Churn rate is a measurement of the number of items or individuals moving out of a collective group during a given period of time. In marketing, the churn rate is the number (typically a percentage) of customers or subscribers who cancel or do not renew their subscription during a given period of time. A high churn rate, also referred to as customer churn, could negatively affect a business’s profits and impede growth. Knowing the churn rate of a business is critical to evaluating the effectiveness of marketing efforts and overall customer satisfaction. In addition, it’s much easier and cheaper to keep existing customers than acquire new ones.
Churn rate formula
To calculate a business’s churn rate, a formula is needed. Churn rate is calculated by tallying up the total number of acquired customers and the number of customers who churned within a designated period of time. The total number of acquired customers is divided by the number of churned customers. The decimal produced is multiplied by 100 to output a churn rate percentage. Here are the steps in a list format:
- Define a time period
- Determine the number of acquired customers during this period
- Determine the number of customers lost during this period
- Divide the number of lost customers by the number of acquired customers
- Multiply the number by 100 to determine the churn rate percentage.
As a simplified example, say a company starts the month with 500 customers. At the end of the month, they have 450 customers. So, the churn rate would be calculated as follows:
500 – 450 = 50
50 / 500 = 0.1 x 100 = 10%
What causes churn?
Churn isn’t straightforward, but common sources of churn include the following:
- Price: If a customer finds a more cost-effective solution that offers the same usability and features, they are likely to churn. This is why it’s important to establish the value of a product in order for a customer to feel that it’s worth the price.
- Market fit: If a customer is not a good fit for the product from the beginning of the sale, they are likely to churn within a few months.
- User experience: If a product is glitchy, difficult to use, or not aesthetically pleasing, customers are less likely to use it, making it even less likely they will continue a subscription. Likewise, if a customer has negative experiences towards a company’s marketing tactics, social media, or customer support team, they may decide that interacting with the company is not worth using the product.
How to reduce customer churn
The first step in reducing customer churn is to identify the cause. This can be done by sending existing customers a survey as to why they left, calling the customer, or sending a personalized email. Other ways to reduce churn include:
- Having quality customer service
- Improving the user onboarding experience
- Create a community feel around your product. This could be done by creating a forum or knowledge base about your product
- Keep customers engaged and informed with content
- Segmenting customers for better targeting
It’s also worth mentioning that many customer relationship management (CRM) systems on the market cater to companies wanting to improve and increase customer interaction to decrease customer churn.