Ultimate Guide to Customer Churn Rate [Definition, Formulas, and FAQ]

churn rate
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Your sales team knows how many customers they acquired last week, month, quarter, and year. Every good sales team should have what it takes to know these figures and be aware of their customer retention rates. However, on the other hand, do they know how many customers left the business by failing to renew their subscriptions or call again?

What Is Customer Churn Rate?

Generally speaking, customer churn rate is a simple concept. It is the percentage of the average number of customers who have left your service during a specific period. Customers who have decided to stop patronizing your business for one reason or another.

Customer churn rate or attrition rate is directly opposite to customer retention rate, which informs you of the number of customers who came back to buy from your business or renewed their subscriptions repeatedly during the same time period.

 churn rate definition

A high customer retention rate means you are attracting more customers, which ultimately improves your annual churn rate.

Anything could be responsible for why a customer leaves a business service.

2 Types of Churn Rate to Prioritize

No matter the business structure, churn rate can give valuable data on important metrics supporting operations and profitability. 

Here are a few types of churn rates you should constantly keep updated;

1. Customer churn

Customer churn rate measures the total number of customers of a business who abandons or deletes their account, stops coming to buy your stuff, or simply did not renew their subscriptions over a specific time frame.

There are two significant types of customer churn;

Voluntary churn

This would calculate the churn rate based on the total number of customers churned on their own accord. Their reasons could be such as dissatisfaction or alternative options.

Involuntary churn

This occurs when customers stop purchasing from businesses because of unavoidable situations, like credit card errors or service unavailability when relocating. 

2. Revenue churn

Revenue churn rate measures the total revenue a business misses compared to the usual revenue over a specific time frame.

Calculating the revenue churn rate is just as crucial as customer churn. These two metrics show how well a company improves its customer retention rate and lifetime value.

Businesses can calculate revenue churn rates based on the proportionate decline in customer numbers over the same period to assess the effect of revenue churn rates.

A company’s customer base can provide valuable information about the success of its sales operations.

How Does Churn Affect Other SaaS Metrics?

For a SaaS company, the result of your churn rate calculation could be used to tell the progress of other metrics like monthly revenue. A higher churn rate can generally negatively affect your monthly earnings and potentially increase your annually revenue churn rate.

Customers churn for different reasons sometimes the prices customers pay are also a factor, and this can help your sales determine the pricing strategy.

 what is churn rate

While it could be detrimental to set prices so low, you should strive to provide a product that your total customers can afford without much stress. This is a long-term strategy to attract more customers and reduce the rate at which customers churn.

Optimizing your pricing tiers could also improve your customer lifecycle values and help churned customers find a way to your product.

In addition, a high revenue churn increases cost and decreases customer lifecycle values, reducing the number of sales you record annually from specific customer segments.

Knowing your customer churn rate is essential to any business, regardless of the industry. The results of your monthly churn can inform your sales and marketing teams to create better strategies and offers to improve customer satisfaction and reduce the number of customers lost.

You could set up a short survey to collect cancellation reasons on the ‘cancel subscription’ or ‘delete account’ landing page to know the reason for a high SaaS churn rate. With this, you can help your product and development teams learn why most customers cancel their subscriptions to your SaaS product and implement additional features, functionalities, and add-ons to boost customer satisfaction and ultimately retain customers.

One customer could cancel due to low price, and ten others due to a poor UI/UX; you will know how to prioritize your updates here.

This article explores various topics around the customer churn rate, including formulas to find it, why you should pay attention to this KPI, and how it can help your business stay ahead of competitors through a high customer retention rate.

To know a reasonable churn rate, you should start by looking at industry averages.

The average monthly churn rate for SaaS companies is 3-8%, meaning the average customer retention rate should be in the 92-97% range.

Additionally, we know that the average annual churn is 32-50% which means the average retention rate should be in the 50-68% range.

That being said, it’s best not to compare yourself against the industry average, instead, compare with your top 3 competitors if possible.

 churn rate formula

Metrics You Should Track to Determine Churn and Retention Rate

When trying to determine or create a report of your current customer churn rate, you should want to have answers to the following questions beforehand.

  • How many new customers were onboarded in the last month?
  • How many new customers were onboarded in the last year?
  • How many new customers canceled after the first month?
  • How many new customers canceled after the first month?
  • For how many months did a customer remain a customer before canceling?

It is customary for SaaS businesses to lock their customers into annual or monthly contracts, so do not worry about tracking the number of cancellations during the first month.

However, you need to remember that if you offer a trial version for your SaaS business before signing an annual contract, you need to account for the number of customers who cancel before the trial ends to calculate the SaaS churn rate. Check out the guide, sales pipeline stages.

How Does User Churn Rate Affect Other SaaS Metrics?

Your churn rates directly reflect the benefit of a product or feature your total customers receive from it.

Your SaaS business will need to constantly optimize its software to decrease the number of times it takes to perform simple operations. User frustration impacts metrics such as Monthly Recurring Revenue, Customer Life Value, Customer Acquisition Cost, etc.

100% of your business depends on how many customers you got, right? In other words, your churn rate measures how well your business is doing and the overall progress of your company.

Monitoring lost, new and existing customers is just as crucial to your business as tracking new leads and helps you acquire customers.

The cost of acquiring new customers is much higher than retaining existing customers, so businesses should strive to keep their churn rate as low as possible by rewarding current customers for their referrals.

During the startup phase, investors will likely check the churn rate to assess the potential for long-term growth. Low churn rates are an indication of a healthy business.

How to Calculate Customer Churn Rate

Calculating customer retention rates or renewal rates is simple. The first step of your calculation should be determining the time period. |For example, if your business is billed monthly, it should take into account your monthly churn rate and your total annual churn rate.

Unless you only provide services each year, you only see the annual churn rate. You will only find out how many clients are retained for the specified period of time, usually 12 months.

churn rate formula

You will need to consider two sorts of customer churn rates: voluntary and involuntary.

Voluntary Churn is the percentage that has unsubscribed based on the product. For example, perhaps your product did not meet the need it was created for, or there were just several bugs that the churned customer could not ignore.

Involuntary churn refers to how many people were unable to complete their payments due to things such as unsupported payment options or unforeseen circumstances.

For a practical calculation of customer churn rate, divide the number of churned customers by the number of customers who came to your company in the beginning. It’s overly simplified, so you can focus on individual cohort churn and examine the causes instead.

You can calculate your churn rate through the following steps:

  1. First, decide what time period: monthly, annual, or quarterly.
  2. Decide on the number of customers you had at the beginning of the period.
  3. Decide on the number of customers that churned (left) by the end of the time period.
  4. Divide the number of lost customers by the number of customers you had before the churn.
  5. Finally, multiply that number by 100.

Now that you’ve found out your churn rate, you’re probably wondering what you should do next — especially if you have a high churn rate. Look at the next section for some best practices that can help you decrease churn at your business.

 how to calculate churn rate

Five Ways To Improve Your Churn Rate

With these five checklists, you can improve your churn rate and see your monthly recurring revenue skyrocket as existing customers find good reasons to come back;

1. Have an excellent product that delivers on its promises

This is topping the list because it is only natural for customers to return or renew their subscriptions when you have an outstanding product that delivers on its promises.

Essentially, to improve customer retention rate and reduce your customer acquisition costs, you’ll need a product that will provide the best user experience possible for your customers and help your business stand out from its competitors.

2. Get updates directly from your customers

Many SaaS companies only reach out to their customers on a month-to-month basis when they want to sell to them or if the customer has a problem and needs the company’s support.

This is not an avenue to bombard customers with questions and surveys. Some customers just want to enjoy your product undisturbed, and when they feel like they’re receiving spammy content, they opt-out immediately, so it is your responsibility to know what your customer wants and how they want to relate with you.

Asking for feedback once every two months would make your customers feel important to your business, and that would encourage them to check in the following month.

You can use the information you get from them to improve on your products.

3. Identify your weaknesses

Just as every business has its strengths, every company has weaknesses, including the giants.

Knowing and accepting that you can not deliver 100% in all areas of your business operation would help your know where and what to focus on.

However, you should try fixing those weaknesses as soon as you have identified them. If you’re not aware of your weaknesses, you’ll never be able to fix them.

4. Fulfil your brand promises

Customers sign up for products because they see a unique solution to their problems in the product; however, when you stop delivering on those promises, you stand a great chance of losing them.

Consider products that delivered on their brand promise and still are;

 customer churn rate

Each of these companies consistently delivers on its brand promise. It is something that customers have come to expect. So do your best to deliver what your company’s brand promise is.

If you follow this rule as you calculate the churn rate, you’ll notice a drop in your revenue churn.

5. Discover the reasons why your customers cancel

If you do not make efforts to find out why your customers are canceling at such an alarming rate, how do you plan to resolve the issue that is the cause of the high cancellation rate?

It should always be requested that a customer tells why they have canceled. These data can then be used to understand better their business and customers, allowing them to make necessary adjustments.

Determining why customers cancel may provide some good insight for your business. Afterward, you can analyze each response to see if you can make any adjustments to prevent a future cancellation.

6. Be careful with your PR

You might never think this is a thing, but earlier this year, 2022, Ulta Beauty came under intense fire for an email newsletter sent with an insensitive subject, “Come hang with Kate Spade!”

This email was intended to promote the new line of perfume they had launched, but many customers walked away and never came back because they had imagined something different.

It reminded them of Kate Spade’s suicide in 2018 after suffering from depression. Even though Ulta has since sent an apology email to subscribers, expressing the true meaning of the email, customers who were fans of Spade or who were simply super sensitive remained adamant and stayed away for life, ruining their customer base and expansion revenue.

That’s a way one bad PR can harm your business and increase your revenue churn.

what is a churn rate

Conclusion On Churn Rate Calculation

Knowing how to calculate your churn will offer valuable insights into your business. The churn reduction is directly correlated with increased profits.

If you’ve started reporting monthly or annual metrics, you’ve got to keep an eye out for and analyze churn for possible additional revenue.

Quarterly churn can tell you about customer trends, and how they grow or decrease monthly, while annual churn improves your results if handled correctly.

By calculating churn, the annual churn change will also tell you if your company’s existing customer loyalty program is working. What you do with your calculated churn rate could make or ruin your business. ALso, check out some related guides, B2B sales, SaaS sales, and tech sales.

Frequently Asked Questions About Churn Rate

How do you calculate a churn rate?

Calculating the churn rate is simple. You can calculate churn based on your customer losses in the past year. Then, multiply them by your first number of customer losses in the past quarter. The resulting percentage is your customer churns rate.

Is a high or low churn rate good?

Generally, reasonable churn rates for SaaS companies targeting small firms are between 2-35% monthly. The bigger the business targets, the smaller the churn rate will become as the markets become smaller.

Is churn rate a KPI?

Customer churn rates are KPIs used as a measure of customer attrition.

What is the difference between churn rate and retention rate?

Typical customer churn rates are customer signup and exit rates within the given time. Your track churn rate to know how many people left your business (lost customers).

Customer retention rate reflects a 5% retention rate if a customer is signed up and stays. Churn rates mean you lose but retention rates are reasonable because you keep customers.

How to track churn rate vs. retention rate?

The key metrics in the optimization process of a typical subscription business include Customer Crash Rate and Customer Retention Rate. These product analysis tools show how much onboarding you have done and how many of your customers have benefited from the product.

What does churn mean in business?

A company loses money with each passing year. Customer churn is a popular metric used to measure subscription companies’ subscription costs as a percentage of their revenue revenues.

Customer churn rate refers to the percentage of customers who have canceled their subscription in a given period. Churn rates are crucial to companies that pay recurring fees (like the SaaS or subscriptions) for their services. Whatever your monthly income is, if your typical customer does not stay around long enough to pay off the typical CVC, you will have problems. You can track the number of users churning out CRMs.