What is churn?
Customer churn is another term for customer attrition. It looks at the rate at which customers unsubscribe or stop buying from a brand, product, or service.
In the context of businesses and their customers, churn is synonymous with attrition. In other words, it describes the number of customers that don’t renew their subscription or stop buying from a certain brand.
Churn can be considered a cost of doing business, which should incentivise businesses to reduce churn as much as they can. Generally speaking, the less churn you have, the more you can count on recurring revenue that bolsters the bottom line.
What is churn rate?
When assessing churn, businesses will typically look at the churn rate: the rate at which customers stop doing business with a company. This is typically calculated as the percentage of total customers that dropped off in a given time period. Often, this is calculated on an annual, quarterly, or monthly basis, and is usually reviewed alongside customer acquisition rates to get a better sense of the customer journey.
To calculate churn rate in a given period, you take the number of customers at the beginning of the period, subtract the number of customers at the end of the period, and then divide that number by the first number to get the percentage.
What are the different types of customer churn rate?
Customer churn rate can be classified into two main categories: voluntary and involuntary.
- Voluntary churn occurs when a customer chooses to end their contract or subscription. This can happen for a number of reasons, ranging from a poor customer experience or dissatisfaction with the product, or because they can no longer afford the offering.
- Involuntary churn happens when a customer drops off through no direct action on their part. One common example is when the credit card on file expires and the customer is unable to make their payment.
Why should you monitor churn rates?
Evaluating churn rate on a periodic basis is a useful way to understand the effectiveness of marketing and customer retention efforts. It can also help in the following ways:
- Provides a snapshot of how the business is performing. The health of a business comes down to multiple metrics that should be looked at together – customer churn is one such metric.
- Helps show what influences customer behavior. Looking at the customer churn rate alongside other key customer metrics, like a net promoter score, can help indicate what’s working and what isn’t in the customer journey.
- Better positions businesses to reduce churn. Any time brands want to remedy a situation, data is an important factor. The same is true for customer churn.
- Lowers costs. It’s always going to be easier, and less expensive, to retain existing customers than acquiring new ones. Understanding churn rate and what leads to it can support companies in enhancing their retention model.
With the pervasiveness of subscription models across businesses in a variety of industries, understanding churn rate is more important than ever. Companies that best use this metric are the ones that take it as an indicator to look more closely at their customer journey, identify where the friction lies, and set a plan of action to remedy it.