What is churn rate, and how do you calculate it?

Most businesses know how to calculate and track customer growth rates. But its companion metric, the rate at which your customers stop contributing to your business revenue (churn rate), matters almost as much.

This guide will cover the nuances of customer churn rate, including:

• A basic definition

• The benefits of calculating it

• A formula to keep track of it

No customer stays with your business forever. Eventually, they leave your business either because they can no longer afford it or they no longer have a use for it. This concept is called churn.

What is churn rate?

Churn rate or customer churn rate shows the frequency at which your customers leave your business in a predetermined period as a percentage.

For example, if you lose 10 customers each year from your total customer base of 100, your annual churn rate is 10%.

Of course, the real world doesn't usually work with figures as simple as these. In this article, we'll share a churn rate formula for more exact calculations.

Why is customer churn important?

It's easier to keep existing customers than to acquire new ones and more cost-effective to retain a departing customer than to try and get them back later. When these customers leave, their revenue flow stops almost immediately. That makes customer churn such an important metric, especially for subscription-based businesses.

For your business to be sustainable, you need your customers to stick around long enough to generate enough revenue to cover your customer acquisition cost. Calculating your churn rate will help you to know when you're at that point.

Calculating this metric will also help you to know whether or not your customers are satisfied. If more customers start leaving, it might be time to dig into the reasons why. On the other hand, keeping customers for longer can become a core business goal.

Does churn rate affect retention?

The churn rate is directly connected to retention because a high churn rate, by definition, means a low retention rate. Retention and churn rate are different ways to express the rate at which you retain and lose your customers.

Knowing your churn rate can help you figure out the steps needed to reduce it, and therefore, how to increase your retention rate.

What is the difference between churn rate and turnover rate?

The customer churn rate and customer turnover rate are identical. However, you can also calculate your churn rate in a way that goes beyond your raw number of customers. For example, you can calculate revenue churn by substituting revenue for the number of customers.

Is a high or low churn rate good?

High churn is worse than low churn. The fewer customers leave, the more of them stay and continue contributing to your business revenue. Loyal customers provide positive recommendations to others, which will attract new customers to your business.

To calculate your churn rate, you'll need three variables:

• The period you're calculating, typically by month or year

• The number of customers you had at the beginning of this period

• The number of customers you had at the end of this period

From these three variables, you can easily calculate a fourth: the number of customers you've lost during the period. Simply subtract the customers at the end of the period from the customers at the beginning.

Churn rate formula

The easiest way to calculate your customer churn rate is by using this formula:

Churn Rate = ((number of customers at the beginning of the period − number of customers at the end of the period) / number of customers at the beginning of the period) × 100

The result will be expressed as a percentage. For example, if you had 1,000 customers at the beginning of the month and 900 customers at the end of the month, your monthly churn rate will be ((1,000−900)/1,000) × 100 = 10%.

There are other ways to calculate your churn rate using those same variables. For example, if you know how many customers you've lost in the period, you can use this data in place of the (1,000−900) part of the calculation above.

What is a good churn ratio?

Most SaaS businesses aim for a churn rate between 2% and 8%. Generally speaking, the bigger your customer base and the smaller your average revenue per customer, the higher the churn rate can be without hurting your business.

If you have a B2B business with few customers but you derive high revenues from each customer, a churn rate of even 2% can hurt your average revenue.

Churn rates are most useful when seen as trends. Because of the many variables that go into what makes a good churn rate, a single calculation may not be informative. Keep an eye on how your rate increases or decreases over time to make strategic decisions based on your churn rate.

What is a negative churn rate?

Negative churn is rare, but not impossible. It describes a situation in which your existing customers who stuck around for the period generated more incremental revenue than you've lost with other customers leaving during that same time frame.

A negative churn rate is only possible when calculating revenue churn, not customer churn. You cannot lose a negative amount of customers in a given month or year.

Monthly vs. annual churn rates

The only thing that changes when calculating monthly vs. annual churn rate is the period in which you operate:

• Annual churn rate is the number of customers you lose in a year

• Monthly churn rate is the number of customers you lose in a month

Don't confuse these numbers, or try to compare monthly to annual rates. Monthly rates tend to be more volatile, while annual rates allow you to see the big picture of your company's direction.

The basic concept of churn rate is easy, but various real-life situations can bring challenges. It's not as simple as plugging in some numbers and getting instant insights.

These five factors can complicate the way you calculate and analyze your churn rate.

1. Finding a clear and consistent customer definition

It’s not always easy to know how to count certain customers. For example:

• How do you count free trial users?

• What about customers who are with you because of a special offer and contribute less revenue?

• Should you count customers who downgrade their subscriptions as part of the churn, even though they're still subscribers?

You'll need to answer all these questions firmly and consistently to calculate an accurate churn rate.

2. Defining the moment a customer officially churns

You need to define the exact moment of churn and keep that moment consistent over time. Depending on your business or preferences, you could count a customer as leaving in one of the following ways: 

• When they end their subscription

• When their last payment is due

• The moment their account is deactivated

3. Changing the time frame might change your analysis

You can calculate churn weekly, monthly, quarterly, annually, or less frequently. But all those time frames have different implications. An annual churn calculation may seem high compared to a weekly one, but it leads to different types of insights. Stay consistent and mindful of how changing the time frame affects your numbers.

4. Be aware of customer nuances

It's tempting to calculate your churn rate business-wide. But that doesn't account for how different customers behave. New customers on a promotional rate are more likely to churn than those who have been with you for years, and demographics or subscription level can also play a role. Break your churn rate down into customer segments to maximize your insights from the data.

5. Your churn rate can change with the seasons

Your business may naturally be seasonal, so you'll likely see higher churn rates in the off-season. But even if it's not, you might see higher B2B churn towards the end of the year during budget calculations, or more sign-ups at the end of the year during gift-giving and bonus season.

Now that you know what churn rate is, how to calculate it, and how to navigate around some of this metric's complications, it’s time to leverage your insights into business improvements.

These four tips can help you reduce your customer churn over time.

1. Understand why customers churn

The more you understand the why behind your churn rate, the more you can implement measures to minimize the chances your existing subscribers will leave. Look for commonalities in the customers jumping off.

Once you calculate the rate for a while, you can also look for seasonal patterns and trends to help you manage churn.

2.  Know the signs that a customer is likely to leave

Your research into why customers churn can also help you find behaviors and patterns that might predict their leaving. For example, they might stop engaging with your product or participating in training and onboarding.

Once you know some common signs, you can put strategies in place to proactively prevent them.

3. Provide supporting resources and education

One of the most common reasons your customers churn is their lack of engagement with your product. There’s no magic solution, but you can minimize friction by providing educational and support resources at every turn.

For example, implementing a knowledge base can help customers quickly find answers to issues before the problems become big enough to make the customer stop subscribing.

4. Make sure you're targeting the right audience for your products

If you're targeting the wrong audience, you might still get plenty of customer sign-ups—but once they start using your product, they'll realize your value proposition doesn't match their needs. Adjusting your target audience can go a long way toward correcting this situation.

Time to put everything we've just discussed into context. If you want to benchmark yourself against some of the world's biggest subscription-based brands, consider these three examples from different industries:

• Netflix: 3.5% monthly churn rate. This is at the low end for streaming services but has been rising enough over the past two years (up from 1.9% in 2019) to become a cause for concern.

• Peloton: 1.41% monthly churn rate. As the first mainstream fitness subscription service of its kind, there are not many industry equivalents. However, the fact it has doubled in the last 12 months is alarming for Peleton investors.

• Adobe: 10% yearly churn rate. It's annual, so it cannot compare with the monthly rates above. Still, a 10% annual churn rate may be high enough to start investigating where paid users are dropping off.

Calculating your churn rate is just the beginning of sound analytics. It provides a baseline to dig deeper into the numbers, understand why your customers leave, and work out how you can retain a greater percentage of them in the future.