A Complete Guide to Customer Churn Rate

7 min readSep 30, 2021

“Churn” or “customer churn” refers to the number of consumers you lose in a given period of time. Regardless of a company's service or the quality of products, it is a natural part of operating a business.

Customer churn rate is the percentage of customers who leave the service you’re offering after a given time. This time period can be monthly, quarterly or yearly. A lower churn rate indicates that you are retaining more clients while a high churn rate isn't a good sign because it means you are losing revenue.

Who does the churn rate matter to?

For businesses that consumers pay on a regular basis, knowing the churn rate is crucial. These businesses might be subscription-based or SaaS (software-as-a-service) companies. SaaS companies provide licensed software on a subscription basis. Dropbox is a well-known example.

What is the purpose of calculating churn rate?

Since churn rates signify the percentage of consumers who leave a service, it becomes a vital metric for businesses where clients pay regularly. Knowing the churn rate assists the companies in determining how well they are able to sell their service and how satisfied their clients are. It is also profitable to keep existing consumers rather than trying to acquire new ones, since the Customer Acquisition Cost (CAC)is significantly higher than Customer Retention Cost (CRC).

Monthly, Quarterly or Annual Churn Rate?

The monthly churn rate (MRR Churn Rate) is the most common churn rate used by various services. While monthly and quarterly churn provide insight into customer trends, annual churn allows you to assess your year-over-year (YoY) performance and determine whether you've improved from the prior year. Annual churn also provides a more comprehensive picture of how the business is functioning unlike monthly churn which is influenced by occasional fluctuations like sale and promotions. For instance, People may subscribe to your service during holidays. However, once your offer expires, they will leave. An annual churn is, therefore, a preferable alternative.

Reasons for Churn

Churn occurs for multiple reasons. As demonstrated in the graph, if a service is not used, consumers are more likely to terminate their subscription. Excessive advertisements and expensive subscriptions compared to other companies providing identical service are other major issues. Majority of low-rated apps on Google Play have reviews that complain of “an ad after every minute.” In addition, the service might contain poor instructions or bugs that aren't resolved timely.

Advantages of Churn Rate

It provides information on how well the company is doing, particularly in terms of customer retention. Retention suggests customer satisfaction, which in turn reflects the quality and utility of the service.
A consistent increase in churn rate may aid in identifying potential problems with a service, such as bugs, poor customer service, or a expensive subscription.
Knowing the churn rate, companies can maintain their quality to keep existing clients since CAC (Customer Acquisition Cost) is substantially greater than CRC (Customer Retention Cost).

Disadvantages of Churn Rate

Churn rates do not consider the types of customers who are leaving. The majority of the consumers who leave are those who were recently acquired.
While new customers depart because they are dissatisfied with the service, a longtime client leaving is a bigger problem. This is because they had previously loved the service; therefore, there must be a significant reason for them departing. Churn rates do not solve this issue.
Churn rates do not help in determining a how good a company is within an industry. This is because new companies typically have a high CAC because customers are eager to try out the service. However, these customers leave as easily as they signed up. This makes the churn rate go up.
A strong growth rate in one period may be the cause of a high churn rate in the next. In this scenario, a customer's departure is not necessarily indicative of poor service.
Customers acquired through promotions might end up leaving since they were merely testing out the services.
An old company is bound to have a low churn rate compared to a new company because it already has a devoted client base.

How to track a churn rate?

It's a good idea to keep a spreadsheet or use a dashboard that calculates and records your churn rate automatically.

How to determine a good churn rate?

Theoretically, a churn rate of 0% is the best churn rate. In truth, businesses always lose subscribers for one reason or another. The majority of prominent subscription-based services, such as Disney+, Spotify, Hulu, and Adobe, have a churn rate of 4% to 10%.

So, how do you determine what constitutes a "good" churn rate?

This is because the services mentioned above are already well-established and often pay celebrities to advertise them. A startup or a relatively new company, unlike them, is faced with an entirely different situation. A turnover rate of 2% to 8% is generally considered acceptable. The lower the churn rate, however, the better it is for a company.

How to Calculate the Churn Rate

The following factors must be considered when calculating the turnover rate:

The time period for which you are calculating. It can be monthly, quarterly, or yearly.
The number of clients you had at the start of a period
The number of clients at the conclusion of the period

Once you've figured out what they are, you'll need to follow this formula:

(Lost Customers ÷ Total Customers at the beginning) x 100

For example, suppose you have a total of 100 consumers. During month A, you lose 10 for some reason. So, the churn rate would be estimated as:

(10 ÷ 100) x 100 = 0.1 x 10 = 10

During month A, your customer churn rate would therefore be 10%.

It is important to remember that while assessing churn rates, you can not include customers who joined in the middle of the period for which you are calculating the churn rate. Doing so would give you a company's growth rate instead.

To explain this better, take the example above. Let us consider that 5 clients subscribed to your service. You will not consider these 5 new customers in your churn rate for month A. Instead, they'll be included in the churn rate for months B.

Based on what I've said so far, the churn rate for month B would be:

(Lost Customers at the end of month B ÷ Total Customers at the beginning of month B) x 100

Since, a few customers left after month A, and others joined, the total customers at the beginning of month B

=(Total customers at the beginning of month A – Customers lost at the end of the month) + New Customers who signed up for the service.

= (100 - 10) + 5 = 90 + 5 = 95

Now for the churn rate of month B, let us consider that you lose another 10 customers at the end of the month B. Then your Churn Rate for month B would be = (10 ÷ 95) x 100 = 0.16 (approx) x 100 = 16%

Going by what I’ve previously mentioned, a turnover rate of more than 10% is not a good churn rate. Since the company's churn rate is higher than 10% during month B, they must find ways to lower it.

Reducing Customer Churn

To prevent a customer churn, consider the following ways:

Determine the causes of client churn: The easiest method to respond to this is to approach the churned customers directly. To learn why they are leaving, interview them or conduct a survey.
Make sure you're targeting the proper audience.
Keep an eye out for warning indicators: There are several indicators that your customer is losing interest in your service. It could be a delay in logging in or less time spent on the service. If that's the case, figure out why they're losing interest and try to solve it.
Provide Resources: Providing your customers with numerous resources, such as newsletters, blog updates, and personal messages, is a wonderful method to keep them interested. Avoiding churn with a push notification is also an excellent idea.
Requesting feedback: Request feedback on your services regularly. In addition, respond to their queries and suggestions promptly. If there are any negative reviews, respond to them rather than leaving them unanswered. Customers who sign up for free trials should also be asked for feedback. They are more likely to be candid about their experiences.
Offering Perks: Existing clients can be kept engaged in your service by providing incentives. People are more inclined to buy meals from a delivery service that offers promo coupons on a regular basis, for example. Cashback for frequent users is another attractive option.
Keep your pricing moderate. An expensive subscription is a prime reason for customers leaving.

We can see from the above that having a low churn rate is the best option for companies. It shows that they are able to keep their customers, which in turn implies that they are able to retain their revenue. While churn cannot be totally eliminated because consumers will depart for various reasons, it can be securely managed. Interacting with clients and identifying flaws in your service is an excellent place to start.