What is churn rate and how is it calculated?

Every business in the world has a churn rate, which simply means the number of customers a business loses over a specified period of time. Every business tries to minimise their churn rate as much as possible, and there are several ways to do it. 

Some businesses try to replace lost customers with new customers. Others may use analytics to figure out where they are losing customers and fix those issues first. Using part of both methods is likely the best option, but every business owner needs to understand how to calculate churn rate before effectively reducing it.

SaaS and other subscription-based businesses should pay close attention to their churn rate as it can impact this business model even more. The success of SaaS companies is determined by their ability to retain customers, rather than appealing to a wider audience for one-off purchases. Such subscription-based business models are completely reliant on low churn rates, so it is crucial that they understand how to calculate and minimise it. 

Here we explain in more detail what churn rate is, give common causes of churn rate and show you how to reduce churn rate to retain customers.

What is churn rate? 

Customer churn is the term for customers leaving a company during a given time period. Usually represented as a percentage, churn rate is the measurement of customer churn. So if you have 100 customers at the beginning of the month, but 90 customers at the end of the month, then you have a 10% churn rate.

This is clearly an issue that every business needs to address. This is especially so for subscription-based businesses like SaaS companies, for whom churn rate is a massive indicator which demonstrates the company’s overall performance. The percentage of churn rate directly represents a company’s customer retention, a crucial metric when it comes to measuring success.

How can you reduce churn rate?

Some customer churn is inevitable and unavoidable. There are always customers who leave a business for reasons that have nothing to do with the product or service offered by the business. However, it is the avoidable customer churn that we are concerned with here, so let’s look at some of the most common reasons for customer churn.

Common customer churn reasons include: 

• inadequate onboarding

• convoluted ordering process

• unsatisfactory customer service

Inadequate onboarding

Churn rates can increase due to poor onboarding, which means inadequately explaining all the benefits and features of your product or service. There may be features which customers cannot easily access or understand, or benefits that aren’t apparent without a deep dive into the product’s details.

Solution: make it easy for customers to get started

Solution: Ensure your product’s features are easily accessible and understandable for new customers.

Convoluted ordering process

This issue is becoming less and less common as websites modernise and improve their layouts to create a better user experience. But it is still true that a long-winded or confusing ordering process will put off many customers. They may want your product, and would buy it there and then if the ordering process was quick and easy.

Solution: reduce churn by making your purchase flow easy

Make sure your purchase and check-out processes are streamlined.

Unsatisfactory customer service

One of the biggest causes of customer churn is poor customer service. Some customers have questions before they purchase and others have issues after they purchase. Feeling unheard or ignored results in a customer leaving your business.

Improve support to minimise churn

Provide multiple contact points such as a phone number, email and a live chat wherever possible. Also make sure the customer service team is equipped to deal with questions and issues that arise.

Provide an easy payment solution

With GoCardless, around 97.3% of payments will be collected successfully at the first time of asking. With real-time reporting, you always know instantly when a payment fails so you can take action. After a failed payment, Success+ does the heavy lifting, calculating the best day to retry a payment, automating the retries and tracking the results.

 Success+ uses payment intelligence to manage and reduce payment failures. It helps you recover, on average, 70% of failed payments, with 89% of businesses saying that Success+ also saves them time.

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.