Customers exist in a perpetual state of blowing hot and cold. Happy one day, gone the next. That’s why all companies no matter the size should be monitoring when customers leave or “churn.”
Often seen as a measure of failure rather than success, it is one of the most crucial metrics you should be tracking. What’s a business without its customers afterall?
Tracking churn rates will help your whole organization from top to bottom understand just how effective you are at retaining customers and can inspire ideas on what you can do across each team to reduce churn.
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What is churn rate?
Simply put, churn rate is a measure of the volume of customers or employees who leave a company over a specified period of time. It can also be used to describe the amount of revenue lost by the business as a result of these departures. A business’ churn rate and its changes can provide valuable insight into its inner workings, helping to understand the health of the business. The higher your churn rate, the more customers your business is losing.
Why is churn rate an important metric?
Customer churn rate is such a vital metric to track because lost customers equates to lost revenue. If a business loses enough customers, it can seriously affect its bottom line. Another reason it’s important to understand and improve the churn rate is because it’s usually much more expensive to bring in new customers than it is to keep existing ones. That means that companies aren’t just missing out on revenue from those lost customers, they’re also hit with the high cost of finding new customers.
It doesn’t matter how good your organization’s product or service is, you’ve always got to monitor your customer churn rate. Once businesses understand their churn rate, they can work towards bringing it down.
How to calculate churn rate
Churn rate is typically calculated monthly, but it can also be calculated on a daily, quarterly, or annual basis. Churn rate in its most basic form is done by dividing your churned customers by the total number of customers.
Churn Rate
To calculate churn rate, use the following figures:
Number of customers that have churned (X)
Number of customers (Y)
Then use the below formula to calculate churn rate as a percentage:
Customer churn rate formula: (X/Y) x 100 = Z]
For example, if a business had 1,000 existing customers at the start of the month and lost 100 customers by the end of the month, the monthly churn rate would be 10%. Now that’s a very basic example, and is used to illustrate the churn rate as simply as possible, but in reality many companies will face situations where more complex calculations are needed.
Churn Rate by Time Frame
When looking at churn rate over time, annual churn rate is usually expressed as a goal, while monthly churn rates are defined as benchmarks which contribute to the annual goal. Both annual and monthly churn rates are calculated using the same formula.
To calculate churn rate, pick a time frame you want use and calculate the following figures:
Number of customers at the start of the defined period (X)
Number of customers who have churned during that defined period (Y)
Then use the below formula to calculate churn rate as a percentage:
Customer churn rate formula: (Y/X) x 100 = Z
It’s worth noting that annual and monthly churn rates are not equal, and in fact differ greatly. For example, your organization has an annual churn rate goal of 6%. To be able to track your monthly progress towards this goal, you’ll need to use the following calculation to convert the annual churn rate into a monthly one:
1 - (1 - Annual churn rate)1/12
For example, if you have 1,000 customers with an annual churn goal of 7%, you would have a monthly churn rate indicator of 0.6% which equates to approximately six churned customers a month.
1 - (1 - 0.07)1/12 = 0.6%
Examining the monthly and annual churn rates provide a useful way to monitor trends and compare progress over time. SaaS companies should be running churn reports on a monthly, quarterly, and yearly basis, and reports should be shared with all departments across the business. This makes it much easier to spot any correlation between customer churn and any activities that impact customer experience, including price changes, product updates, and bugs.
How to track churn rate?
Now you know how to calculate your own churn rate, you need to learn how and why to track it. Measuring churn is a large task, especially when done manually.
Regular monitoring of the churn rate can help you make quick and reactive adjustments to your customer retention strategies. It’s no surprise that high churn pumps the brakes on business growth. Having a proactive approach to customer satisfaction can help you boost company growth.
Tracking churn ultimately allows you to track how satisfied your customers are with your service. If you’re experiencing high churn after customers try your product, it may suggest problems with price, usability, or product fit. It’s also important to keep an eye out for fluctuations in the churn. In principal, your churn rate should be steady, and any dramatic changes may highlight the need for closer analysis of why customers are leaving at this rate.
Tracking churn rates by cohort can offer additional insight into the factors behind lost customers. If you noticed a sharp rise in churn in the first group to receive a new feature, for example, you might want to specifically ask those customers about their experience with the feature.
What next?
Overcoming churn should be high on the priority list of any SaaS business. Remember. It’s cheaper to retain customers than it is to bring in new ones. Once you understand how your churn rate behaves, you will inevitably begin identifying what makes your customers tick, and the steps you can take to maximize their experience so you can maximize your revenue.
Visit Precursive today to discover how our smart software can help you reduce churn by optimizing your services delivery.
