Customer Churn Rate: How to Calculate and Reduce It

To minimize and prevent customer churn, you need to understand why your customers leave you and when exactly they tend to do it. Let’s take a look at why you need to monitor the changes in customer churn and how you can calculate it.

What Is Churn Rate?

Churn Rate is the amount of customers who’ve left a brand after a certain period of time. Granted, there is no single churn rate benchmark that would work for every business. To understand churn within your business, you need to take into consideration a lot of variables.

What Is a Good Churn Rate?

In a perfect world, it should be 0%, but churn is one of the stages of a customer/subscriber cycle. 

For example, for SaaS businesses, the customer churn is defined by the number of unsubscribes, ecommerce focuses on the number of customers who left the brand, and B2B and B2C businesses look at the number of people who haven’t renewed a contract.

Measuring Churn Rate in the ecommerce industry is especially important for subscription-based businesses. Research shows that retaining an existing customer can be five times cheaper than acquiring a new one. 

Churn Rate vs Retention Rate

While churn rate measures the number of customers who decided to stop using a business service, retention rate calculates the percentage of customers who stick with your product/service.

Customer churn and retention go hand in hand. Understanding the patterns of customer behavior and reasons behind them leaving will help you reinforce your retention efforts and provide a better customer experience.

Indeed, keeping existing customers is more cost effective that acquiring new ones:

• the existing customers are already acquainted with your brand meaning you can optimize your marketing expenses;
• you can be sure they are a part of your target audience and you can’t say the same about the new leads;
• they tend to give the company a chance if they see the company is eager to solve their problem.

It is crucial to spot the moment when the customer is about to leave and to find the reason behind their decision.

Early Signs of Customer Churn

What usually happens before a customer leaves?

1. Customer behavior changes

To see if something’s going on, take a look at the KPIs you’ve chosen for your business. To analyze an email campaign, pay attention to the Open Rate and CTR. For mobile games, an indicative metric is Session Length, while grocery ecommerce platforms should focus on weekly purchases.

You can track customer behavior with the help of RFM analysis. Apart from finding customers that are about to churn or have already churned, this technique allows you to segment customers by Revenue per User. Don’t waste time and money trying to recover all churned customers and invest in winning back only valuable ones.

During RFM analysis, the customers are divided into valuable and regular ones.

Looking at the churned customers, you can see that it’s better to focus on churned customers who have a potential of coming back. Their average purchase value is 2.4 times greater than that of the regular customers. 

2. A customer contacts support 

If you see an unhappy customer who reaches out for customer support frequently, this is a clear sign they can leave. In this case, you need to solve their problem ASAP: unsatisfied customers are hard to win back.

3. Your competitor has a similar product at a lower price

Most customers won’t stay with you if they can pay less for the product somewhere else, but you can still keep them with a special offer.

There are cases when you can influence their decision to leave, but you can’t win them all. Based on this, marketers usually speak of two types of churn:

• Unavoidable churn. It concerns events you can’t predict or influence: a customer moves to a new place, picks up a new hobby, changes their worldview, etc.
• Avoidable churn. A customer’s desire to leave is connected directly to your business: they are dissatisfied with the product, service quality, and so on. In this case, you can change their mind.

How Customer Churn Affects Other Business Metrics

Retention Rate reflects the number of customers that continue to use your product or services. Sometimes these two terms are used interchangeably, but they are not the same: Retention Rate and Churn Rate help you analyze customer behavior from different perspectives. Being able to see what causes customer churn can help you find ways to keep them and vice versa.

‍

We can speculate that a lower Churn Rate means more customers and a larger revenue. In reality, you can increase your income if you focus on keeping valuable customers. 

ARPU — average revenue per user.

Churn Rate impacts Average Customer Lifespan: the smaller the churn is, the longer the customers tend to stay with you. Note that you need to take the same time span to calculate both of the values.

Customer Lifetime Value, or LTV, is another essential metric closely connected with Churn Rate. The longer the customer stays with you, the more money they spend.

You can calculate LTV in several ways depending on the types of your business and the data you have on hand. Whichever way you choose, you need to know your Churn Rate.

Let’s look at the first formula: Churn Rate is already included in ACL (Average Customer Lifespan). 

In the second formula, Churn Rate is a part of RR.

In both cases, AOV stands for Average Order Value, AGM — for Average Gross Margin.

How to Calculate Churn Rate

1. Basic churn rate formula

With this formula, you will get the number of churned customers for the whole time.

Still, Churn Rate is more precise if it is calculated for a specific period of time (a week/a month/ a quarter). This will give you a more detailed look into statistics and allow you to react to changes in customer behavior at once.

This is what a formula for calculating the Churn Rate over time looks like. TC (tp) stands for Total Customer (time period), TC (lp) — for Total Customer (last period), and NC (tp) — for New Customer (this period).

You can get a negative value. This means that the number of active customers is greater than the number of leaving customers.

2. Calculate Churn Rate with the help of cohort analysis

Using cohort analysis to figure out the Churn Rate value allows you to track customer status at different times. As a result, you will see what makes a loyal and life-long customer.

Cohorts (lines) can be formed based on the sign-up date (as in the example), subscription/first purchase date. Next, you need to choose the timeframe to track behavior of cohorts. Churn Rate is calculated for every cell of the matrix.

For instance, the given matrix tells us that most customers churn within the first three months after they’ve signed up. The February 2020 and March 2020 cohorts stand out from the rest as they show a higher Churn Rate. This means we need to find what was wrong and fix it by analyzing what happened at that time: new features, interface updates, changes in the bonus program.

Customer Churn and Revenue Churn

We’ve already mentioned that Customer Value is the key to retention. One valuable customer can bring in more revenue than two or three (or even more) regular customers. Measuring the Revenue Churn value helps you see how much revenue you lose because of the churned customers and how valuable the remaining clients are.

There’s a general rule: if the Revenue Rate exceeds the Churn Rate, it means that you are left with less valuable customers and vice versa. This lets you know if you need to put effort into bringing them back.

MRR — Monthly Recurring Revenue. 

Churn Rate and Revenue Rate will tell even more if you use the advanced formula.

What Is Churn Rate in Email Marketing

This is the percentage of subscribers who have left your list over a certain period of time. You can calculate subscription churn rate in email marketing either with the formulas we’ve already seen or in the following way:

Unsubscribe is the number of unsubscribed users. Soft/Hard Bounce indicate temporary/permanent technical problems, List Size is the size of your email list.

You need to make sure the number of new subscribers is bigger than the subscriber churn rate. Otherwise, your email list will go down until there’s nothing left.

There are two types of churn:

1. Active churn. A customer makes it clear they no longer want to get emails from you. It tells on such metrics as Unsubscribe Rate, Spam Complaints, and Invalid Address Rate.
2. Passive churn.  A customer interacts with your emails because they aren’t interested or they don’t check their inbox. You can’t tell what exactly happened which makes it hard to calculate this type of churn.

Churn Rate Benchmarks

Startup companies should aim for a Churn Rate of 10–15%. The number should go lower as you grow, but if it doesn’t, this is a bad sign.

For small and mid-sized businesses that’ve been in the game for a long time, a good Churn Rate is 3–5%. 

A preferable CR value should be no more than 1%.

Annual Churn Rate for email marketing is about 25–30%.

How to Reduce Customer Churn 

1. Analyze the target audience

Trying to attract every possible customer is a waste of time and money. Focus on your target audience as they are interested in your services and products and will stick around for a long time.

2. Personalize customer communications

Use the right communication channels and segmentation by interests to create a personalized experience for your customers. 

3. Provide quality customer experience and support

People tend to remember negative experiences of interacting with a brand. 56% of customers leave a business because of a poor customer experience, while about 25% of customers will recommend (in person or via social media) others avoid this business. This will influence both the existing and potential customers.

4. Collect customer feedback

Create a survey or call your customers to see if they’re satisfied with your brand. Ask them if there’s anything they think could be improved. Make sure you listen to your audience and introduce the necessary changes.

5. Offer incentives to your customers

To make your customers feel valued, you need to show your appreciation for them: introduce a loyalty program or coupons.

There are many ways to influence your customers and change their mind if they want to leave. Your strategy to prevent customer churn will depend on the type of your business, customer relationships, and your willingness to improve. 

There will always be customers who churn, but you need to focus on retaining only the valuable ones.