Churn rate 101: What is it, how it is calculated, and how to reduce it

A company’s churn rate is one of the most important metrics that should be taken into account when determining a business’s health. If you spend thousands of dollars on acquiring customers but they don’t stay loyal to your company, all the time and effort put into acquiring them was meaningless.

What exactly is churn rate, how can you calculate it correctly, and, finally, what can you do to reduce it? Let’s find it out. 

What is the churn rate?

Definition

Churn rate tells you how many customers you’ve lost over a given period of time. Basically, it indicates the value of the product you’re offering and how good you are at retaining customers.

How does it affect other metrics?

Churn is a decelerator of growth. That is why you will see it reflected in your financial metrics, such as monthly recurring revenue, customer lifetime value, and customer acquisition costs.

Your monthly recurring revenue indicates the long-term viability of your business. When your customers leave, your MRR decreases. 

The lifetime value of your customers also shows how rentable your business is. When your customers churn, the LTV gets lower: all the value that they could have brought to you disappears. Read more to find out how to calculate it.

The last metric we will mention is the customer acquisition cost. The more you spend on acquiring a new customer, the higher impact the churn rate has on your profitability. By reducing the churn rate, you can lower your overall CAC. 

How to use it?

Your churn rate is an important starting point for a deeper analysis of the state of your business. It will lead to a greater understanding of your customers, the reasons behind their behavior, and what makes them leave your product (if they do). 

By evaluating your churn rate, you can draw various important conclusions:

• Evaluate the health of your company and forecast performance
• Spot characteristics of customers that churn or those that stay the longest, and adjust your selling strategies accordingly
• Evaluate the effectiveness of your customer retention plans and identify events that influence your churn rate.

All of the above will give you actionable and data-driven insights for improving your customer retention.

How do you calculate the churn rate?

General rule

In simple terms, your churn rate is the number of customers who leave a product over a given period of time, divided by the total number of customers. It seems quite straight-forward, but there are numerous issues that can influence the number you get – even with the same data entry.

Various metrics

Let’s start with the total number of customers. Over any given month, say, this number varies due to new sign-ups and cancellations. That is why you should clarify the way you count your customers.

Your total number of customers over a specific time frame consists of those that signed up prior to that period, including both new and lost customers. Depending on these variations, your churn rate can quickly get distorted.

Then comes the churn moment. You can pick either the moment when your customer cancels a subscription or the end of a subscription that isn’t renewed.

Choosing the right total number of customers and churn moment can solve the distortion problem. When you identify the end of a subscription as the moment of churn and deduct new sign-ups, your cancellation won’t interfere with the churn rate.

Take into account that when your customers cancel, you still have an opportunity to win them back before the end of their subscription.

Various methods

When you decide to calculate your churn rate, you will find that there are different ways to do it – and it’s important to bear in mind that they will all give you very different results. Steven Noble at Shopify described the four ways of calculating churn rate that we will cover briefly.

The simple way

To calculate churn in this way, you simply have to divide the number of churns by the number of customers at the beginning of the period. It requires the least amount of calculating, yet it has its shortcomings.

For example, if your new customers are a major percentage of your overall customer number, they will affect the churn rate result heavily. That is why the same customer behavior can give you a very different churn rate.

The adjusted way

In this method, you use the average number of customers through the time frame as your denominator. It helps showcase significant growth in your company, yet it’s not easily transferable for a different time frame. As an example, your monthly churn rate can differ from your quarterly time frame significantly.

The predictive way

This method strives to let you predict the churn rate. It’s far from perfect though, and in reality, it gives you out-dated information. It is also difficult to connect with various events that happen in your funnel, and therefore you can’t see correlations clearly.

The Shopify way

Noble describes the way they count their churn rate at Shopify, which combines the two previously mentioned methods. It allows you to normalize the impact of high growth periods and scale across different time frames. It can also give you an up-to-date value of your churn rate.

Nevertheless, you should remember that your values can differ for each customer plan, cohort, or new vs. old customer groups. 

If you wish to find out more in-depth information about churn, you should check out the original post.

What should you keep in mind?

If you have a lot of new customers, you may want to count their churn rate separately. A general rule is that new customers churn at a higher rate than those who have been around for longer.  By gaining these insights you can adjust your mitigation strategy accordingly.

Your churn rate, along with other metrics in business analytics, should comply with the following three characteristics: they should be understandable, comparable, and actionable.

When you share your key metrics with your company, each employee should have a clear understanding of their meaning and importance.

You should be able to compare them across various periods of time to learn how your business is developing.

Last but not least, you should have a clear idea of what action you can take to improve the metric.

Due to these requirements,  you should consider expressing your churn in a different manner. Nadav Dakner suggests four alternative ways:

• The number of customers lost
• The percentage of customers lost
• The value of monthly recurring revenue (MRR) lost
• The percentage of MRR loss

Using these additional ways to show customer churn may help you make a quicker, more appropriate comparison between two given time frames.

External factors

Your churn rate can be influenced by various external factors. Once you notice a correlation, you’ll learn how to invest your time and resources to lower your churn rate, as well as which issues aren’t relevant to your churn.

• Seasonality
  Is your business affected by seasons? If so, your churn rate will also vary. In this case, you should wait for several cycles until you can compare your churn rate appropriately.
• Customer segments
  As you have different strategies for each customer segment, you should calculate the churn rate separately. This allows you to focus your efforts where they are needed, and avoid fixing non-existent churn problems.
• Time frame
  The time period in which you choose to count your churn rate depends on the specifics of your business. Moving from one time frame to another can show different churn rate results: make sure they’re not incorrect!
• Sample size
  In your early days and in periods of intensive growth, your sample size can change drastically. This will influence your churn rate as well, making it hard to compare changes over time appropriately. 
• Business-specific factors
  Your churn rate is probably influenced by various factors specific to your business. Applying a consistent calculation method and comparing the churn rate fluctuations with other indicators can help you spot these external factors.

To keep track of external factors, you should apply a consistent calculation method to make the results comparable.

Voluntary vs. involuntary churn

Some customers may decide to abandon your business. This is considered a voluntary churn. Others may fail to pay for their subscription due to technical issues, like an expired credit card or insufficient funds, which results in involuntary churn.

When calculating the voluntary churn rate, you should focus on improving your product value. With involuntary churn, you may need to focus on overcoming possible obstacles in the process of renewing a subscription. 

Churn in e-commerce

Even though the idea of a churn rate comes from recurring revenue models, it can be adopted by e-commerce businesses. When you don’t offer a subscription, you have to establish a similar churn event that can replicate the idea in your business. For example, if most repeat purchases happen within a month, those customers who don’t make a purchase in this time frame are your churn. 

How can you reduce your churn rate?

Avoidable customer churn is costing U.S. businesses $136 billion a year.  If this value seems abstract to you, try to count what would happen if you had 10% less churn than you currently have.

When it comes to reducing churn, your customer service can help you a great deal.

Learn when your customers churn

To create actionable insights,  you must first take relevant data and establish when churn usually occurs. 

Even if you introduce changes to your sales funnel, you may still experience some kind of churn. Treat it as an opportunity to develop your product further and learn more about your customers.

Try to figure out what defines your happy and unhappy customers. Think about the moments when they behave differently, their preferences, and so on. Distribute feedback forms or suggestion boxes for the customers that wish to churn to gather this information. 

In the long run, this will help you spot the customers that are likely to churn – and act before they leave. For example,  you can prepare special limited time offers for those who are at risk of churn.

Don’t forget to regularly check payment options and their expiration dates. Notify your customers about invalid card data, cards that expire soon, and make sure that all the technical processes are up-to-date.

Create a roadmap for new customers

Mapping out your customer journey can help you in defining the key moments of a customer’s experience. By mapping the journey out, you’ll know when your customers need your support, at which moment they need to be engaged.

As the churn rate is usually higher for your new customers, their onboarding is crucial. Focus on showing them the value of your product,  or sending over tips, interesting features, or case studies. Check out this article to learn more about how to provide a solid onboarding process for new customers.

Communicate proactively

Don’t wait until your customers experience problems before talking to them. When you reach out to them, you’ll become their trusted partner. This will help you build customer relationships and work on improving the customer experience. 

Remember not to be too spammy though. Messaging your customers at key moments may be a good idea to start with. 

Offer incentives

Investing in at-risk customer groups can benefit your business in the long run. Think about promo codes, discounts for prolonging the contract, or loyalty programs. Remember that keeping your customers loyal is always cheaper than acquiring new ones.

Ask for feedback

Gathering feedback from your customers can give you better insight into their actual feelings. This is where live chat can come in handy. It is quicker than email and requires less effort from your customers than a feedback form. Another thing to consider is collecting your feedback directly on your site.

Stay competitive

Do you remember that the churn rate indicates the value of your product? Unfortunately, this is not a given for eternity. That is why you should keep improving and working on your product and strive to stay competitive.

As the customer experience continues to be the strongest differentiator, you can focus on this area. Do you offer omnichannel customer support? How do you handle frustrated customers?

Here you will get more ideas about how to work on improving your customer experience.

Use the right tools

You don’t have to do everything manually. And you shouldn’t either! With the right tools like LiveAgent, improving customer service can be a piece of cake.  

Nowadays, your customers rely on search engines and resources on your website to troubleshoot problems– before they eventually contact customer support. Prepare for that. By creating a knowledge base, you can provide your customers with a reliable resource to solve their problems on their own. 

When they can’t find a solution directly on your website, make sure your live chat is handy. When it comes to getting answers in real-time, live chat is definitely the winner. Check out our blog post on how to make the most of live chat to build customer relationships.

If you offer call center support, make sure it is integrated with other channels. Using a universal inbox allows you to manage all your customer tickets from one place, regardless of the channel they use.

Don’t forget about the importance of social media in customer service. Take a look at our blog post to learn the best practices of delivering excellent customer service on social media.

Conclusion

The churn rate is a crucial metric for your business. It conveys important information that allows you to boost your profits.

Let’s recap the most important thoughts:

• Calculation of the churn rate is the starting point of analyzing your business health
• Take note of different customer behaviors
• Make sure your customers are prompted to resolve payment issues in advance
• Strive to outrank the competition: customer experience may be your differentiator

Don’t forget the role of your help desk in providing an excellent customer experience. Try LiveAgent’s free 14-day trial and discover the power of 180+ advanced help desk features.