# How to Calculate Customer Churn Rate

April 5, 2024
December 27, 2022
December 27, 2022
|
12
min.

Imagine your business as a garden. Like a garden needs regular tending and care to thrive, so does your customer base.

One key metric that can help you understand the health of your customer base is churn rate, akin to the weeds in a garden.

The churn rate reflects the percentage of customers who have stopped using your products or services and can indicate areas needing attention and improvement.

To properly care for your customer base and keep it healthy, it's important to regularly measure and understand your churn rate.

In this blog post, we'll provide a step-by-step guide on calculating your customer churn rate, so you can identify any potential issues and reduce them, just like a diligent gardener would remove weeds to keep their garden healthy.

## What Is Customer Churn?

Customer churn, also known as customer turnover or attrition, refers to the percentage of customers who have stopped using a company's products or services.

It's an essential metric for businesses to track, as it can significantly impact their revenue and profitability. In the metaphor of a garden, churn can be thought of as the weeds that threaten to overtake the healthy plants.

Like a gardener would work to remove weeds and promote healthy plant growth, businesses must reduce their churn rate and retain valuable customers.

Measuring churn is significant for businesses with subscription models; a high churn rate can lead to a constant need for new customers to maintain the same level of revenue.

For example, a company with a high churn rate may need to acquire two new customers for every one customer they lose to break even.

On the other hand, a company with a low churn rate has a more stable and reliable customer base, similar to a garden with a healthy balance of plants and few weeds.

In the following sections, we'll provide a step-by-step guide on how to calculate your customer churn rate, so you can identify any potential issues and take steps to reduce them.

## How to Calculate Customer Churn

Calculating customer churn rate is vital in understanding and addressing this key metric for your business. Like a gardener needs to assess their garden for weeds regularly, businesses need to evaluate their customer base for churn periodically.

There are several ways to calculate customer churn, depending on the specific metric a company is concerned with.

These can include the number of customers lost during a specific period, the percentage of customers lost during a particular period of time, the value of recurring business lost during a specific period, or the rate of recurring value lost during a specific period of time.

The most basic calculation for customer churn rate is:

number of churned customers / total number of customers

For example, if your company had 100 customers during May and lost five that same month, your churn rate would be 0.05 or 5% (5/100). It's crucial to track churn over a span of time, such as monthly, quarterly, or yearly, to get a sense of trends and patterns. You can also track churn by product or segment, such as by industry or customer type.

Reducing customer churn is critical for businesses, as a high churn rate can lead to a constant need for new customers to maintain the same level of revenue. By understanding and addressing churn, businesses can improve retention and create a more stable and reliable customer base, much like a gardener works to remove weeds and promote the growth of healthy plants in a garden.

## Churn Calculation Formula

Calculating your customer churn rate is a straightforward process; you only need a few critical pieces of information. The churn rate formula is:

(Lost Customers ÷ Total Customers at the Start of Time Period) x 100

Let's break this down with an example. If your business had 250 customers at the beginning of the month and lost 10 customers by the end, you would divide 10 by 250 to get 0.04. You then multiply 0.04 by 100, resulting in a 4% monthly churn rate.

It's important to note that the time period you choose for your calculation will depend on your business and your goals. For example, some companies may track churn monthly, while others may track it quarterly or yearly. It's also possible to track churn by product or segment, such as by industry or customer type.

In addition to the basic churn rate formula, there are other ways to calculate churn depending on the specific metric you're interested in. For example, you can calculate the value of recurring business lost during a specific period of time or the rate of recurring value lost during a specific period of time.

No matter which measure you choose, tracking and understanding your churn rate is essential for identifying areas for improvement and reducing customer churn. By following the churn calculation formula and regularly assessing your customer base, you can take steps to retain valuable customers and create a healthy and stable customer base, much like a gardener would tend to their garden.

## How to Predict & Reduce Customer Churn

Predicting and reducing customer churn is crucial for businesses, as it can significantly impact revenue and profitability.

To predict and reduce churn, it's essential to regularly track and understand your churn rate and identify any potential issues or factors contributing to it.

One way to predict churn is to segment your customer base and analyze churn rates by segment. This can help you identify trends or patterns contributing to churn, such as certain products or customer types.

Another way to predict churn is to use customer data and analytics tools to identify any red flags indicating a customer is at risk of churning. For example, look for changes in customer behavior, such as a decrease in usage or engagement or a decline in satisfaction scores. Identifying these red flags early can proactively address any issues and prevent churn.

To reduce customer churn, it's essential to focus on customer retention and satisfaction. This can involve offering excellent customer service, providing valuable and relevant content or resources, regularly soliciting feedback, and addressing any concerns or issues.

You can also consider offering incentives or rewards for customer loyalty or implementing retention campaigns targeted at at-risk customers.

By regularly tracking and understanding your churn rate, analyzing customer data, and taking proactive steps to retain and satisfy your customers, you can successfully predict and reduce churn, reaching an acceptable churn rate for the growth of your business.

## Why Is Churn Rate So Important?

Churn rate is an essential metric for businesses to track, reflecting the number of customers who have stopped using their products or services.

Understanding and measuring your churn rate can help you identify areas for improvement and take steps to reduce it, ultimately leading to a more stable and reliable customer base.

There are several reasons why churn rate is so important:

1. Revenue impact: Churn can significantly impact a company's revenue, as lost customers represent lost revenue. A high churn rate can lead to a constant need for new customers to maintain the same level of revenue, which can be costly and time-consuming. By reducing churn, businesses can improve retention and create a more stable and reliable source of revenue.
2. Customer acquisition cost: Acquiring new customers can be expensive, as it often involves marketing and sales efforts. By retaining existing customers, businesses can save on these acquisition costs and focus on maintaining and growing their customer base.
3. Brand reputation: Customer churn can also impact a company's brand reputation. If customers are unhappy with a company's products or services, they may share their negative experiences with others, leading to a decline in reputation. Businesses can improve customer satisfaction and maintain a positive reputation by reducing churn.
4. Customer lifetime value: Churn rate is also closely tied to customer lifetime value, which is the total value a customer brings to a business throughout their relationship. A high churn rate can lead to a lower customer lifetime value, as customers may stick around longer to make multiple purchases or become long-term loyal customers. Businesses can increase customer lifetime value by reducing churn and creating a more profitable customer base.

Churn rate is a crucial metric for businesses to track and understand, as it can significantly impact revenue, customer acquisition cost, brand reputation, and customer lifetime value.

By regularly measuring and addressing churn, businesses can improve retention and create a healthy and stable customer base.

## What's the Difference Between Customer Churn and Revenue Churn?

While both terms have the word "churn" in them and are indeed each a churn metric, they are two very different metrics measuring different aspects of a business's customer base.

As the name might imply, customer churn refers to the percentage of customers who have stopped using a company's products or services. It's an essential metric for businesses, as it can significantly impact revenue and profitability.

Revenue churn, on the other hand, refers to the percentage of revenue lost due to customers canceling or downgrading their subscriptions or services. This can be calculated by dividing the total revenue lost due to churn by the total revenue at the beginning of the time period.

Both customer churn and revenue churn are important metrics that should be tracked closely; they both provide different insights into the health of a business's customer base.

For example, a company may have a low customer churn rate but a high revenue churn rate, indicating that while retaining a high percentage of their customers, those customers are downgrading their subscriptions or services, leading to a loss of revenue.

## 5 Principles for How to Reduce Churn

Reducing customer churn is critical for businesses, as it can significantly impact revenue and profitability. To effectively reduce churn, it's essential to regularly track and understand this key metric and identify and address the root causes of churn.

Here are five principles for how to reduce churn and create a stable and profitable customer base:

### 1. Understand your churn rate

The first step in reducing churn is understanding and measuring your churn rate. By regularly tracking and analyzing this metric, you can identify any trends or patterns contributing to churn and take steps to address them.

### 2. Identify and address the root causes of churn

Identifying the root causes of churn is essential to address it effectively. This may involve analyzing customer data and feedback, conducting customer surveys or focus groups, or examining other factors such as product or service quality.

### 3. Focus on customer retention and satisfaction

Improving customer retention and satisfaction is key to reducing churn. This can involve offering excellent customer service, providing valuable and relevant content or resources, regularly soliciting feedback, and addressing any concerns or issues.

### 4. Consider offering incentives or rewards for customer loyalty

Another way to reduce churn is to offer incentives or rewards for customer loyalty. This can include loyalty programs, special discounts or promotions, or other perks encouraging customers to continue using your products or services.

### 5. Implement retention campaigns

Retention campaigns can be an effective way to target at-risk customers and prevent churn. These campaigns can involve personalized messaging or offers tailored to individual customers' specific needs or interests.

## Conclusion

Customer churn rate is an essential metric for businesses to track and understand, as it reflects the number of customers who have stopped using their products or services.

By regularly measuring and analyzing churn, businesses can identify areas for improvement and take steps to reduce it, leading to a more stable and reliable customer base.

Following the steps outlined in this blog post, including calculating your churn rate, predicting and reducing churn, and implementing retention campaigns, will enable you to reduce churn effectively and improve the health and success of your business.

Remember: by treating your customer base like a garden and regularly tending to it, you can ensure its health and longevity, just like a gardener works to remove weeds and promote the growth of healthy plants in a garden!

##### Mark Lerner

Head of Marketing @ Parative, the Customer Behavior Platform. SaaS enthusiast, B2B Marketing Specialist, Startup Survivalist. Dad x2.