What is the Churn Rate?

Your Churn Rate, Customer Attrition Rate, Customer Turnover Rate, or Customer Defection Rate is the rate at which customers stop doing business with your company. They may have canceled a service, not renewed a subscription, or simply ceased to be active customers.

It is an important business term for companies that rely on repeat customers or subscriptions.

If you have a lower churn rate this year compared to last year, it means that you are now retaining more customers than before. A higher rate, on the other hand, means more customers are leaving your business.

While the term “dropout rate” has a similar meaning, it’s typically used in educational settings to describe students leaving courses or programs. In business settings, “churn rate” is the more common term.

Monique Danao, a writer for Forbes specializing in Small Business and Tech, provides a concise explanation of the term in her article titled ‘What Is Churn Rate & How Do You Calculate It?’ published on November 25, 2023. She states:

“The churn rate refers to the rate at which subscribers or customers stop transacting with your business. Simply put, they are subscribers who canceled their subscriptions or customers who did not return to your store. Understanding the difference can be useful in making better strategic decisions for your business.”

Understanding the Importance of Churn Rate

Churn rate matters because it directly impacts your business’s bottom line. It is much more expensive to acquire a new customer than it is to retain an existing one.

High churn rates imply a constant need to replace lost customers, which can significantly increase expenses. Conversely, a low churn rate signifies the presence of happy, loyal customers, which is better for a thriving business.

Put simply, a company with a low churn rate tends to be more profitable than one with a high rate.

Four people standing in a room, one other person leaving through the exit door, plus a definition of THE CHURN RATE
Image created by Market Business News.

Types of Churn

Here are three types of churn in the world of business:

  • Customer Churn

This is the most familiar type – it represents the number or percentage of customers who leave over a given period.

  • Revenue Churn

This shows the percentage of revenue lost due to customer departures. While similar, it accounts for variations in subscription levels or customer spending habits.

  • Staff Churn

Also known as employee churn, it refers to the rate at which employees leave a company within a certain period. However, most people use the term “Staff Turnover.”

Calculating Churn Rate

The basic formula for calculating the churn rate is:

(# of customers lost in a month ➗ # of customers at the start of the month) x 100

For example, if you started the month with 100 subscribers and lost 10, your churn rate would be 10%. See the image below.

Mathematical formula to calculate the Churn Rate.
Image created by Market Business News.

Reducing Your Churn Rate

The following tips may help keep your churn rate low:

  • Deliver Excellent Customer Service

Responsive and helpful support makes customers feel valued. Customer service today is no longer a useful extra to offer consumers – it has become a necessity.

Since the advent of the internet, consumers have come to expect top-quality customer service and support.

  • Continuously Improve Your Product or Service

Carefully monitor your customer feedback and add features or updates to your offerings accordingly. Let your customers see that you offer real value for money.

  • Maintain Clear Communication

Be transparent and proactive about changes, updates, product enhancements, policy adjustments, or any issues that might arise.

Communicate regularly with all stakeholders through newsletters, social media platforms, direct emails, webinars, and community forums. In some business models, you should consider talking to your customers on the phone or even face-to-face.

Final Thoughts

Treat your churn rate as more than just a number. It is a measure of the overall health of your customer relationships.

Track your churn, find out the reasons behind it, and do what you can to minimize it. It will be worth all the effort, as reducing churn helps maintain and enhance your company’s viability, ensuring it continues to thrive over the long term.