While often tricky to track, churn offers a glimpse of customer loyalty, enabling businesses to quantify whether they are set up for success.
Defining Customer Churn
Often referred to as customer attrition, defection, or turnover, churn measures the rate at which a company loses paying customers.
There are two types of churn that a company can measure:
- Gross churn – Gross churn is the total number of customers who unsubscribe or switch from a service company during a prespecified period.
- Net churn – Net customer churn measures the number of customers lost with respect to the number of customers gained during a period.
Ideally, companies that choose to measure this metric will calculate both types of churn. While net churn gives an enhanced representation of the overall business health, gross churn better reflects the quality of service delivered.
For example, a company could lose all 100 of its customers but get 150 more and have a positive net churn rate. Yet, something is wrong. The company will only notice this if they calculate gross churn too.
Customer Churn Rate Formula
The gross customer churn formula is:
Meanwhile, the net customer churn formula is:
To showcase how these formulas work, consider a company that measures customer churn annually. At the start of the year, they have 100 customers. In the next 12 months, they lose 30 and gain 20 more.
Now, gross churn would simply equate to 30%, because: (30/100) x 100 = 30%.
However, new customer churn is lower, as: ((30-20)/100) x 100 = 10%.
Ideally, net churn will lie below zero percent, indicating positive business growth and a higher number of new paying customers than those who have unsubscribed.
How to Calculate Customer Churn Rate
Before getting to the stage where it is possible to calculate customer churn, companies must take a couple of steps first.
Step 1: Implement a Tool to Track Customer Volumes
A small business or a new company in its early stages of growth may track its customers using manual tools or spreadsheets. However, mid-sized to large organizations need a system that tracks website, marketing, sales, and subscription/renewal activity to track customer volumes in real-time. CRM systems are helpful for this purpose.
Step 2: Determine the Period of Measurement
Companies can track churn across a time of their choosing, yet companies often calculate it on a monthly, quarterly, or annual basis.
Monthly churn metrics help companies track how seasonality and particular initiatives impact customer turnover. Quarterly churn rates reveal the fiscal year is looking, and annual rates reflect year-on-year performance.
The period of measurement may also depend on the private or public nature of the company, alongside shareholder and regulatory requirements.
Step 3: Calculate Churn As Per the Formula
By referring to the metrics and analytics insights derived from the CRM, companies can calculate churn rates for a specific period, product, region, or customer segment.
Typically, this is the responsibility of CX/customer success teams, sharing churn reports with business leaders for further analysis.
Benefits of Measuring Customer Churn
By measuring customer churn, companies can unlock the following benefits:
- A low churn rate indicates a healthy business, which is why the metric often features in shareholder reports and corporate fiscal summaries. Companies may leverage this metric to raise funding or increase share prices.
- Tracking churn helps companies pinpoint why customers leave. These reasons often fuel successful retention strategies.
- Customer churn trends help anticipate business issues before they arise. For instance, a slight but steady dip in net churn quarter on quarter could signal rising dissatisfaction among customers, which merits further investigation.
- The metric helps CX teams calculate customer lifetime value and forecast revenues, enabling companies to plan for the future.
There are a couple of caveats to measuring customer churn. First, avoid measuring it in isolation. Other metrics will enable root cause analysis to distinguish incidental cases of churn from more significant concerns. Second, the metric fluctuates wildly between different industries, so bear this in mind when engaging in external benchmarking.
Learn about the current state of customer churn by reading our article: SugarCRM Research: Customer Churn is Soaring