Last editedJul 20212 min read
Understanding your business’s annual churn rate is critical, but many people simply aren’t aware of the best way to do an annual churn rate calculation. Giving you insight into your company’s health and long-term prospects, as well as potential issues with your product or service, annual churn rate is a metric that every subscription company needs to master, sooner rather than later. Learn more about how to calculate annual churn rate, right here.
What is churn rate?
Churn is a metric that measures the rate by which customers are leaving your business. There are two main types of churn: customer churn and revenue churn. Customer churn relates to the rate by which customers choose to end their subscriptions within a given period, whereas revenue churn refers to the percentage of revenue that you lose within a given period.
It’s worth remembering that for subscription businesses where every subscriber pays the same amount of money to use the product/service, customer churn and revenue churn will be equal to each other. However, for subscription businesses using pricing strategies that do not charge all their subscribers the same (such as tiered pricing or per-user pricing), the figures will be different. It’s important to analyse both metrics to gain a full understanding of how your customers are churning.
Businesses should measure churn because it has a significant effect upon survival and profitability. If a customer churns before their CLV (customer lifetime value) outweighs their cost of acquisition, the business will have made a loss. Over the long-term, a high churn rate may indicate that there are issues with your product, from an incorrect price-point to negative user experience.
What’s the best way to calculate annual churn rate?
Before we show you how to calculate annual churn rate, it’s important to remember that there’s no industry-wide annual churn rate formula. In fact, there may be as many as 43 different ways to do an annual churn rate calculation. We’ve identified two simple methods for calculating customer churn and revenue churn. Here’s how to calculate the annual churn rate for customer churn:
Customer churn rate = Number of churned customers within a given period / total number of customers up for renewal during given period
If you want to work out revenue churn, you can use the following annual churn rate formula:
Revenue churn rate = Revenue cancelled or lapsed within a given period / total revenue up for renewal during given period
Annual churn rate formula example
Let’s look at an example. Company A had 52,430 customers up for renewal in 2019, with 3,245 customers churning during this period. In addition, they had a total revenue figure of £401,429, with £33,408 revenue cancelled during this period. To calculate the annual churn rate of Company A, you simply divide the number of churned customers by the total number of customers, before multiplying by 100 to discover the customer churn rate:
3245 / 52430 = 0.061892 x 100 = 6.19%
Then, to work out the annual revenue churn rate, you divide the cancelled revenue by the total revenue, before once again multiplying by 100:
33407 / 401429 = 0.083201 x 100 = 8.32%
As you can see, revenue churn is slightly higher than customer churn. This may mean that you have difficulty maintaining subscriptions from customers at a higher price-point, so re-evaluating your pricing structure may help to reduce revenue churn.
Are there any other ways to calculate annual churn rate?
Yes, as we mentioned previously, there is a broad range of annual churn rate formulas that you can use. However, keeping it simple is usually the best policy, as your calculation will serve as a great starting point to really dig into the numbers and do a deeper analysis. Plus, a simpler calculation is more easily comparable, and won’t leave the less business-minded members of your organisation scratching their heads in confusion. That’s a deceptively important issue – if people don’t understand what the company’s annual churn rate means, they won’t be able to act on it.
We can help
GoCardless helps you automate payment collection, cutting down on the amount of admin your team needs to deal with when chasing invoices. Find out how GoCardless can help you with ad hoc payments or recurring payments.