What is customer churn rate and how is it calculated?

As a business, you want to make money, reduce costs, and increase revenue streams. Many factors can impact your bottom line, one of which is customer churn rate. This is a term that is frequently used in business—but what is churn rate, how can it impact your business, and how do you calculate it? Understanding the customer churn rate for your business can give you valuable insight into your existing customer base and how well you’re serving them. Let’s look at what churn rate is and how knowing your business’s customer churn rate can benefit you.

Customer churn rate definition

Churn rate is the number of customers who have stopped doing business with your company in a given period—for example, a month or a quarter. It is expressed as a percentage. Expressing churn rate as a percentage gives meaning to the number. For instance, if a business says they lost 1,000 customers in the last quarter, that could be a lot or a little. It depends on how many customers they had at the start. If the same business says they lost 11% of their customers last quarter, that clearly has more meaning.

Customer churn rate is measured across all businesses because it provides an organization with so much information. All companies expect a certain amount of churn since customers’ needs change: Their financial situation may have changed, they may have had to cancel their services following a move, or a new competitor may have come on the market. The churn rate for most businesses is less than 20%.

Why is customer churn rate important?

Data is at its most valuable when it can provide insight into what you want to know. Knowing how many of your customers stopped doing business with you in a given period, for instance, can give your company an opportunity to investigate where you can improve. Some areas that a company might want to look at when addressing its churn rate are:

• The product offering: Are your current products right for your customers?
• Ease of use: Is your product too time-consuming or too complicated to use?
• Delivery: Are customers getting what they are expecting or were promised from your company?
• Customer service experience: Are problems resolved in a way that satisfies the customer?

Many other factors can impact the customer churn rate. Knowing what they are for your business can give you the opportunity to address underlying gaps in service or products. Once you know what the issues are, your organization can take steps to improve the customer experience.

How customer churn can impact your organization

Your customer churn rate affects your profitability, and it can affect your growth. When you lose customers, you lose revenue. Acquiring new customers will grow your business and replace the ones you lost. However, since the cost of acquiring a new customer can be five times more than retaining an existing customer, it may take a long time before you see any profitability from a new customer. In addition, some companies may not have the budget to continually attract new customers, which will limit their growth. Also, if customers are unhappy with a business, their influence can affect the company’s growth by causing others not to use the products or services of that business. Reducing your customer churn rate by just 5%, on the other hand, can lead to an increase in profitability of up to 95%.

Knowing your customer churn rate and putting a plan in place to reduce it can have the following benefits:

• Increased profitability, as the acquisition costs for the customer have already been accounted for.
• Customers who already deal with you will spend up to 67% more on the services or products your company offers than a new customer will.
• Happy customers will spread the word about your company.
• Existing customers are more likely to buy other products and services from your customers than new customers.
• The likelihood of selling to a new prospect is 5–20%, but for an existing customer, it’s 60–70%.

Churn rate formula

There are many ways your business can calculate the customer churn rate. The simplest method is to take the number of customers lost during a period, divide it by the number of customers at the beginning of a period, and multiply by 100.

If a company had 10,000 customers at the beginning of the quarter and lost 750 over the course of that quarter, the calculation would look like this:

750 / 10,000 x 100 = 7.5%

So, in this case, the company’s churn rate is 7.5%.

This churn rate formula can be used regardless of whether you report monthly, quarterly, or annually.

Using customer churn rate to your advantage

Being aware of your churn rate can allow you to identify and address gaps that cause customers to leave. Reducing churn can lower your costs and increase your bottom line.

Data is most useful, though, when its findings are put into action. Lytics can help increase customer retention in your business by using the right data to connect with your existing customers in a meaningful way.

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