No one likes losing customers, especially if your business runs on subscription services and repeat buyers. But it’s inevitable: no matter what business you’re in, customers come and go.
That doesn’t have to be a bad thing! We can learn a great deal from customers who stop doing business with us, just as we can from the ones who stick around so we can improve our customer experience. We just have to be willing to listen to what they say… and willing to improve for the next customer who comes along.
That’s why customer churn is often cited as one of the most important metrics that a business can track. It’s right up there with conversion rates, retention rates, acquisition rates, and customer lifetime value.
What can your churn rate tell you? How do you calculate it? And how can you use it to improve the products, services, and experience you offer? Read on… because you’re in the right place, with the ultimate guide in hand.
Why does churn rate matter, anyway?
First, a quick primer on the term. Customer churn is the number of customers that stop using your products or services during a specific time period. You may know this metric by one of its other names: “customer attrition”, “customer turnover” or “customer defection”.
You may also know its partner: customer retention. While customer churn tracks the number of people who leave, retention measures how many people stick with you.
Churn rates rose to prominence as a key metric within the SaaS business model (software-as-a-service, for any industry newbies). SaaS companies rely on recurring revenue to survive and thrive – and that means keeping customers coming back, time and time again. But any company that has customers can benefit from tracking churn, whether it’s measured in terms of repeat purchases, memberships, or accounts.
No matter what your business does or what industry you’re in, some amount of churn is natural. Still, your goal should be to keep that number as low as possible.
High churn rates sap your revenue and resources. For every customer who leaves, you’ll need to spend time and money to replace them. That could cost anywhere from 6 to 12 times the monthly revenue you’d get if they stayed. You lose potential revenue from expansion opportunities like cross-sells and upsells when customers leave. You could also lose potential revenue from referrals – and even take a hit in brand reputation if lost customers spread bad experiences within their networks.
Low churn rates keep your revenue growing over time. The longer a customer stays with you, the more likely they are to make an additional purchase, increasing their overall lifetime value. Happy customers are also more likely to recommend you to others they know. Don’t forget the lower cost associated with renewing a customer – it’s about 5 times less than the cost of bringing in a new one. In fact, increasing customer retention by just 5% can lead to an over 25% increase in profits for your business/organization.
Why should you calculate your churn rate?
Your churn rate can tell you a lot about the health of your business. A bit like the proverbial canary in the coal mine, it can let you know when something’s gone wrong and give you time to address it before it becomes a bigger problem for your business.
Generally, high churn could be a sign of some common problems:
- Your prices are too high for what customers get from your product or service
- Your product/market fit is too poor to attract the right customers
- Your marketing efforts aren’t attracting your target customers
- Your experience isn’t focused on your customer’s needs or success
- Your product is lacking in key features, quality, or usability
- Your competitors are giving customers a better product or offer
- Your company values don’t resonate with your buyers’ values
Your churn rate won’t tell you exactly what the problem is, but it’ll let you know that it’s time to dig in and find out!
And once you start making improvements, you can track your churn rate to measure the impact of your efforts. It can even tell you if major initiatives like new product launches or campaigns are drawing people in or turning them away.
How do you calculate your churn rate?
You can calculate your customer churn rate with our free tool:
Customer churn vs. revenue churn
Not all customers are equal – some may be big spenders who are dedicated for the long term, while others may be sampling your product or service for the first time with a cheaper, entry-level option. Some may upgrade service while others downgrade. If you want to measure the amount of money that leaves your business each month, revenue churn is a helpful metric.
To calculate your revenue churn rate, you’ll need to know your monthly recurring revenue (MRR for short) at the beginning and end of the period you’re measuring. Then, crunch the numbers:
Let’s say you started January earning $100,000 in recurring revenue. At the end of the month, that number fell to $80,000 thanks to downgrades and cancellations. Your revenue churn would then be:
Note: it is possible to have negative revenue churn! That simply means you’ve gained revenue in the period you’re measuring.
Active churn vs. passive churn
Sometimes customers leave because they’re dissatisfied with the product or service, the pricing, or they simply got a better pitch from a competitor. This is called active churn, or voluntary churn, because they’re making an intentional decision to end their business relationship with a provider.
But that’s not the only reason customers churn! Payment issues, such as expired credit card numbers, insufficient funds, or network failures can cause churn too, even when customers are over-the-moon happy with you and your business. This is called passive churn, or involuntary churn, because the customer would have otherwise stuck around.
Obviously, the exact proportion of active and passive churn will depend on your business and industry. But to give you an idea of how it might break down, Recurly estimates that roughly 4% is voluntary while 1.4% is involuntary.
Addressing passive churn is low-hanging fruit for improving churn rates. The customers are already satisfied with their service – there’s just a technical problem standing between them and their renewal.
Analyzing your churn rates
We’ve given you the basics on churn rates – something that you can easily calculate and present to your stakeholders. But if you’re a data enthusiast who wants to dive deeper (like us!), there’s a vast ocean to explore!
After all, the broad strokes miss some small subtleties that can make a big difference, such as:
- The size of your sample: Losing 1 of 10 customers is very different than losing 10,000 of 100,000 customers, though the churn rate is the same.
- The speed of your growth: Lots of new acquisitions within a period can hide high customer losses.
- The period you measure: Your monthly rate could look different depending on which date you start from.
- The length of your contracts: Your contracts may start and expire at different times between different customers.
- The seasonality of your business: It may take a few cycles of measuring churn to understand if seasonal trends are at play.
- The lag in measurement: The basic calculation only measures what has happened already, when it may be too late to make a difference.
- The people who leave: Some customers are more costly to lose than others in terms of actual recurring revenue, lifetime revenue, or potential revenue.
That’s why some organizations adopt more precise ways of measuring churn. The basic calculation can tell you whether you have a churn problem… but further digging can tell you where that problem lies.
Some common variations in churn rate analysis include:
Customer segmentation
Rather than calculating churn across your entire customer base, this kind of analysis involves running the numbers across different customer segments. The goal is to figure out not just how many people are churning, but who those customers are – something that can help you prioritize and target your retention efforts most effectively.
For example, you might segment the customers who churned based on:
- Account size
- Individual or firmographic characteristics
- Geography
- Attitudes, interests, and values
- Needs and values
If you’re not sure how to segment your customers, we’ve got a guide to help!
Cohort analysis
Cohort analysis separates customers into different groups based on when they first purchased your product or service, and each group’s churn along a timeline. So, for example, you could compare the churn over time between customers who signed up in January 2022 against customers who joined in October 2022.
This kind of analysis can help measure the progress you make as your company grows, along with the impact that different projects and initiatives have on retention. For example, it helps answer questions like:
- How many people signed up in January and left after their first, second, or third renewal compared to other cohorts?
- What did we do in October that made so few customers leave after 3 months?
That said, cohort analysis requires you to track an ever-growing number of new customer cohorts across their lifetime with you! That might seem simple enough at the beginning, but be prepared for some complexity after more time has passed!
Age analysis
A sister approach to cohort analysis, age analysis groups your customers by the amount of total time they’ve been with you. This gives you an overall view of how quickly customers tend to drop off in, say, the first month of service, regardless of when they made their first purchase.
Age analysis is a great way to figure out if there are common gaps in the customer journey after specific time-based milestones. For example, if you notice a lot of new customers dropping off after their first month, that might be a cue to buff up your onboarding, like Hootsuite did with their Hootsuite Academy; if you notice a decline after a year, you might want to take a closer look at your loyalty programming.
Age analysis doesn’t get as granular as cohorts do, but they are a much simpler way of answering some of the same kinds of questions.
Behavioral analysis
Are customers who sign up for your newsletter less likely to churn than those who don’t? Do customers who skip your free trial drop off at a higher rate after a purchase? Are customers who engage with you daily sticking around longer than those who use your service once or twice a week?
Tracking churn alongside key milestones and actions your customers take can help shed light on how your biggest fans use your product or service vs. those who bail.
It also allows you to flag roadblocks in your customer journey – and fix them before they become a problem. Knowing the habits of your best-performing customers can also help you target others with high potential, so you can make the most out of your relationship together with customer success efforts.
When analyzing behavior, it’s easy to get too granular – and then there are vanity metrics that won’t tell you anything at all. So if you’re going to make behavioral analysis part of your churn discussion, keep it to the behaviors that matter most to your business.
Predictive churn
Basic churn calculations run on a key assumption: “We lost X% of customers last month, so we expect to lose X% this month, too.” Rather than looking at what churn has already happened, predictive churn analysis aims to forecast the potential churn that’s ahead.
Using the data collected about customers, predictive analytics models the probability that each customer will leave – before they leave. This allows you to handle churn proactively, rather than dealing with it after customers have already left.
That said, predictive churn analysis is a complex beast. If you’re not comfortable with statistical analysis, or if your leadership isn’t likely to understand it, then it might not be your best bet.
My churn rate is too high – now what?
In a perfect world, your churn rate would be zero. If you’ve somehow managed it, great job (and please, share with us how you did it)! If not, you might be interested in learning a few techniques to keep your churn rate low.
But before we get started, what is a low churn rate? And what is too high? Generally (very generally), you should aim to keep your churn rate in single digits. As for the details, that’ll depend on a lot of factors, including:
- The stage of your company: Are you just starting up, scaling quickly, or maintaining steady growth?
- The size of your audience: Are you serving 10, 100, 1,000, or 10,000+ customers?
- The industry you’re in: Is high churn expected given the service you offer or the kinds of customers you serve?
If you’ve looked at the numbers and think your churn rate is too high, here are some steps you can take to bring it back down:
- Identify your churn “red flags”: What do customers who churn have in common? Do they belong to a particular customer segment, is there a milestone they hit, or do they share a pattern of usage behavior before they leave?
- Focus on your highest-value customers: Prioritize the needs of customers who you can’t afford to lose – accounts with the highest lifetime value, the biggest purchase amounts, or the most frequent buyers.
- Ask your customers for feedback: Whether it’s a direct message from your customer success team or an automated survey, reach out and ask if there’s anything you could do better. Most importantly, make sure you respond with updates and changes.
- Try a longer contract period: Make sure your customers have enough time to get to know your product or service and experience the value you can add to their business.
- Make customer success a priority: You win when your customers win. Customer success is all about helping customers reach their goals through your offerings. If you don’t have a strategy in place already, consider tackling it!
- Educate your customers: Help customers get started on the right foot. This could involve product education around your features and benefits, guided onboarding for a faster ramp-up, and in-depth education for those deeper rabbit holes.
- Offer rewards for sticking around: Loyalty programs, discounts, and renewal offers can help sway customers to keep doing business with you, rather than signing up with a competitor.
Start reducing churn for your business today with our free churn calculator and ultimate customer success guide.
