What is Churn Rate and How Do You Calculate It?
Are you noting a newfound emphasis on the term churn rate? Perhaps you’re just curious about its meaning, methodology, and implications for your business.
In this post, you’ll learn the churn rate definition in detail, different types of churn rates, how to calculate it, and the best churn rate practices to increase revenue.
Here’s a brief outline of what we’ll be discussing:
- Churn rate definition
- 3 primary types of churn rate and their formulas
- How do you calculate churn rate?
- What is a good churn rate?
- 7 best practices to reduce attrition churn and increase revenue
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Churn rate definition
Churn rate (sometimes called the attrition rate) is the percentage of customers that stop doing business with your company within a specific period. It’s also the percentage of a company’s workforce that resigns within a particular time frame.
3 primary types of churn rate
Here are the three primary types of attrition rates:
- Customer churn rate
- Revenue churn rate
- Employee Churn Rate
1. Customer churn rate
The customer churn rate is the percentage of your company’s contractual customers who cancel their subscriptions within a given time frame, stop purchasing products, or stop investing in your services.
It’s a key indicator of success for businesses that provide services or use a subscription model.
There are two versions of the customer churn rate your business can employ:
- Voluntary churn rate: This metric reflects the percentage of customers who voluntarily terminate their memberships, or service contracts, or stop purchasing your products because they are unhappy with your company’s service quality.
- Involuntary churn rate: This benchmark is the percentage of customers that cancel their services, products, or subscriptions owing to situations beyond their control, such as bankruptcy or relocation.
Businesses typically focus on their voluntary attrition rate since it directly impacts their primary functions.
2. Revenue churn rate
Revenue churn rate measures how quickly you lose profit due to customers or subscribers downgrading or canceling their service.
There are two distinct customer churn rates that your business may employ:
- Gross revenue churn rate: This metric measures the amount of money lost as a result of downgrades and cancellations.
- Net revenue churn rate: This metric is the total income lost due to product or service subscription cancellations and downgrades minus the income obtained due to product or service subscription renewals and upgrades.
In a nutshell, revenue churn rate is very similar to customer churn rate. For instance, the customer attrition rate indicates the proportion of customers you lost over a specific period. In contrast, the revenue attrition rate shows the proportion of income you lost over the same timescale.
3. Employee churn rate
Employee churn rate (sometimes referred to as employee turnover rate) is the percentage of staff members who quit their jobs in your organization within a specified time frame.
This attrition rate tends to vary depending on your company and the industry. For instance, a consulting firm is likelier than a fast food joint to experience a low turnover rate. Businesses usually aim for churn rates at or below the average for their sector.
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How do you calculate churn rate?
Now that you know the churn rate definition, you might be wondering how to calculate your business’s attrition rate.
Well, there are many methods for determining different types of attrition rates. In this section, you’ll learn how to calculate:
- Customer churn rate
- Revenue churn rate
- Gross revenue attrition rate
- Net revenue churn rate
- Employee Churn Rate
Customer churn rate
You can calculate your customer churn rate by dividing the total number of customers who terminated your services or stopped purchasing your products within a set timeframe by the total number of customers at the beginning of that period.
Suppose you had 500 paying customers at the beginning of the billing cycle, and 50 decided to cancel their subscriptions somewhere during the period. In that case, your customer churn rate calculations will be:
[(500-450)/500] * 100 = 10%
We can conclude that you lost 10% of your customers during that timeframe.
Revenue churn rate
Revenue churn rate equals the income lost due to service terminations or product losses over a set period divided by the total income of recurring services or product sales due for renewal at the beginning of that period.
Let’s say a year ago, your company had $50 million in annual recurring income up for renewal. It incurred a loss of $12 million in revenue today because of client service cancellations. That translates to a churn rate of:
Revenue churn rate = ($12 million / $50 million) * 100 = 24%
Therefore, we may deduce that annual income fell by 24%.
Now that we’ve covered the basics of calculating revenue churn rate, let’s look at how to calculate it in various forms, from gross to net to negative net.
Gross revenue churn rate
Suppose your business starts a new month with a monthly recurring revenue (MRR) of $10,000 but loses $1,000 worth of subscribers. Additionally, two of your clients downgraded from the premium to the standard plan, so your MRR fell by $500. In that case, we can calculate the monthly gross churn rate as follows:
Gross revenue churn rate = [[$1000 + $500] / $10,000] * 100 = 15%
So, your company’s gross MRR churn is 15% when we consider downgrades by consumers.
Net revenue churn rate
Net revenue churn rate is the difference between the total revenue lost due to cancellations and downgrades and the total income earned due to upgrades, purchases and reactivations of existing subscriptions.
Imagine the case where your beginning MRR is $10,000, and you’ve already lost $900 due to cancellations and downgrades. On the other hand, two of your customers switched to a more expensive plan during the same month, resulting in an extra $450 in MRR. In this case:
Net Revenue Churn = [($900 – $450) / $10,000] * 100 = 4.5%.
We can conclude that your company has a net MRR churn of 4.5%, considering the growth in MRR from upgraded clients.
Employee churn rate
The employee attrition rate is calculated as the number of resignations divided by the average workforce during a specified term.
If your company has 150 employees and three of them resign during the term in question, the employee attrition rate for that term would be:
Employee churn rate = [3/150] * 100 = 2%
As a result, your organization saw a 2% employee attrition rate throughout that period.
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What is a good churn rate?
In a perfect world, your company would have a 0% churn rate, demonstrating that it isn’t losing any customers — but in reality, churn rates rarely reach zero.
Sometimes, no matter how well-run a company is, there will always be customers who decide to stop doing business with your company.
In this case, it’s crucial to evaluate your company’s churn rate in relation to the typical churn rate in your industry, taking into account whether your business is emerging or established.
The only way to know if a churn rate is good or insufficient is to compare it to the churn rate of the industry in which your company operates. Given the inherent differences in business models between sectors, the churn rates that are considered acceptable in different sectors will vary.
What does a high churn rate mean?
If your business has a high churn rate, you’re losing customers rapidly and probably faster than you’re gaining new clients.
In most cases, if your company is rapidly losing clients, it could be because you’re providing a defective product or offering inadequate support to your customers.
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7 best practices to reduce attrition churn and increase revenue
Earlier, we mentioned that poor customer service is a leading cause of high customer churn rates. In fact, 89% of customers switch brands after having a negative experience with a particular company.
Take a look at the following practices you can employ to reduce attrition churn and boost revenue:
- Provide prompt, proactive customer support
- Leverage customer segmentation
- Incorporate trigger-based interactions
- Identify high-risk customers
- Set checkpoints and offer rewards
- Add more value to your offering
- Show your customers you appreciate them
1. Provide prompt, proactive customer support
Any negative interaction with a customer, no matter how small, can make them reconsider their purchase. Many customers will never return after a lousy encounter.
They will also spread the word about their negative opinion of your company. So, you must always aim to deliver service that goes above and beyond for your customers.
2. Leverage customer segmentation
Customer segmentation is a common strategy to divide your audience into smaller subsets. You can categorize your customers into segments based on their location, demographics, and purchase history, allowing for more precise targeting in situations like conversion and recovery.
3. Incorporate trigger-based interactions
Customers undergo a multi-step process when they sign up for your service or purchase your product. If you time your email campaigns correctly, you can significantly reduce customer churn.
Whether you’re dealing with a new subscriber who hasn’t checked back in or a long-term member who hasn’t done anything in a while, send them automatic, personalized emails prompting them to take action.
4. Identify high-risk customers
There are several warning signs that a customer is ready to churn before they cancel a service or cease making purchases. If you see a drop in website traffic or any engagement red flags, take action immediately.
It’s common for customers to go from utilizing the service every day to every other week to every other month until they eventually stop.
For example, you might send out automated mailings to re-engage a dormant group and lower the attrition rate. The key is to focus on tracking a group’s overall usage decline and follow up with re-engagement emails to those people.
5. Set checkpoints and offer rewards
Including checkpoints in your service is an excellent way to make it more engaging for your users. This action may lower your churn rate as more customers take advantage of the service and keep their subscriptions.
Also, show gratitude to the customers who are still with you by offering bonuses like reduced upgrade costs or a free trial period after a specified period of use.
6. Add more value to your offering
Your business must undergo constant refinement to prosper. Whether fixing bugs or upgrading an existing feature, finding new methods to develop your service is always a good idea.
You want your service to be so beneficial that customers never consider switching to another provider.
You might upgrade an existing feature or implement brand-new innovative additions. Whether you’re selling a product or a service, adding value will prevent customers from buying from your rivals.
7. Show your customers you appreciate them
You can improve customer retention by demonstrating gratitude to your current customers. If you praise your valued customers more often, they’ll stick with you. For instance, you can mention or tag them on your various social media channels.
You can also post their insightful suggestions on your blog. It’s essential to take the time to thank them consciously.
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