Retention

What is Customer Churn?

Customer churn is a measure of the customers lost by a subscription business. Customer churn is also called as Logo churn.

How is Customer Churn Calculated?

Customer churn is calculated as the ratio of the number of customers lost during a period (typically a month or a year) and the number of customers present at the beginning of that period. It’s usually expressed as a percentage.
            Customer Churn = ([Customer at the beginning of a period] - [Customers at the end of that period])/[Customers at the beginning of that period]
        
If the number of customers at the beginning of 2019 is 100 and through 2019 five of those customers canceled their subscriptions, customer churn is 5/100 or 5%.
Customer churn can be expressed as a monthly figure or an annual figure.
            Monthly Customer Churn = (1 - ([1- annual-customer-churn%]^12)
        
            Annual Customer Churn = (1 - ([1-monthly-customer-churn%]^(1/12))
        
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How should a business interpret Customer Churn?

Beyond just being a measure of how many customers are lost during a period, customer churn has profound implications on the health of a business. Customer lifetime value and customer churn are inversely related. A larger customer lifetime value helps justify a larger cost of acquisition. So higher the customer churn,
  • Tighter the implicit restrictions on your 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. From systemic reasons like poor customer-product fit to involuntary ones like an expired credit card.
While it’s inevitable, there’s such a thing as too much 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 of 5% translates to approximately 46% annual churn. That is, a business with 5% monthly customer churn 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.