Last editedJan 20232 min read
Customer churn rate and customer retention rate are some of the most crucial metrics for subscription-based businesses to track.
They offer insight into how many customers are having a positive experience with your service versus how many are dissatisfied and opting to jump ship to a competitor. As both these trends will have a big impact on company revenue, it pays to know how to monitor and potentially alter retention and churn rates.
In this post, we’ll define the terms customer retention and customer churn and explain how to calculate them.
Customer retention rate vs churn rate
What is customer churn?
Customer churn rate refers to the percentage of customers that begin using a service, but then leave after a certain amount of time. In simple terms, it’s the amount of customers you’re losing.
There are two types of customer churn: voluntary and involuntary.
With voluntary churn, customers actively choose to end their subscription or cease using a business’ services or products.
Involuntary churn, on the other hand, is when a customer doesn’t intentionally end their subscription but is forced to as their payment method fails. This is usually due to card expiration or insufficient funds.
What is customer retention?
Customer retention is the percentage of customers which both sign up to a business and remain customers over the long-term. It therefore simply refers to the amount of customers a business retains.
Having a high retention rate comes with many benefits.
Firstly, you can reduce the amount spent acquiring new customers. In fact, attracting new customers and onboarding them is far more expensive than keeping the customers you have.
Secondly, high retention rates indicate that your product or service is a success and customers are highly satisfied. This will open up doors for growth and expansion down the line.
Thirdly, good retention rates allow you to more accurately forecast revenue as you have a clearer idea of how many customers — and therefore how much revenue — you will receive in the following months and years. This is very useful when it comes to budgeting and planning investments.
How to calculate retention rate
Calculating your retention rate is fairly simple to do. However, it will require you to have accurate information regarding dates and quantities of customer onboarding.
First, you need to decide on a time interval, i.e. monthly, annually or otherwise. If you operate a monthly subscription service, it can be useful to look at your monthly retention rates as well as annual ones.
Next, you will need to know the number of customers you acquired over your designated time interval.
Then you can use these figures to calculate customer retention rate using the following formula:
Customer Retention Rate = (Customers at the end of the period - New Customers Acquired) / Customers at the Start of the Period
For example, let’s take the month of June as your designated period of time. Say you had 1000 customers at the beginning of June. You acquired 200 customers throughout the month, but 50 customers also cancelled their subscription. Applying the formula, we can measure your retention rate as:
1150-200/1000 = 0.95
How to calculate churn rate
As mentioned above, there are two types of customer churn rates: voluntary churn and involuntary churn.
The following formulas is used to calculate total customer churn rate:
(Lost customers/total customers at the start of period) x 100
For example, say you had 2000 new customers over the month of June, however 150 left. Applied to the formula:
(150/2000) x 100 = 7.5
You therefore have a churn rate of 7.5%.
To calculate voluntary and involuntary churn separately, simply replace the lost customer value with the number of customers lost due to voluntarily leaving/involuntarily as separate equations.
A useful metric to combine with customer churn rate is monthly recurring revenue (MRR) and/or annual recurring revenue (ARR). This will provide insight into how much revenue you are losing as a result of customer churn.
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