What is Churn Rate? 10 Things You Need to Know
When you think of churn rate, you may picture a butter festival somewhere with a strange competition. When we talk churn rate and business, though, churn rate takes on a completely different image, and believe it or not it is even worse than a butter festival churning competition.
As a business, customers leaving is never a good thing. Churn rate, (AKA attrition rate), is the rate at which customers just stop doing business with you. Whether it’s those that discontinue their subscriptions or employees that leave their jobs within a certain period – it’s all churn, baby.
It’s considered the silent killer and has taken businesses out entirely. If you can manage to keep customers happy, you can increase renewals, but how exactly do you do that?
Here’s the cold hard truth about churn: if you don’t learn how to manage it, you’ll spend time and resources just to keep the lights on.
Here’s the good news: if you learn how to decrease churn, you can double or triple your ROI and keep happy customers for life.
Today we tackle what churn really is, why it’s important, how to calculate it, and some tips and factors on decreasing it all together.
Churn Rate, Defined
The classic definition of churn is the percentage that measures the rate at which a business is losing its customers or subscribers during a certain period of time.
Here are the different types of churn:
- Subscription cancellation
- Account closure
- Buyer decision to go with a competitor
- Non-renewal of a contract
Any customer leaving a business for any reason is impactful on business outcomes, and revenue is the ultimate guide when defining churn. Let’s clarify the revenue churn rate.
Revenue churn rate, defined
Aside from how many customers are lost, how much revenue is lost?
Not every unsatisfied customer churns immediately. In a monthly model, they have the ability to downgrade to a lower subscription plan which leads to a smaller amount of revenue you get from that customer or, in other words, a lower customer lifetime value (LTV).
With a revenue churn rate, you may not lose customers, but you could earn less revenue. Revenue churn is the percentage of monthly recurring revenue (MRR) lost from downgrades and cancellations during a certain amount of time, which is calculated monthly.
If you see that your revenue churn rate starts to increase, it’s an early sign that users don’t see enough value in the plan they’re using and downgrade or cancel the service. Alternatively, this can also mean that your new customers subscribe to more affordable plans, but your existing customers paying more start to churn.
Let’s jump into why churn is important and how to calculate it.
The Importance of Churn Rate for Business Outcomes
If you’re not thinking about churn, you’re underestimating its power.
It is one of the defining (non-vanity) metrics that showcase the actual growth of any business. A businesses’ acquisition rate has to exceed its churn rate in order to scale.
Churn rate is important because it can provide valuable customer feedback on products, pricing, competitors, and staff. It should be monitored consistently to prevent unhappy customers. Here’s where a churn prevention strategy – or renewal increase strategy to put a positive spin on it – will help you boost your efforts to retain customers.
After all, it’s more cost-effective to retain an existing customer than it is to acquire a new one.
Churn Rate, Calculated
Ready to do some calculations?
Calculating churn rate seems pretty simple at first but depends on a few things which can get messy. It depends on how you define your customers and how external factors may affect your understanding of what churn could mean.
The churn rate metric is more adaptable to subscription-based business models, however, it can be customized for any revenue goals you want to achieve. It’s important to have a clear definition of what an active customer means and what it takes for the customer to leave.
The easiest way to calculate churn rate is:
Divide the total number of churned customers over a period by the number of customers at the beginning of the period.
(number of churns in a certain period) : (number of customers at the beginning of that period) x 100 = churn rate %
For example: 10 customers lost : 100 current customers x 100 = 10% churn rate
Counting customers can get complicated if they are all not “equal” in value.
The total number of customers for one month isn’t measurable because that number will change during the month due to new sign-ups and cancellations, right?
You may find that you have three different kinds of customers to measure:
- New customers
- Renewed customers
- Reduced plan customers
These different types of customers could mean different values, depending on your business. The easiest way is to segment your customers based on where they are in the funnel, how much value they bring to the table, and how long they’ve been with you.
What does “churn” mean to you? And be sure to understand the ‘moment’ of churn has multiple definitions. You may define the moment of churn as the moment that the subscription ends and renewal doesn’t happen or the actual time that the customer cancels. They could mean different things when it comes to value. Perhaps you have two different churn rates to keep track of. Factor that in!
Other factors to include are your customer sample sizes, subscription time frames, customer segments, and seasonality changes. Not to overcomplicate it, but each factor will remain different for each business, so keep an eye on how to measure them all.
There are several different ways to calculate churn, but as long as you know the parameters, you can begin to keep track of everything you need. Start by getting an average number of customers who leave to begin. That will allow you to see where the benchmark is for a ‘good’ churn rate.
How to Get a Good Churn Rate
A good churn rate can vary for every industry, this is well-known.
Some companies average churn somewhere between 2-4%. For startups, churn in the first year can be as high as 24%. Some have said that an average monthly churn rate is 3-8%. But this percentage could be lower the more niche your industry is.
Your churn rate is a direct reflection of the value of the product or service that you’re offering to customers. That means that whatever value you bring to your customers is what you will lose if that customer leaves. It’s a reflection of your brand, your reputation, and your service.
‘Good’ is a relative term that will be defined by your customers, your team, and your service. And, at one point, you may feel that ‘good’ is not good enough and you will strive for better!
The truth is that churn depends on your volume, your rates, and your customer experience goals. These varying churn rate averages should serve as a benchmark in your industry and a guide to be informed and scale for the future.
If you want to get a “good” churn rate, you will first need to know the factors that affect it most.
Factors Affecting Churn Rate
The churn rate forces you to evaluate the immediate results of any business transactions.
There are many factors that go into churn, and they should be an integral part of the equation. Some factors that influence churn rate are:
- Providing value. Showcasing value to customers justifies paying any price for your product or service for potential customers. You can provide value by creating educational content, showcasing stellar customer reviews or positive testimonials. You can also provide value just by being there for your customers when you need them.
- Subscription duration. The amount of time an average customer spends paying for products or services can be altered and discounted to prevent churn. For instance, if you have a monthly subscription, you can offer one month free or a discounted rate for a 6-month contract.
- Customer satisfaction. The more satisfied customers are with your customer support, the less likely they are to leave, especially if there are bad experiences. Customer satisfaction is not just for issues, it’s before, during, and after any purchase. The buying journey should be pleasurable and pleasant!
- Customer acquisition cost. The amount of money spent to obtain a new customer may be high, which means a high retention rate in order to scale. So, if you spent a lot of money up front to obtain that customer, how much are you going to need to spend monthly to keep that customer happy? Do the math.
- Competitor switching. The more costly it is for a customer to move to a competitor, the less likely it happens, considering implementation costs and onboarding. People don’t often want to switch companies unless they’ve had a wretched experience. Start-up costs are a real thing and it’s important to remember that they will have to re-learn everything with something new.
Since every business is unique, it’s difficult to know what is considered good churn. The bottom line—optimal churn rates may vary.
When in doubt, follow this golden business rule: keep renewals high and churn levels low to scale for growth.
Reducing Churn Rate
The goal is to reduce churn or increase renewals overall. The biggest benefit of reducing churn is that you not only get happy customers, you also get people talking positively about your brand.
It’s not as simple as it seems, however. When you set out to reduce your churn rate, it’s not going to happen overnight. It’s a series of actions that will have a positive impact on customer loyalty.
It will all depend on how your business defines active and inactive customers. Here are some methods that can provide the best results in reducing churn rate:
- Boost brand awareness. Even when you obtain a customer, you can still build brand awareness. Customers that have a good connection with your brand are less likely to churn, and more likely to be a referral. Create invaluable content that contains personal stories, knowledgeable DLC, connectable messaging, and incentivized programs.
- Provide excellent customer support. One of the biggest investments you can make to prevent churn is to hire the best customer support staff. Providing stellar 24/7 customer support, whether that be chat, phone, or email, will not only help retain customers but will also showcase optimization opportunities for your sales funnel.
- Make merchandising a priority. Getting your merchandising tactics right and actively promoting to existing customers can dramatically improve your churn rate. Make use of artificial intelligence (AI), be mobile-ready, communicate openly with your vendors, and personalize the experience for the shopper.
- Activate marketing automation. Marketing automation is one of the best tools to showcase the benefits of your products. You can automate blog subscription emails, onboarding emails, and re-engagement campaigns, which can be very effective if they are personalized based on what the customer wants (not what you’re trying to sell).
- Utilize website intelligence. Whether you have a membership site or not, try using website analytics and digital intelligence tactics to reach the customer where they are, such as cart abandonment or on-page signals.
The Challenge of Churn For Growth
When it comes to business, the number one priority is obtaining new customers – which is why churn falls by the wayside.
For true growth, a business must have a growth rate that exceeds the churn rate. That means that your lead generation tactics must equal your customer success tactics.
It’s critical for subscription-based businesses to balance new growth and existing customer retention. Regardless of the costs involved in obtaining new business, it may seem logical to sacrifice new-subscriber gains in order to reduce churn. Instead, we hope you’ve learned some tactics here that will help increase your renewal rate without sacrificing any lead generation tactics.
Good luck keeping customers happy enough to stick around and shout from the mountain tops how much they love your product or service. How have you found ways to reduce churn for your business or brand? Share your thoughts with us at the Restrict Content Pro team or reach out if you’d like to try a demo for yourself.
