Churn Rate Meaning
The churn rate is the rate at which customers stop buying from a business. It is usually expressed as a percentage of customers that discontinue their subscription in a specific timeframe.
To calculate churn rate, divide the number of customers that have discontinued subscription by the number of users that the business acquired over the same period and multiply by 100. So if the customer acquired 200 customers and lost 10, the churn rate is (10/200) * 100 = 5%. An alternative approach is dividing the customers lost by the total subscribers at the start of the period in question.
For a company to grow its customer base, the number of new customers should exceed the customer churn rate. It is a metric that is most valuable in subscriber-based companies where customer subscriptions are the largest proportion of revenues.
The churn rate indicates how well a business retains its customers which would usually be a reflection of the product value and quality of service the business provides. A high churn rate impedes growth and erodes profits. Churn rates may also be higher for newer companies in tandem with their higher growth rates given their novel entry into the market.
A key drawback of the churn rate is that it does not distinguish between new customers and old customers. While losing any customer should be viewed as a negative, old customers leaving should elicit greater concern as it could point to a more serious cause for their leaving. Newer customers are relatively transient and perhaps quickly figured the product might not be for them after trying it out.
Businesses can improve the churn rate by:
- Improve the customer onboarding process.
- Invest in more training for sales and support reps.
- Solicit customer feedback at key moments.
- Offer exclusive promotions to existing customers.
- Proactively communicate with customers.