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What Is Churn Rate?

Customers come and customers go – but if more of your customers are going than coming, it’s a problem that will impact your bottom line. Customer churn rate measures how well you’re retaining customers over time. What is churn rate exactly? It’s a helpful metric to understand if you wish to boost customer retention. Here’s how it works.

Churn rate explained

The churn rate meaning is the rate at which customers leave your business. Churn might be voluntary, like an active cancellation of a service, or involuntary, like card details expiring. While this definition applies to the customer churn rate, there’s a secondary type of churn. A company’s revenue churn measures the percentage of revenue lost during an accounting period. Churn could also apply to employee turnover, or how quickly employees are leaving their positions during the period in question.

The rate is usually expressed as a ratio or percentage, calculated by dividing the number of departed customers by the number of remaining customers. This figure will be negative if your customer base is growing, while high churn rates indicate that more customers are leaving than staying. It costs far more to acquire new customers than retain existing ones, so this is an important metric to keep an eye on.

Types of churn

There are two types of churn rate meaning to be aware of.

  1. Voluntary churn: The customer actively decides to stop purchasing your services. They might cancel a monthly subscription service, or switch to a competitor.

  2. Involuntary churn: The customer leaves the business due to inaction, whether it’s forgetting to update payment information, moving without changing their address, or exceeding their limit.

Involuntary churn can turn into voluntary churn if a customer expects to receive a service and then the payment fails. They may choose to actively take their business elsewhere.

What is the churn rate formula?

To better understand this metric, you can look at the churn rate formula:

Number of churned customers / Total number of customers

“Churned customers” simply means the number of people who have left your company, whether it’s through active cancellation or lapsed payment. Another way to write the formula could be:

(Beginning customers – Remaining customers) / Beginning customers

How to calculate churn rate

To calculate customer churn rate, first you should decide the period you’ll be analyzing and then plug the required information into the formula above. Some businesses will look at monthly churn, while others might choose quarterly or annual rates.

Let’s say that Company ABC had 500 customers on its books at the beginning of the month. At the end of the month, it had 475 customers on its books, meaning 25 have left. To calculate the customer churn rate, the formula would be:

25 / 500 = 0.05

With a 0.05 ratio, the company lost 5% of its customers in a single month. However, one thing to keep in mind is that monthly figures could represent a seasonal blip. You should consider churn rate over time to forecast trends more accurately. Still, losing 5% of business in a month is a warning sign that the company needs to find out how it can improve customer satisfaction.

How to use churn rate

There are several ways to put the churn rate formula to use in your own business. It offers insight into a company’s long-term prospects by looking at customer retention from month to month. A high churn rate gives you a warning sign that it’s time to deal with customers more effectively.

You can use churn rate to calculate customer lifetime value (LTV), identifying high-value customers. The business can focus efforts on retaining these higher value customers to boost overall revenue in the long term. As an indicator of performance, this is a useful metric to have in your toolbox.

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