Do you know how many customers you lose every year? How about every month? Chances are you don’t have a clue. Most businesses don’t track their customer churn rate, which makes it impossible to know how many customers are defecting.
The number of customers you lose in a given time period is called customer churn, and it’s a metric that can be pretty scary. But it’s also a metric that’s vitally important.
You can’t improve your business’s revenue if you don’t know how many customers are leaving. To create an improvement plan, you need to know the turnover rate.
What Is Customer Churn Rate?
What is the customer churn rate? The customer churn rate is the percentage of your customers or subscribers who cancel or don’t renew their subscriptions during a given period, such as a month or a year.
The churn rate is the percentage of customers who stop using a company’s products or services during a given time period. It is a critically important metric for companies whose customers pay regularly, like subscription-based companies. If a company’s churn rate is high, it means that it is losing a lot of customers and is not making enough money from each customer to cover the costs of acquiring new customers.
You can find out how many people have stopped using your product by looking at your CRM software. This will show you how many users you had at the beginning of a period and how many users you had at the end.
Why Is Churn Rate Important?
If you want your business to be profitable, you need to pay attention to your churn rate. Your churn rate is a measure of how many customers you lose over a period of time, and it can have a big impact on your bottom line. If you have a high churn rate, it means you’re losing customers faster than you’re acquiring them, and that can quickly become a big problem. There are lots of reasons why you should pay close attention to your churn rate, but the bottom line is that it all comes down to profitability, customer retention, and customer acquisition.
If you can retain just five percent more of your customers, your profits will go up by 25 to 95 percent.
Churn rate is a measurement of how many customers are leaving. A high churn rate means that a lot of customers are leaving, and you will need to acquire new customers to replace them, which is costly. A low churn rate means that you are retaining more customers. Retaining customers is usually less costly than acquiring new ones.
There is a lot of information that can be gained by studying your churn rate.
- Use your churn rate to measure your company’s health and long-term prospects. Is the rate on the rise? That’s a sign you need to do something because it could get worse over the long term.
- Monitoring churn rates month-to-month gives you a granular look at consumer behavior. This lets you understand how your company’s customer retention efforts work from one month to the next.
- Identify changes that hurt customer retention. Changes that can affect this could be anything from product and service changes to a social media marketing campaign that either just isn’t resonating or is putting customers off.
- Optimize products, services, customer support strategies, marketing campaigns, and more. Do you have add-ons that people try, then abandon? Or do people upgrade to a premium package and quickly downgrade? Are they more likely to unsubscribe after contacting customer support about an issue? Understanding your churn reveals these kinds of patterns. Use that information to tweak products, services, and strategies so that people are less likely to cancel or downgrade.
- Calculating churn rates means you’ll need to go in-depth, creating a detailed churn analysis. Through that analysis, you’ll be able to calculate customer lifetime value and customer acquisition costs. That will give you a clear picture of how much new customers are costing you — and how profitable existing customers will be.
- Through segment and cohort analysis, you’ll be able to learn which customers are most successful with your product. Is it the premium subscribers, those on the basic plan, or the people who use the most add-ons? Are there certain demographics that perform better than others? Your churn rate will tell you.
- Calculating churn—especially on a month-to-month basis—lets you forecast your company’s performance. Over time, the data you gather will provide you with averages to work with. These averages can tell you lots of things: how many new subscribers to expect in a given period, how many cancellations, which products people are most likely to subscribe to, and so on.
- Understanding churn also helps you improve the customer’s experience. If you notice churn rises along with support requests, for example, then you know that there is an issue causing frustration and cancellations. From there, it’s a matter of tracking down and resolving that issue.
Churn rates are one of the most important metrics for SaaS companies for the following reasons: -They provide insights into customer behavior and how likely they are to continue using your product. -They can help you identify issues with your product or pricing. -They can help you determine whether your marketing and sales efforts are working. -They can help you predict future revenue.
Common Challenges When Calculating Churn Rate
In order to calculate your company’s churn rate, you cannot simply compare the number of subscribers to the number of cancellations. The churn rate is constantly changing and therefore needs to be recalculated often. There are also different types of churn that need to be taken into account. By considering all of these factors, you can create a more accurate picture.
Changes in Your Customer Base MoM or YoY
While companies who sell physical products may have an easier time in some respects, they can’t unsubscribe or downgrade what they’ve purchased, and returns generally only happen when the product received is faulty.
It can be more difficult to establish an exact sales count or customer count for subscription-based products because the numbers are always changing. Subscriptions and cancellations will change over time as your service trends, or as people decide they no longer need the product.
The size of your customer base may vary depending on your business model, the time of year, and other factors.
Differentiating Between Multiple Types of Churn
This can make it difficult to identify which types of churn are most problematic and what can be done to prevent them. There are many different types of churn, which can make it difficult to identify which ones are most problematic and what can be done to prevent them.
Here are a few types of churn you probably encounter:
- Voluntary Active Churn: This is the easiest type to understand because voluntary active churn is a measurement of customers who purposefully unsubscribe. It’ll be up to you to learn why they’re unsubscribing, but when this type of churn is present, it’s an indicator that you need to look at things like pricing, package offerings, onboarding methods, customer success strategies, and other areas that may need improvement so that you can keep subscribers.
- Involuntary Passive Churn: As the name implies, this type boils down to accidental cancellations. One example would be people who have forgotten to update payment information when their address changes, or if they have received new debit or credit cards. Their monthly payment fails because their information is no longer valid. Usually, these accidentally churned customers don’t even realize there is a problem until they receive a cancellation notice.
- “Good” Churn: Good churn can be difficult to track, but it often correlates to your current customers who are taking advantage of package add-ons. Within a churn analysis, you’ll notice that the revenue coming from this group of people outweighs any revenue lost from those who are downgrading or unsubscribing.
- Downgrade Churn: These are the customers who aren’t necessarily canceling outright, but they are removing add-ons from their subscriptions, or they’re rolling their package back to your basic tier rather than sticking with premium services. This type of churn can represent a lot of lost revenue, even though your overall customer count may remain consistent over a given period. It can also shed light on where you may need to improve upgrade options to entice more people to buy them.
Churn comes in many forms, these are just four of them. If you want to better understand your organization’s churn rate, you’ll need to do some deeper analysis.
Churn Rate Formula
The churn rate is the percentage of customers who stop using a company’s products or services during a given time period. The churn rate formula is: (Lost Customers ÷ Total Customers at the Start of the period) x 100.
The below section explores a tool that automatically calculates churn rate, which may be helpful for those who find the math intimidating.
HubSpot’s Customer Service Metrics Calculator calculates both revenue churn and customer retention rate, as well as eight other imperative customer success metrics. If you want to determine your churn rate manually, you can find an explanation and example of calculating this metric below.
How to Calculate Churn Rate
To calculate the churn rate, you’ll need to know the number of customers you had at the beginning of the period, as well as the number you lost. To find the churn rate, divide the number of lost customers by the total number of customers at the start of the period, then multiply the result by 100.
Remember, the steps to calculate churn rate are:
- Determine a period: monthly, annual, or quarterly.
- Determine the number of customers you had at the beginning of the period.
- Determine the number of customers that churned by the end of the period.
- Divide the number of lost customers by the number of customers you had before the churn.
- Multiply that number by 100.
At the beginning of last quarter, your software company had 500 customers.
In spite of this, you still managed to keep your customer base steady.
This means your customer churn rate for this quarter would be 10%.
This means that your customer churn rate is 10%.
Here’s how it looks when you do the math out:
- Customer Churn Rate = (Lost Customers ÷ Total Customers at the Start of the period) x 100
- Customer Churn Rate = (50 ÷ 500) x 100
- Customer Churn Rate = (0.10) x 100
- Customer Churn Rate = 10%
If your churn rate is high, you’re probably wondering what you should do next. Take a look at the next section for some best practices that can help you decrease churn at your business.
Steps to Take After Calculating Churn Rate
Your company could suffer in the long term if you don’t actively work to lower your churn rate. There are several strategies you could implement to decrease it.
Analyze churn to improve your customer service team.
Although you may try your hardest, some customers will still end up leaving. If this does happen, use it as a chance to find out why they decided to leave, and what you can do to stop other customers from leaving for the same reason.
It’s important to track your churn and retention rates, which you can do using HubSpot’s Customer Service Metrics Calculator. The calculator is free to use and lets you see your retention rate over time.
You can use episodes of customer churn to improve the performance of individual customer support reps or managers, compare your product or service against competitors, or identify deficiencies in the customer experience that you want to improve with the help of your product and development teams.
Revamp your onboarding plan for new customers.
The best way to keep customers from leaving is to start onboarding them from the moment they sign up. Send them a welcome email, give them access to 1:1 customer support, and create online instructional content to show them how to get the most out of your product or service.
Invest in more training for support and sales reps.
The sales reps should sell the customers the actual worth of the product so that the customers don’t feel tricked. Also, the customer support employees should be able to deal with any problem that comes up, to keep the customers content. If the company invested in these two departments, it would decrease the rate of customers leaving.
Ask for feedback at key moments — and respond promptly.
You should try to get customer feedback at various points throughout their experience with your product. If you know that customers are likely to stop using your product if they don’t log in every 15 days, ask for feedback around day 10 and try to re-engage them.
Ask your customers for feedback at key moments in their experience with your product or service. Use this feedback to improve the customer experience and strengthen relationships.
Sometimes, customers will write negative reviews. In this case, you will want to respond as soon as possible.
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