Churn vs retention rate: what are the differences?

When you run a business, it can be difficult to stay on top of all the metrics you need to track. Cash flow is obviously highly important, but is it more or less important than net profit, sales revenue and growth rate? Metrics which are sometimes forgotten but are nonetheless vital –  particularly when considering the viability of a business over the longer term – are the churn rate and retention rate. In this article, we look at the question of churn vs. retention rate, how these two numbers could affect your business and what you could do to retain more of your customers.

What is churn rate? 

Churn rate is a term for the percentage of your customers who shift away from your business, either by ending a subscription or simply choosing to no longer spend money with you. A higher churn indicates that customers are choosing not to remain loyal to your business for some reason, and should be the prompt for you to find out what that reason could be.  

How to calculate churn rate

The first step to take when calculating churn rate is to choose a time period for the calculation to cover. A large business with many thousands of customers might track the churn rate over a period of a week. For a smaller business, more helpful would be tracking the churn rate for a longer period, such as a quarter or a year. The methodology is relatively simple. Calculate the churn rate for a month like this:

• Take the number of customers you have at the start of the month

• Subtract the number of customers you have at the end of the month

• Divide the result of this subtraction by the number of customers at the start of the month

• Multiply the result gained by 100 to reach the churn rate for that month

If you start the month with 500 customers and end it with 400, then the calculation is 500 minus 400 equals 100, divided by 500 which equals 0.2. That figure is then multiplied by 100, to get a churn rate of 20%. 

What should your churn rate be?

In general terms, the lower the churn rate, the better it is for your business. As a rule, a smaller business can consider a churn rate of 5% per month to be reasonable, while larger companies tend to aim for a lower churn rate. The industry in which you operate can impact on the level of churn rate which is acceptable – the more competition there is within your industry, the more customer churn you are likely to experience as people shop around. 

What is customer retention rate?

The customer retention rate is the flipside of the churn rate for your business. It represents the proportion of your customers who opt to stay with your business. A high retention rate indicates two things:

• Your attempts to offer customer satisfaction are proving to be effective

• Your marketing efforts are working

Another key benefit of achieving a higher retention rate is that you can afford to spend less time and effort seeking new customers, and devote more of your energy to enhancing and improving your offer to existing customers. Customers who have been retained demonstrate a degree of trust in your business which is likely to see them spending more money with you. 

How to calculate retention rate

The numbers needed to calculate the retention rate of your business are as follows:

• The number of customers you have at the start of the month

• The number of customers you have at the end of the month

• The number of new customers who signed up during the month

Subtract the number of new customers from the number of customers at the end of the month. Divide the result of this subtraction by the number of customers at the start of the month, and multiply the result by 100. 

If a business starts the month with 20,000 customers, for example, adds 2,500 customers during the month and ends the month with 19,000 customers, the calculation is 20,000 minus 2,500, which is 17,500, and then 17,500 divided by 19,000, which is 0.921. This figure is then multiplied by 100 to give a yearly retention rate of 92.11%.

In simple terms, the closer your retention rate is to 100% the better, because this signifies a high degree of customer satisfaction. Although customer retention rate is likely to grow the longer you’ve been in business, one simple step to reduce churn and boost retention is to use GoCardless as a payment platform. Using GoCardless reduces failed payments, which means minimising one of the key drivers of customer churn.  

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.