What is Churn Rate

What is Churn Rate?

The churn rate measures customers moving out of a business in a given time. It is also known as the attrition rate. Expressed in percentages, it also finds the number of employees or students leaving the organization. A company’s growth rate must exceed the churn rate to increase revenue.

An increasing churn rate indicates that a company cannot retain customers. Therefore, it is essential for companies with subscription-based models to track their customers regularly. As a result, customers switch at twice the pace. 

Growth and churn rates are opposite rates that define the incoming and outgoing of customers. The growth rate is at which a company gains new customers, while the churn rate tracks the rate at which a company loses customers. 

In subscription-based companies, tracking customers is vital. A small change in the number of customers can affect the entire business entity. If the customers move out too soon, the company is said to have minimal brand loyalty. 

Importance of Churn Rate in Business

Acquiring clients is always more expensive than retaining clients. Therefore, companies track their customers on different parameters to find what type of customer leaves the company more quickly. There can be many reasons why a customer might cancel their subscription. 

When a customer leaves your business, you lose a significant investment. Customer churn is frequent in many business industries with higher competition. The competition makes it easier for customers to switch between different companies. Therefore, it is essential to note why customers are more likely to stay or leave an organization. A good or bad churn rate can vary for different business types. 

Types of Churn Rate

There are two types of churn rates, voluntary and involuntary.

Voluntary 

The voluntary churn rate defines the exit of a customer for personal reasons. With bad experiences and increasing competition, customers switch. However, if a company is working on its customer satisfaction or brand loyalty strategies, it may retain many customers over time. 

Involuntary 

An involuntary churn rate is similar to an unavoidable market risk. These are problems unrelated to your product or service. For example, they can be a billing error or no funds in the customer’s card canceling the subscription. 

To control involuntary churn, companies should use an account updater that finds information about credit cards used by customers. Companies can also implement dunning campaigns to remind customers of due payments. 

Advantages and Disadvantages of Churn Rate

Advantages

  • The churn rate is the most straightforward calculation a company can carry out for their business’s development
  • Finding a churn rate can help companies clarify the quality of their business in customers’ eyes.
  • Increasing or decreasing the churn rate will justify customer satisfaction and brand loyalty.
  • If the company sees an increase in the churn rate over a period, there must be a fault in the company’s operating system.
  • Companies can compare the churn rates of competing companies to look for it’s average, accepted in a particular business category.

Disadvantages 

  • The idea behind the churn rate is to find the leaving customers, but some drawbacks are attached to this calculation.
  • You need to clearly understand what type of customer is leaving, whether the customer is new or old, or if there is any other reason for the departure.
  • Another drawback is the effect of campaigns on attracting new customers. Some customers may stay only for a certain period with a program and soon leave as the program ends. 
  • Churn rates accounting for competing companies may need to be clarified more. New companies tend to have a higher growth rate than old ones. However, the churn rate for such companies is also very high than the old and established ones. 

How to Calculate the Churn Rate?

As described above, the churn rate is the number of customers lost over time. So the formula for churn rate is: (total customers lost/ total customers in the beginning) x 100. For example, if a company had 150 subscribers in the initial year. After one year, the total number of subscribers decreased to 135. Therefore, the total number of lost customers in one year is 15. So 15 divided by 150 multiplied by 100 gives us a churn rate of 10% per year. 

There are several steps to calculating the churn rate:

First and foremost, determine the period you want to use. It can be monthly, quarterly, or annually. After that, find out the number of customers you had at the beginning of that period and the customers that left at the end of that period. 

Furthermore, divide the lost customers by the number of customers in the beginning and multiply by 100 to find the churn rate. Small and e-commerce businesses use several excel business templates and web applications to find their churn rate.

An Example of Calculating and Analyzing the Churn Rate

Let us look at an example of a subscription box business model. 

A fresh startup of subscription boxes designs childcare product boxes for different age groups. Its most popular box is the infant box, developed for kids aged six months to two years. The price of this box is $250 + delivery charges.

The company’s initial subscribers for the year 2021 were an average of 300 a month. However, in January 2021, the total number of subscribers was 360; in December, they declined to 296. So, for 2021, the company’s churn rate was 64/360 x 100. The calculation gives us a churn rate of 17.78%. 

it defines that the company lost 17.78% of its initial subscribers in 2021. As mentioned above, there can be several reasons for the decline in the initial customer base, such as advertising, campaign, payment issues, etc.

High vs. Low Churn Rate

A higher churn rate is terrible for the company. It indicates that the company is losing a significant amount of its customer base from time to time. It can negatively affect your company’s monthly revenue.

A lower churn rate indicates happy customers. It shows that you have gained a loyal subscriber base and are fulfilling their requirements.

Conclusion

The churn rate is an essential metric for a growing company. It helps analyze what kind of product is performing better than the other in the market according to its purchase. Tracking your lost customers will give you an edge over your marketing strategies. In addition, knowing how to calculate your customers’ losses accurately will provide you with valuable insights. 

Subscription-based companies or companies with regular customer inflow and outflow must consider calculating the churn rate at regular intervals. Soon they will find what strategies suit them best, minimizing customer churn.

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