What is Churn rate: definition, formulas, and tips to reduce churn rate
Churn rate is the percentage rate of subscribers who end or discontinue their subscription to a service within a given time frame. It is also known as the rate of attrition.
Churn rate is vital to know in order to keep your business not just afloat but growing. A high churn rate indicates an impediment of growth and a damper on profits, whereas a 5% increase in customer retention can increase profits by 25% to 95%.
In other business contexts, the churn rate also refers to employee turnover as existing workers leave and new ones are hired.
Churn rate formula
Retaining customers is easier and less expensive than finding new ones, so a low churn rate will help the budget on multiple levels.
To determine churn rate, you take the number of customers lost during a specific time period and divide it by the number of customers you had at the beginning of that specific time period plus new acquired customers, which will result in your churn rate percentage.
For example, if you started with 800 customers at the beginning of the month, gained 200 new ones, and lost 10 existing customers over that same month, your monthly churn rate will be 1%.
There’s an alternative popular formula that is calculated even more easily:
Churn rate is customers that have churned in a month/year divided by the number of customers at the beginning of that month/year.
This formula can also be used for calculating employee churn rate. Just divide the number of leavers in a month by your average number of employees in a month. Then, times the total by 100.
Please note, there is no one correct way to calculate churn rate. In fact, there are dozens of variations of churn rate formulas. Your formula may depend on the type of your business, the complexity of customer behavior, and many other factors. The formulas above are the most popular churn rate formulas.
Churn rate and growth rate
For a company to grow, the churn rate must be much lower than its growth rate, which is the percentage rate of new customers.
It is important to understand growth rate in the context with churn rate. Both help determine overall gains and losses. When the churn rate is higher than the growth rate, no matter how big your growth rate is, it will hurt your revenue. These two rates can’t really be separated from each other when determining how well your business is doing.
Reducing churn rate
So how do you reduce churn rate? The dream is to have a 0% churn rate, but that is not realistic, as people will always have a myriad of reasons to end their subscriptions. But there are ways to keep customers from leaving, and, as mentioned before, it is easier and more lucrative to keep a customer than to try to find new ones. Here are some suggestions for lowering churn rate and retaining customers:
- Good onboarding practices: When you get a new customer, you want them to know they are in good hands and are appreciated by your business. Welcoming emails, informational and educational content, making customer service easy and quick, all of these things will help keep people wanting to work with you.
- Asking for feedback soon after joining (and then again and again): Not only will your customer feel their voice is important to you, you will get free insights into how to improve your product. This will also encourage customers to use your product. Therefore, keeping a feedback loop going will keep you aware of how your product is performing and keep tabs on how your customers are feeling about their experience using it.
- Be proactive: Reach out to your customer. Email drip campaigns can be very helpful in keeping in touch with valuable informational content, sale announcements, helpful tips, and other offers, while keeping it fully automated. Engaging with customers via social media is also easy and quick. Making sure you keep your customers up-to-date on changes or issues shows them you care and are dependable.
- Analyze: Customer churn is inevitable, but it is not uncontrollable or completely random. When a customer does churn, examine why. Look at their case and see if there is something you can do different to keep others from churning. When a big percentage of customers churn, realize you may have a bigger problem you need to fix.
Reasons behind high churn rates
Most of the time, there’s a reason a customer cancels their subscription. Sometimes it is as simple as they don’t need your product anymore, but there are other big reasons to consider:
- Selling to the wrong audience: This is a legit and easy-to-make mistake. If who you are trying to sell to is not the right fit, you are not going to keep them as customers for very long. Researching the market for your product, creating a buyer persona, and taking aim at the right prospects will get you customers who will stay with you.
- Price: Consumers want the best product for the lowest price, always. There is no other way to say it. If your price does not match your offer, people will not be willing to keep paying for it. You have to make sure your product lives up to its price and if it does, you have to make sure your customers know how to use your product to its highest efficacy so they feel they are getting their money’s worth.
- User experience: If your product runs perfectly and smoothly, your customers are much more likely to stay with you. If your product is glitchy, hard to use, or cumbersome, not so much. People use products to make their lives easier, not harder, so make it easier by constantly improving the user experience.
- Customer experience: Your company should be easy to work with and customer interactions should be a positive experience. Poor customer service is a really quick way to get your churn rate higher. This includes a positive social media presence that is also helpful and quick to respond.
Churn rate is an essential metric of your business’s success. Lower churn rate can be achieved through studying customer feedback, customer behavior, market trends, and looking at your own product’s usability. Educational content, great customer service, and an established place in the market can also help keep churn rates low.