Guide to customer churn rate
Customer churn rate is one of the most important metrics for businesses to track. Find out what is is and why it matters.
Published April 22, 2020
Last updated July 23, 2020
Customers can be a fickle bunch—happy one day, gone the next. That’s why it’s important for companies of all shapes and sizes to monitor when customers leave, commonly known as customer churn or customer attrition.
While customer churn is often considered to be a measure of failure rather than success, churn is one of the most important metrics you can track. It impacts nearly every aspect of a company’s business, from product and revenue to customer loyalty and customer satisfaction. Because what’s a business without customers?
Read on to find out what your customer retention rate is, how to calculate it and why it matters.
What is customer churn rate?
Customer churn rate is defined as the percentage of a company’s total customers that stop doing business with the company over a specified time period. No matter what you sell, customer churn is one of the most impactful metrics for businesses because it’s the ultimate measure of customer happiness.
When evaluated alongside a company’s other key metrics, a company’s churn rate is a powerful way to assess what a business is doing well, and where it needs to improve.
Depending on the nature of a company’s business, churn rate may be monitored annually, quarterly, monthly, weekly, or in the case of some SaaS companies, even daily. While all companies strive to have loyal customers and a churn rate of zero, the reality is that customers come and go. Therefore, it’s important for companies to come to grips with what is causing customers to cut ties with their business and consider customer retention strategies that could help.
How to calculate customer churn rate
To identify your company's churn rate, choose a period of time you want to measure and identify the following values:
- Number of customers at the start of the period (X)
- Number of customers lost during that period (Y)
Then, use the following formula to determine your customer churn rate (Z) as a percentage.
Customer churn rate formula
(Y/X) *100 = Z
For example, if a business had 100 existing customers at the start of the month and lost 10 customers by the end of the month, it would divide 10 into 100, and get .1, or 10 percent. This means the company had a monthly churn rate of 10 percent.
Depending on the nature of a company’s business, it may also look at churn through the lens of other churn metrics, including recurring revenue lost, decreased engagement with a product, percentage of revenue lost, or any number of variables specific to their product and business. The more granular a company is with churn analysis, the more effective it can be when working to reduce churn with its customer base.
Why is customer churn an important metric?
Customer churn is an important metric because lost customers equal lost revenue. If a company loses enough customers it can have a serious impact on its bottom line. In fact, according to a study by Bain & Company, improving the customer retention rate for existing customers by just 5 percent can improve a company’s profitability by 25 to 95 percent.
Another reason it is so important to improve customer retention and reduce churn is that it’s considerably more expensive to find new customers than it is to keep existing customers. The same study found that customer acquisition costs to find a new customer are five times higher than the cost of keeping an existing customer. So companies that lose customers to churn aren’t just losing the revenue from those customers, but they’re also stuck with the high cost of finding new customers.
No matter how good a company’s product or service may be, it’s critical that they understand their customer churn rate, what makes existing customers happy, and focus on their loyal customers to assure they maximize their customer retention rate.
4 tips for reducing churn
Understanding a company’s churn rate is an important first step—but it’s just that, the first step. Once a company understands how many customers churn, it’s important to find ways to minimize churn and grow their business. Here are 4 steps that companies can take to begin to develop a churn reduction strategy.
Listen to customers
Loyal customers don’t leave for no reason. It’s important for companies to listen to their customers in the form of surveys, feedback forms, and other customer satisfaction indicators to understand why existing customers are leaving. Businesses should also look inward and consult metrics from all the different touchpoints in the customer journey to find ways to improve the customer experience. If you are a SaaS company, this may involve looking at their customer onboarding process. An online retailer might look at customer success rates when searching for a product.
Identify at-risk customers
If a company wants to focus on customer retention, it’s important for it to understand which customers are most likely to leave. Of course, that’s easier said than done, but companies should consider the metrics they have available to them and look for patterns that could indicate that a customer is at risk. This can include things like the amount of time since they’ve been in contact with sales, visited a website, or placed an order. Other factors could include negative feedback, product returns, or a poor interaction with customer service. Once a company understands who may be at risk, it’s easier to target them with special offers or enhanced support to try and rebuild customer loyalty.
Double down on your best customers
Even with the best plans in place and advanced customer churn prediction metrics, it’s nearly impossible to get a customer churn rate down to zero. That’s why it’s also important for a company to identify and take care of its best customers. By maximizing sales with the customers that are most likely to buy a company’s product or service, a company can grow to help offset the inevitable churn that it may experience down the road.
Invest in service and support
One-third of customers say that they'll stop doing business with a company after just one bad interaction with customer service. Eighty percent say they’ll leave after multiple bad experiences. Companies that want to cultivate customer loyalty and maintain long-term relationships with their customers can’t afford to deliver sub-par service and support. One of the ways companies can deliver fast, personalized service, and support on all the channels that are most important to customers are with helpdesk or customer relationship management software.
Turn the churn around
Customers are the lifeblood of any business. It’s important for companies to understand customer churn if they want to grow and adapt to meet their customers’ needs. While it can be a scary metric to face, understanding customer churn is the first step to improving any business and managing profitable long-term relationships with customers.