Churn rate is a measurement of how many customers leave your business, or “churn,” during a given time period. It is tracked primarily by businesses with a subscription model or with recurring customers month after month. It measures the rate that customers cancel and helps project future sales and other metrics like customer lifetime value.
Using a CRM to manage your customer relationships can help you track your customer retention numbers as well as better handle sales opportunities and reduce customer churn. Insightly provides you with reporting that lets you track how well you are retaining customers. It is free for up to two users, and a 14-day free trial is available. Visit Insightly for more information.
What Churn Rate Is Used For
Churn rate is used to identify how many of your customers are canceling or failing to renew their account or subscription with your business. It is used by software-as-a-service (SaaS) companies and other subscription services as a measurement of customer retention since it is a major factor in subscriber growth. The more customers your business loses, the more new customers you need to sign up to continue to grow.
For example, let’s say you have a business that delivers custom coffee roasts each month for a set fee. Your customers subscribe to your service and pay you each month. Every month, you are working to sign up new customers but, at the same time, some customers cancel. When they do, that’s called churn, and the comparison between how many customers leave in relation to your total customer base is a helpful measurement for a variety of reasons.
A few of the specific reasons a business monitors churn rate include:
- Determining whether a business is growing: If the churn rate is higher than the company’s growth rate, the business has negative growth and is losing customers faster than they are signing up.
- Identifying problem areas: If a company’s churn rate is increasing, it can indicate problem areas that need to be addressed.
- Comparing your business health to an outside standard: Different types of businesses have different expected churn rates. Knowing what they are for your business means you can compare your business with your industry standard to measure performance.
How to Calculate Churn Rate
There are a variety of ways to calculate churn rate, but we will focus on a simple formula that gives you a good picture of what percentage of your customers you are losing during a given time period. The simplest way to calculate churn is by dividing the number of customers who leave your business in a given time period by the total number of customers at the start of that period.
Churn Rate = Number of customers churned during the time period/Total number of customers at the start of the time period
For example, if you had 500 customers on September 1, and lost 15 customers, your churn rate was 0.03 or 3%. This method ignores new signups during the month because they can’t technically churn until the following month when their subscription would be up for billing. Additionally, while the time period is given here as months, you should use whatever time period you use for your subscription commitment.
While they are relatively straightforward, here are the components involved in churn rate:
While you can calculate customer churn over almost any timeframe, you should choose the time period you use for billing your subscriptions. That means that, most often, companies are looking to identify their monthly churn rate if they have a monthly subscription service. Likewise, if your customers sign up for an annual subscription, you would measure your churn rate based on an annual basis since your customers can’t technically churn before the end of the period.
Number of Customers
To calculate the rate of churn, you need two numbers. The first is the number of customers you had at the beginning of the time period you are measuring. It doesn’t matter how long they’ve been a customer, just that they are counted on day one.
In addition, you should ignore customers who sign up during the time period (month, for example), since they cannot technically churn until they don’t renew. Even if they cancel, they haven’t churned until they don’t make a subscription payment.
The second number needed is how many customers left during the time period. It’s not the overall difference between your starting and ending numbers of customers since that would include new customers. Rather, if you had 100 customers at the beginning of the month, and five of them left that month, you churned five customers during that time period.
Additionally, you might calculate churn based on a longer period to find the average on a monthly basis. For example, if 40 of those customers left over the course of the year, you would divide that number by 12 to get your average monthly customer churn.
Who Should Measure Churn Rate
Churn rate is a metric that is specific to businesses that utilize a subscription or recurring customer billing method. For example, if your business sells SaaS, or if you offer a monthly delivery of a product or service. Business-to-business (B2B) service providers like marketing agencies or landscape maintenance providers might also use churn rate to measure the percentage of their recurring customers they use each month.
Here are a few specific roles that benefit from measuring churn rate:
- Business owners: Business owners should have a good grasp of the churn rate for their business since it is an important metric for evaluating whether your customer base is growing or not.
- Sales teams: Sales team members and managers can use churn rate to determine whether their sales efforts are attracting the right type of customers, and whether or not their sales efforts are matching them with the best solutions to their pain points.
- Customer service managers: Managers who handle customer service can use churn rate to determine which efforts are most effective at increasing customer retention and reducing churn.
Benefits of Measuring Churn Rate
Measuring the churn rate has many benefits, most of which are related to improved customer relationships. For example, measuring churn rate can lead to changes you implement that make your customers happier, which reduces the amount of money you spend on retaining customers or even finding new customers.
A few of the most significant benefits of measuring churn rate include:
- Understanding customer satisfaction: Help monitor your overall customer satisfaction based on how many of your customers are.
- Making better decisions about pricing and product offerings: As your business grows and you make changes to your tiered pricing, for example, you can monitor churn rate to decide how much of a positive or negative impact the changes have on your customers.
- Lowering customer acquisition costs: The better you retain existing customers, the less pressure your business be under to replace lost customers with new ones to grow, and the less you will have to spend to market to those customers.
- Lowering customer service costs: When you identify problem areas based on the customer churn rate, you can make changes that lower your overall expenses related to supporting and retaining customer, making your business more profitable.
Cost of Measuring Churn Rate
Most of the costs associated with calculating churn rate are already incurred by a business that uses sales management or even accounting software. The only other direct cost is the time required to gather the data and run the calculation.
Here is a breakdown of the direct and indirect costs associated with measuring churn rate:
- Software: Customer relationship management software with advanced reporting ranges from $20 to $50 per month, per user. Bookkeeping and accounting software like QuickBooks that can help you measure churn rate starts at $20 per month.
- Time: It probably won’t take you more than an hour at most to calculate customer churn for your business if you’re already measuring the components needed.
When you consider the benefits of measuring the customer churn rate for your business, the costs are paid for by the improvement in your overall customer relationship process. In fact, the direct and indirect costs to your business in terms of not having the best information to make business decisions are substantial if you aren’t evaluating customer retention and attrition.
Alternatives to Measuring Churn Rate
There are several business metrics that are closely related to customer churn rate. In fact, sometimes these alternatives are just as, if not more, important to your business than customer churn. For example, understanding your customer churn rate is helpful in determining the overall value of your customers over their entire customer relationship.
Here are a few additional metrics you should consider:
Customer Acquisition Rate & Growth Rate
Your customer acquisition and growth rates are closely related. Customer acquisition rate is a measurement of how many new customers you are adding each month. It is an important variable in measuring customer growth since your overall increase in customers is based on the number of new customers you acquire minus the number of customers that churn.
The formulas for both are simple and should be measured for a specific time period.
Customer acquisition rate:
# of new customers / # of existing customers
Customer growth rate:
(# of new customers – # of customers that churn) / # of existing customers
Customer Lifetime Value
Customer lifetime value (CLV) uses the following variables to calculate the overall value of an average customer relationship: the average revenue of your customers, your overall profit margin, and the length of your customer relationships. It provides you with a metric you can use to evaluate whether the return on your marketing efforts is worth it and to compare the relative value of your customers to determine which are over or underperforming.
This helps you look at the overall cost to your business to generate and keep customers and compare it to the value they provide to your business over the full customer lifespan, measured in profit. For example, you might use it to determine whether a specific marketing effort is likely to be worth the investment over time.
The equation for CLV is as follows:
[(Annual revenue x profit margin)/(Number of customers)] x Average customer lifespan = CLV
Tools to Help You Calculate Churn Rate
Churn rate isn’t something that you can usually just run a report out of your standard CRM unless yours comes with more advanced analytics, customizable fields, or the ability to track customer interactions beyond the initial sale. However, if you’re using an accounting tool or a payment processing tool for recurring invoicing, either can provide you with the number of customers and the number that have canceled.
Here are a few tools you should consider to help calculate churn rate.
Who it’s for: Small businesses needing online access for managing their bookkeeping and keeping track of their finances through simple reporting features.
What it costs: $20 to $150 per month
QuickBooks Online is used by millions of small businesses to keep track of their finances. It gives you the ability to record income and expenses, track customer sales, generate reporting, and evaluate the financial health of your business. QuickBooks Online is also helpful for calculating customer churn rate since it gives you the ability to set up recurring invoicing and keep track of which customers are canceling or failing to renew.
Who it’s for: Small businesses that want to accept payments in person or set up recurring invoices.
What it costs: There is no monthly or set up fees, but Square charges 2.9% + 30 cents for every transaction.
Square is a merchant account provider that allows small businesses to process credit cards anywhere. In addition to accepting payments on your mobile device, Square allows you to set up online and invoicing payments for recurring subscriptions. The simple interface and reporting features make it easy to have a picture of how your number of customers is changing over time, helping you calculate your churn rate.
Frequently Asked Questions (FAQs)
Does churn rate change?
The short answer is yes. Changes in your sales process, marketing activities, and customer support can affect your customer churn rate. The better you attract the customers that are the best fit for your business, the lower your churn rate will be. In fact, this is one of the reasons it’s important to measure churn rate since it can change based on either positive or negative circumstances that should be addressed.
What are the most common causes of churn?
Most customer churn can be attributed to one of three categories: customer dissatisfaction, payment issues, or external factors like relocation or changing jobs. Knowing what causes your customers to churn is an important piece of information for a healthy business.
How do I reduce customer churn?
The two best ways to reduce customer churn is to be sure you are targeting customers that are the right fit and focus on maintaining strong customer relationships. Customers that are not a good fit for your product are more likely to leave, resulting in higher churn. On the other hand, finding the right customers and meeting their needs will reduce overall churn and create happier customers.
What is a good churn rate for my business?
The answer to this depends on your industry and your specific circumstances. The average monthly churn rate for all B2B industries is about 5.5% and about 7.6% for business-to-consumer (B2C) companies. However, this varies widely based on the type of subscription and the price.
Measuring the average customer churn rate for your business is an important aspect of making good strategic decisions about your sales and customer retention efforts. In addition, it helps you evaluate the strength and health of your individual customer relationships and make adjustments that result in reduced customer churn. Now that you understand and can calculate churn rate, there’s no reason not to start using it in your business.
If you’re looking for a sales management application that can help, Insightly is a fully featured CRM with powerful contact and deal management features as well as helpful reports and third-party integrations including QuickBooks. Insightly has a free version for up to two users, and paid versions start at $29 per month. Visit Insightly today to start your 14-day free trial.