What is Customer Churn?

Customer churn is a measure of the customers lost by a subscription business. Customer churn is also called customer attrition.

Customer Churn Rate Formula

Churn rate is one of the most important metrics for growing SaaS companies. It is calculated as the ratio of the number of customers lost during a specific period of time(typically a month or a year) and the number of customers present at the beginning of that time frame. Customer churn is usually expressed as a percentage.

Customer Churn Rate = ([Customers at the beginning of a time period] - [Customers at the end of that time period]) / [Customers at the beginning of that time period]

For example, if the total number of customers at the beginning of the year 2019 is 100 and through 2019 five of those customers canceled their subscriptions, the churn rate is 5/100 or 5%.

Customer churn rate can be expressed as a monthly figure or an annual figure.

Monthly Customer Churn Rate = (1 - ([1-annual-customer-churn%] ^12)

Annual Customer Churn Rate = (1 - ([1-monthly-customer-churn%] ^(1/12))

Why is Customer Churn Rate Important?

Acquiring new customers is six times more expensive than the retention of existing customers. Churn could happen for a number of reasons including improper onboarding process and poor customer service.

Beyond just being a measure of lost customers during a given time period, customer churn has profound implications on the bottom line of a business. Customer lifetime value and customer churn are inversely related. A higher customer lifetime value helps justify higher customer acquisition costs. So higher the customer churn,

  • Tighter the implicit restrictions on your customer acquisition strategy

  • Lower the confidence potential investors have in your business

That said, customer churn is mostly inevitable and is caused by a variety of reasons, categorized as voluntary and involuntary churn

While it’s inevitable, there’s such a thing as high churn. A figure of 5-7% annual customer churn is acceptable by most standards - anything more requires deeper investigation and redressal.

A monthly customer churn rate of 5% translates to approximately 46% annual churn. That is, a business with a 5% monthly customer churn rate will end the year with half the customers it had at the beginning of the year. In other words, it will have to add 50% more customers during the year just to break even with the customer base it had at the beginning of the year.

4 Ways to Reduce Customer Churn

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