What is churn rate?
Churn rate, also known as attrition rate, is a business metric that calculates the number of customers who leave a product over a given period of time, divided by the remaining number of customers. It's typically used in the context of subscription-based models, including software-as-a-service (SaaS), telecommunications, and other subscription businesses.
The churn rate can be both a measure of business performance and customer satisfaction. A high churn rate can indicate problems with the product, customer service, or other aspects of the business, whereas a low churn rate can suggest that customers are satisfied and choose to continue using the service.
It's important to note that churn rate isn't just about customers who cancel their service. It can also include customers who downgrade to a lower tier of service or who reduce their usage.
Examples of churn rate
Churn rate is calculated for a specific time period by dividing the number of lost customers in that time by the number of customers at the beginning of the period. To convert that figure to a percentage, multiply by 100. For example, if a business has 500 customers at the beginning of a week and loses 5 of them, one would figure the churn rate by dividing 5 by 500 for a total of .01 or a churn rate of 1%.
Why do customers churn?
Customers can churn for a variety of reasons. Here are some common ones:
1. Poor Product or Service Quality
Customers generally churn when they're not satisfied with the quality of the product or service provided. This could be due to the product not living up to their expectations, frequent technical issues, or lack of desired features.
2. Inadequate Customer Support
If customers face issues with a product or service and can't get timely or helpful support, they are likely to churn. Effective customer support is vital in addressing concerns and preventing customer dissatisfaction.
3. High Pricing
Customers might churn if they perceive the cost of a product or service to be too high compared to the value they're receiving. They might find more competitive pricing or better value elsewhere, leading them to cancel their subscription.
4. Lack of Personalization
In today's market, customers increasingly expect personalized experiences. If a company fails to deliver personalized content, offers, or services, customers might feel undervalued and decide to churn.
5. Product Misfit
Sometimes, customers churn because the product or service just isn't the right fit for their needs. This could be a result of miscommunication during the sales process or a shift in the customer's requirements or business strategy.
6. Better Alternatives
The presence of better alternatives in the market can also lead to churn. If a competitor offers a product or service that is superior in terms of features, quality, or price, customers might switch to that competitor.
7. Negative Customer Experiences
Any negative experience – be it related to the product, customer service, billing issues, or anything else – can lead to churn. This could be a single severe incident or a series of smaller negative experiences.
8. Inadequate Customer Engagement
If customers do not feel engaged with a product or a brand, they may lose interest over time and eventually churn. Engagement can be driven by regular, meaningful communication, user-friendly interfaces, and opportunities for customers to provide feedback or interact with the community.
Why is churn rate hard to understand?
Churn rate is easy to calculate but difficult to understand because most customers who choose to no longer do business with a company do not communicate their reasons for doing so. While it is generally assumed that the reasoning behind most churn is dissatisfaction, there are other, less addressable reasons a customer may discontinue using a product or service such as job loss, change of location, lifestyle changes, and more.
How to calculate churn rate?
Churn rate is calculated by dividing the number of lost customers over the initial total customers during a specific time period. Take the number of lost customers, divide by number of total customers, then multiply the result by 100 to express it as a percentage.
How to calculate churn for annual plans
To calculate the churn rate of an annual plan take the number of users who discontinued their subscription over the course of the year, and divide it by the number of subscribers at the beginning of the year. Then take that figure and multiply by 100 to express it as a percentage.
How often should I calculate my churn rate?
Different industries will have different best practices for how often churn rate should be analyzed but marketing teams should keep in mind that checking too frequently could lead to a false sense of success or unnecessary panic. Monthly, quarterly, and yearly are common intervals for calculating churn rate, but if there have been major changes to a brand’s strategy or if user feedback suddenly changes in volume or sentiment it may be wise to examine churn rate along with other metrics to see if actions need to be taken.
What is a good churn rate?
Average churn rates vary from industry to industry but the most successful companies generally aim for a churn rate below 2%.
What do you use the churn rate for?
Churn rate is an engagement metric that measures the rate at which customers are choosing to discontinue doing business with a company and can be an indication of overall customer sentiment. A high churn rate, especially a rising one, could be a red flag that users don’t feel their needs are being met, whereas a lower or declining churn rate can show the success of retention efforts.
Churn Rate vs. Growth Rate
Churn rate calculates the percentage of customers lost over a period of time while growth rate calculates the percentage of customers gained over a time period.
Advantages and disadvantages of churn rate
One of the main advantages of churn rate is that it is easy to calculate and can be measured at any time a company thinks it would be useful to do so. Another is that a rising or falling churn rate can be a clear indication that customer satisfaction is changing in the same way. One disadvantage however, is that churn rate alone cannot indicate why customers chose to leave the brand.
How to reduce churn rate?
Reducing customer churn should be a top priority for any customer-centric organization. Here are several strategies that can help to reduce churn rate:
1. Improve Customer Service
Providing top-notch customer service is critical. This includes quick response times, effective problem resolution, and a friendly, professional demeanor. It's also beneficial to offer multi-channel support, such as email, phone, live chat, and social media.
2. Offer Competitive Pricing
While you shouldn't necessarily aim to be the cheapest option on the market, it's important to provide good value for money. Regularly review your pricing strategy and consider offering discounts or incentives for long-term contracts to increase customer retention.
3. Enhance Product Quality
Continuously invest in your product or service to ensure it meets or exceeds customer expectations. This could include adding new features, improving usability, or enhancing performance.
4. Personalize Customer Experience
Personalization can significantly improve customer satisfaction and reduce churn. This could mean personalized content, product recommendations, or customer support. Using customer data can help tailor experiences to individual user needs and preferences.
5. Proactively Engage Customers
Reach out to customers regularly, not just when there's a problem. This could be through newsletters, social media, or personalized messages. Regular engagement can help build stronger relationships and loyalty.
6. Identify At-Risk Customers
Use data analytics to identify customers who might be at risk of churning, based on behaviors like decreased usage or late payments. Once identified, you can proactively address their issues or offer incentives to stay.
7. Collect and Act on Feedback
Regularly ask for and act on customer feedback. This can help identify areas for improvement and show customers that you value their input, which can increase loyalty and reduce churn.
8. Provide Clear and Honest Communication
Communicate clearly and honestly about any changes to your product, pricing, or policies. Surprises can lead to dissatisfaction and churn, so it's better to be upfront.
9. Invest in Customer Onboarding
A good first impression can go a long way. Invest in customer onboarding to ensure that new customers understand how to get the most value from your product or service, which can increase satisfaction and retention.
