Dictionary
Debitoor's accounting dictionary
Churn rate

Churn rate - What is churn rate?

Churn rate measures the percentage of a business’ customers who cancel their account or leave the business within a specific period of time.

Churn rate is essential to determine the satisfaction of existing customers. Learn more about Customer Acquisition Cost (CAC) to determine the costs related to acquiring new customers.

Churn rate is an important metric to determine customer satisfaction and the overall health of your business. If your business has a high churn rate, this means that your customers are not happy with continuing with your services and ultimately, your business may not be sustainable long-term.

In business, churn rate is most commonly used to measure customer churn. However, it can also be used to measure employee churn, which is the percentage of employees who left the company within a time period.

How does churn affect your business?

Churn is a direct reflection of the value of a business to its customers. Churn not only affects your customers' satisfaction with your business but can also affect your revenue. If customers leave, then so does their money.

Churn also indicates the long-term health of your business. If your business spends money to acquire new customers (e.g. marketing costs), and they churn before you regain the costs, then you are losing money.

A few factors that can affect your churn rate include:

  • Price
  • Poor customer onboarding experience
  • Complex interface
  • Absence of features
  • Ineffective customer service

Regularly reviewing your churn rate will help you recognise if there are any concerning trends, and pinpoint if changes are helping your churn rate.

How to calculate churn rate

Churn rate measures the percentage of existing customers that have left a business over a set period of time. To calculate your customer churn rate, you will need the following details:

  • The time period you wish to measure your churn rate
  • The # of customers your business had at the beginning of the period
  • The # of customers your business had at the end of the period

The calculation for churn rate is:

((# of customers on start date - # of customers on end date) / # of customers on start date) x 100

Churn rate example

As an example, a business is calculating its churn rate for the first month of 2021. On the start date (January 1st), the business had 600 customers. On the end date (January 31st), the business had 400 customers. Using the formula above, we can calculate the percentage of customers the business lost in January:

((600 - 400) / 600) x 100 = 33.33%

Therefore, this business lost 33% of its customers in January 2021 and should look into some strategies to retain its customers.

How to lower your churn rate

If your business has a high churn rate, this means that you are losing customers at a faster than ideal rate. You should work on improving your customer experience and loyalty. After all, the happier your customers are, the more they will purchase from your business, and the more your business will grow.

Some strategies your business can incorporate to lower your churn rate include:

  • Improve your onboarding processes
  • Offer competitive pricing
  • Offer a referral or loyalty program
  • Provide excellent customer service
  • Upsell your products to existing customers
  • Create automated discount emails for customers who are likely to churn

You should calculate your churn rate on a regular basis in order to identify trends and act accordingly. Making some simple changes can greatly reduce your churn rate and keep your customers satisfied with your business.

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