customers were acquired, and how many customers were churned during that time period.

Take the number of churned customers and divide it by the total number of acquired customers. Finally, divide that number by 100%, and you have your churn rate for that period.

It’s worth noting that churn rate should be tracked frequently. It’s worth it to calculate churn monthly, quarterly, and annually.

There are many tools online to help you calculate and track your churn rate.

Examples of churn

Let’s say that your SaaS company acquired 1,000 customers during the month of May. Let’s also say that your company lost 100 customers because they were not informed that they needed to renew their subscriptions. 

If we take the churned customers (50) and divide it by the acquired customers (1,000), then multiply that number by 100%, we get a 10% churn rate. 

Although churn is most often associated with the percentage of customers lost, there are a few other ways to calculate churn:

  • Value of recurring business lost

  • Percentage of recurring value lost

Advantages of calculating churn

Ideally, the lower the churn rate, the better. It is far more expensive to acquire new customers than it is to retain old ones. This is simply because existing customers know your product. Additionally, losing customers can greatly impede growth.

In order to make up for those lost customers, you will have to spend time and money to convince them that your product is worth spending money on. On the other hand, existing customers already know because they’ve already purchased it.

Because of this, the slightest shift in churn rate could either mean big profits or big losses. Something as little as 0.02% increase in your churn rate can result in a massive loss.

Why do customers churn?

  • Customer no longer wants your product

Whatever attracted the customer in the first place is gone. Whether that’s company values, product quality, or the price point at which the product was first introduced to them.

  • Bad user experience

This could be a bad UI update, a lack of important features, or even something as simple as a minor bug.

  • Customer found a better alternative

This is probably the most common, as customers are always on the lookout for a better deal. 

How to reduce churn rate

As stated above, the lower the churn rate, the better. Churn rate has many different factors and it’s up to you to keep track of them. Depending on the industry, product, company, and every other element you can think of, there are many different ways to decrease churn.

That being said, there are a few simple things you can do to insure your churn rate stays nice and low. Here are a few of the more popular examples:

  • Address churn as it happens

Churn is inevitable. No matter who you are and what sort of business you run, churn will happen. As churn is calculated, it is vital that you use what you learn to prevent customers from churning for the same reasons in the future.

  • Invest in your best customers

Every business has big-ticket clients. These clients are considered more valuable than the rest. It is worth it to spend extra time with them, and make sure they have everything they need.

  • Ask for feedback

Feedback is very important in any situation, but especially when talking about churn. The best way to solve any potential issues is to address them as soon as possible. Asking for feedback from customers can really shine some light on why other customers are leaving.

For example, you may be able to determine how long it takes the average customer to churn from the time they first log in. Sending out a feedback survey before that time arrives would be most ideal.

  • Communicate often

Transparency is vital for the longevity of a company. Staying open and communicating with you customers is one of the best ways to let them know you care. 

In order to communicate on a broad spectrum, you will need to create interesting and engaging content, interact with customers via social media, and keeping every updated via email.

Communicating openly and honestly lets customers know that they can trust you. That means they will most likely continue to buy your product. 

  • Make it easy for new customers 

Making sure your new customers have everything they could possibly need to transition into your brand is important. In a way, this point is a combination of everything else in this list.

Creating a well-rounded onboarding process is the easiest way to make new customers feel welcome. You’d be surprised how far a simple welcome email will go. Taking it a step further with tutorials and educational materials will really help new customers navigate and feel comfortable with your product or service.

  • Be competitive

No matter what business you’re in, there will be competition. You will have to stay on top of pricing, features, incentives, and quality in order to make sure your customers are getting the best bang for their buck and you maintain your competitive advantage.

Of course, this is a short list, and there are many more things we could add. The key is to make sure you customers, new and old, are happy.

General FAQ

What is the formula for calculating customer churn?
The formula for calculating churn rate is a simple one: Users lost in a month/Users at the start of the month+ users gained. For example: You have 1,000 users at the start of the month. By the end of the month, you’ve lost 200, but gained 500. The formula would look like this: 200/1,000+500 = 0.1333. Or, 13.3%.
What is an acceptable customer churn rate for Saas companies?
Ideally, your churn rate should be around 5-7%.
What is customer churn for eCommerce websites and how is it calculated?
For eCommerce websites, churn looks a little different. Instead of calculating based on subscriptions, eCommerce websites typically calculate based on repeat purchases. So for example, if an eCommerce websites determines that a repeat customer typically purchases again within 60 days, they may consider any customer who doesn’t make a repeat purchase within that time frame as a churned customer. After that has been determined, churn rate is calculated exactly the same, just using that time frame instead of the typical month.
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