Customer churn is the rate at which customers abandon a product or service provider and switch to a competitor. For many, it is one of the most critical business metrics, indicating its health and how successfully a company can engage and retain its customers.
2022 is a vital year for churn measurement, as research suggests that organizations are going through a "Great Customer Resignation" of sorts. As per 2022 Sugar CRM research, more than half of companies (58 percent) have endured increased churn over the past 12 months.
The study also suggests that the average business will lose nearly one customer for every three new acquisitions in 2022.
"Companies face a daunting scenario – struggling to fill the top of the funnel with qualified leads while losing customers at the bottom of the funnel," notes Craig Charlton, CEO of SugarCRM. This makes it crucial to pay close attention to this metric and adopt measures for churn avoidance.
Measuring Customer Churn
When calculating customer churn, it is important to note two widely-used customer churn formulas – gross churn and net churn.
How to Calculate Gross Customer Churn
The gross figure refers to the total reduction in the customer base without differentiating between new and old customers.
Even if new customers offset those who fell prey to churn, this metric will not highlight the issue.
Nevertheless, it is useful when organizations want to calculate the business's overall health.
Its formula is as follows:
Let's say the organization is calculating customer churn for 2022. It started the year with 1,000 customers, lost 300 customers along the way, but acquired 200 more.
So, the company closed 2022 with 900 customers. As a result, the net churn rate will look like this:
[(300 - 200) ÷ 1000] x 100 = 10%
Net churn can also appear as a negative figure. If so, this is a prime indicator of a healthy business.
How to Calculate Net Customer Churn
Many customers choose to calculate churn without considering customer acquisition. Doing so is advantageous since, in many cases, multiple teams are responsible for customer acquisition and retention, and the success of one team should not compensate for the failure of the other.
Therefore, many companies calculate net churn in addition to gross churn. To do so, they will likely use the following formula:
