What is the churn rate?
Definition: Churn rate is the percentage of customers that canceled their subscription to the service over a specific period of time.
It helps businesses track how many customers they lost and why, helping them to improve customer retention processes and increase revenue.
Churn rate formula & how to calculate it
The formula: the number of lost customers divided by the total number of customers and is expressed as a percentage. These two metrics are calculated for a certain period of time (i.e. 30 days, 60 days, 100 days, etc.).
Churn Rate = Lost Customers / Total Number Of Customers * 100
The process for calculating churn rate:
- Choose a time metric (Year, Month, Quarter).
- Count the number of customers at the beginning of the period.
- Count the number of customers lost during the period.
- Divide the second number by the first and multiply by 100.
What is an acceptable churn rate?
Higher churn means more customers are leaving the business, so having a lower churn will always be better for a company.
The acceptable churn rate varies from industry to industry. A retail chain will have a higher churn acceptance as customers aren’t too loyal and are always looking for better prices. A B2B SaaS business will have lower acceptance as customers don’t switch to other products often.
This number also depends on the business's position in the market, as a startup will have a higher churn rate while solidifying its spot in the market, while a corporation will have a lower churn rate.
Calculating all the factors, a 5 - 7% churn rate on an annual basis is considered acceptable for most industries.
Churn rate examples
A SaaS company's subscription-based model costs $20 monthly.
At the beginning of the year, they had 1000 customers, and they acquired 800 new customers throughout the year. During this period, 120 customers canceled their subscriptions.
They started the year with $20.000 MRR and acquired $16.000 new MRR, but they finished the year with $33.600 MRR.
After calculation, their churn rate came to 12%.
12% = 120/1000*100.
This is a very high churn rate for the company, so they calculated the churn rate for each month to see churn trends.
They noticed that in February, their churn rate was 5.5%. The month started with 1040 subscriptions but had 57 cancelations.
This was their worst month, and they investigated why. The conclusion was that in February, their customer support was on vacation, meaning their customers had problems and no one to solve them, leading them to churn.
