Last editedJan 20233 min read
There are endless performance metrics for businesses to follow, one of the most important being the churn rate. This key metric measures how well your business is retaining its customers over time. So, how is churn rate calculated, and why is it important? In this guide, we’ll look at what you can do to achieve a better churn rate.
What is churn rate?
Sometimes called the attrition rate, churn rate is a metric used in business to show the rate that customers leave a product or service over time. It’s a useful metric to follow if you want to understand customer satisfaction and its relation to revenue. A high churn rate leads to a loss of revenue as customers cancel their services or choose a competitor’s products instead.
It’s important to understand that all businesses experience churn. It’s a natural component of the business cycle – customers come, and customers go. It’s in every business’s best interest to reduce churn and improve customer retention. A high churn rate indicates that something’s going wrong with your business model, whether it’s unsustainable pricing or unappealing marketing.
How is churn rate calculated?
To calculate customer churn, you can use this simple formula:
(Customers Beginning of Month – Customers End of Month) / Customers Beginning of Month
For example, imagine that your company started the month with 1000 customers and ended the month with 900. Here’s how to calculate churn using the formula above:
(1000 – 900) / 1000 = 0.1 or 10%
Your churn rate would be 10%, meaning you’ve lost 10% of your customers. While this figure may seem high, there are numerous causes of churn rate. Sometimes there’s a sudden drop in customers due to seasonal buying trends, for example. While this formula applies to monthly churn rate, it can easily be adjusted to suit any period. If you’re anticipating a higher churn rate after the holiday rush in sales, you might want to calculate churn over the full sales quarter or year instead.
What is a good churn rate?
To use this calculation more accurately, it’s important to first answer the question: what is a good churn rate? This will depend on your industry, the time of year, and your company’s age. More established companies can expect to have lower churn rates due to being more well-known. By contrast, younger companies will have higher churn rates as customers test their wares.
Generally, average churn rates can vary between 2% to 8%, but you should strive for the lower end of this spectrum. Churn rates can also be negative if you’ve gained more customers than you’ve lost. This means you’ve added revenue to surpass any lost revenue.
How to improve churn rate
While no business can escape churn altogether, there are many ways to reduce your rate. Here’s how to improve churn rate:
1. Understand the difference between voluntary and involuntary churn.
There are two types of customer churn, each with different root issues to solve. When a customer actively cancels their subscription, this is called voluntary churn. It typically relates to customer satisfaction (or lack thereof). The second type of churn is involuntary, which is due to failed or canceled payments. The customer might not directly wish to leave, but as payments are rejected their service ends. By calculating both voluntary and involuntary churn, you can find more targeted solutions.
2. Provide accessible customer support.
Be available to your customers to make sure they’re getting the most out of your products and services. Provide online tutorials, guides, and customer support. Most customers will reach out to a business first with queries before flat-out canceling their services. By combining online resources with real-time support, you can help settle doubts and assist with the onboarding journey.
3. Track buyer behavior.
If you provide subscription services, it’s a good idea to use a management platform with analytics tools. These track customer engagement so you can learn to recognize the signs that a buyer might be ready to jump ship. Typical red flags could be a reduction in logins and shorter sessions over time. Step in with special offers to bring them back onboard.
You can read more about the ins and outs of customer churn in our intro to churn guide. GoCardless can help reduce involuntary churn by preventing failed payments. We offer an ACH direct debit payments solution that pulls payment directly from customer bank accounts. This, alongside our Success+ intelligent retry feature can reduce failed payments by up to 70%, cutting involuntary churn in the process.
We can help
GoCardless is a global payments solution that helps you automate payment collection, cutting down on the amount of financial admin your team needs to deal with. Find out how GoCardless can help you with one-off or recurring payments.