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))
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.