How to calculate customer churn rate: Definition and simple calculation

Today, customer churn rates are soaring, reaching as high as 30% in some global markets. The cost of losing customers isn’t just an inconvenience; it’s a significant financial setback, especially when acquiring new customers often comes with a hefty price tag.

So, if you are wondering how to improve service to customers and take necessary action before it’s too late, then you are at the right place.

In this blog post, we’ll dive into the world of customer churn rates, how to monitor customer engagement, calculate churn rates, and most importantly, keep your customers from jumping ship.

What is the customer churn rate?

Customer churn rate signifies the percentage of customers who discontinue using a company’s product or service over a period of time. It’s a key metric for businesses to track, as it can have a significant impact on revenue and profitability.

Understanding the churn rate provides clarity on when to prioritize investments in customer success and customer retention over acquiring new customers. Some of the key findings include,

• Bain & Company’s research highlights a 5% increase in customer retention can lead to a 25% to 95% increase in profits.
• An extensive study conducted by Havard Business Review revealed that 80% of companies use customer satisfaction scores to analyze customer experience and improve it.
• Adding to the insight, Investp’s findings underscore that the cost of acquiring a new customer stands at 5 to 25 times higher than retaining an existing one.

Churn rate formula

This formula calculates the churn rate as a percentage, showing the number of customers who stopped using a service during a specific time frame compared to the total customer base for that period.

Monitoring the churn rate is crucial for businesses, as it provides insights into customer retention efforts and helps in implementing strategies to reduce churn and improve customer loyalty.

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How to calculate the customer churn rate?

Imagine you run a business with 100 customers at the beginning of the year. During the year, you got 20 new customers, but 15 of your existing customers decided not to use your products or services anymore. So, your customer churn rate for the year would be 15%. In simpler terms, it means that 15% of your customers left you during that year.

Churn Rate=( Number of Customers Lost (15) / Total Customers at the Beginning (100) ​) × 100% =15%

Learn more about how customer churn rate can be monitored depending on the nature of your business:

Understanding the impact of customer churn

Customer churn serves as an essential metric for businesses that directly impact the revenue streams. There are several reasons for the increase in the customer churn rate.

The rise in customer churn rate can be attributed to several significant factors, including

1. Firstly, the immediate impact is on the revenue. When a customer decides to leave, the revenue generated from the transactions departs with them, directly affecting the financial health of your company.
2. Secondly, attracting new customers incurs substantial expenses. Investing in marketing and sales strategies is essential to attract new customers, making customer acquisitions a costly endeavor.
3. Furthermore, a high customer churn rate can damage the company’s brand reputation. Departing customers are always dissatisfied and tend to share negative experiences with others. Negative word-of-mouth can deter potential customers, making it challenging to expand the customer base.
4. Lastly, reducing the customer lifetime value (CLV). When churn increases, CLV decreases, indicating a reduction in the long-term profitability of the customer relationship.

Note: CLV represents the average amount of money customers spend with a business throughout their lifetime.

Are you watching your churn rate? Here’s what a good customer churn rate is.

Frederick Reichheld, a customer loyalty expert, once said, “Customer churn is the silent killer of businesses.”

This quote highlights the importance of retaining customers. A good customer churn rate is one that is low and sustainable, typically less than 5% per month for SaaS companies. This means that the company is retaining at least 95% of its customers each month.

Companies can reduce the customer churn rate by,

• Offering excellent customer service
• Providing high-quality products or services to meet the customer’s demand
• Building strong relationships with customers and understanding their needs
• Offering incentives to customers like discounts and loyalty programs
• Regularly updating their products or services based on newly added features

Implementing these steps not only reduces customer churn but also enhances businesses’ profitability and positions them for sustainable, long-term success.

Understanding revenue churn rate for business success

Revenue churn rate is the percentage of revenue that a B2B company loses from existing customers over a given time period. It is calculated by dividing the total revenue churned by the total monthly recurring revenue (MRR) at the beginning of the period.

A higher revenue churn rate can make it difficult for companies to grow and achieve profitability. A few reasons why companies experience revenue churn:

• Customers may find better alternatives and are no longer using your product.
• Customers may downgrade their subscriptions to a lower plan.
• Customers may churn due to negative experiences or issues with customer support.

For instance, the average annual revenue churn rate for a B2B company is 14%. This means that the average company loses 14% of its revenue from existing customers each year.

However, there’s a wide range of revenue churn rates among product-based companies. Some have as low as 5, while others have churn rates as high as 30%.

Here, the best way to reduce the revenue churn rates is to track the churn rate closely and identify the factors that cause customers to stop using your service/product. Once the root causes of churn are identified, you can take steps to address them.

Comparative analysis: Customer churn rate vs. revenue churn rate

Customer churn rate and revenue churn rate are two important metrics for businesses to track, especially those in the product-based industry. Both metrics measure the rate at which customers stop doing business with your company, but they differ in what they measure specifically.

It’s the percentage of customers who cancel or fail to renew their subscription during a given time period.

Let’s say a company has a customer churn rate of 10% and a revenue churn rate of 5%.

The company loses 10% of its customers each month, but those customers are only contributing 5% of the company’s revenue.

Revenue churn rate

It’s the percentage of revenue that a company loses from existing customers over a given time period.

Let’s say a company has a customer churn rate of 5% and a revenue churn rate of 10%.

The company loses fewer customers each month, but those customers contribute more to the company’s revenue.

Strategies to reduce customer churn

Analyze the data

Analyze the churn rate based on the different customer segments, usage patterns, or demographics. With this, companies can get insights into which types of customers are churning the most. Study churn patterns over the time frames to discern trends. This temporal analysis helps to understand the cyclical nature of churn and can help in predicting future trends.

Identify the reasons for churn

Conduct customer surveys or interviews to understand the churn reasons. Also, customer feedback can be invaluable in identifying areas that require improvement. Analyze the customer support interactions and identify common issues. Addressing these pain points directly impacts customer satisfaction.

Improve customer experience

Companies can use customer feedback to improve products and service offerings. Enhancements can make offerings more appealing to customers and align them with the market demands. Educate customers about your company’s product/service to enhance usage and understanding. Providing education to address dissatisfaction can markedly decrease customer churn.

Implement customer retention strategies

Introduce your customers through loyalty programs or incentives for long-term success. Rewarding them can encourage them to stay longer. Use their data for personalizing marketing efforts. This can make customers feel valued and more likely to stay. Additionally, implementing targeted engagement campaigns through emails, social media, or other channels. Using these strategies can help in engagement with your brand.

Monitor customer interactions

Do keep an eye on social media platforms where your brands have been mentioned. Address any negative feedback promptly. Monitor online reviews and respond to negative comments, show them how customers’ opinions are valued by you, and proactively address concerns.

Customer success management

Assign a customer success manager to your key accounts, and these managers will help in building relationships, address concerns, and ensure that your clients are well satisfied with your services.

Schedule regular check-in calls or meetings with customers to gather feedback and assess their satisfaction.

Internal Alignments

Make sure all the departments are well aware of the churn rate, how to calculate the churn rate, how to increase the customer retention rate, and align their efforts to improve customer satisfaction. Provide training to employees who interact with customers. Equip them with the skills to handle customers’ issues effectively.

Long-term relationship building

Create a community around the product/service where customers can interact. Community fosters a sense of belonging and loyalty. Continue to innovate and stay ahead of customer needs by providing good customer service. Also, anticipating what customers want can reduce churn in the first place.

Churn - A wake-up call for business

Churn rate is more than just a number; it’s a powerful metric that guides businesses to make powerful decisions and boost their revenue. Think about it; you have already won customers’ trust when they choose your brand. But when a customer churns, it’s a red flag. It indicates that something is wrong along the way.

Now, what if I tell you that you can retain customers you’ve worked so hard to acquire and experience a sustainable growth rate?

DevRev makes this possible. By empowering your businesses with advanced customer retention strategies. DevRev streamlines collaboration and unifies teams through its OneCRM platform. This not only reduces churn rates but ensures customer satisfaction.