Churn Rate
Churn rate is the percentage of customers lost during a given period, calculated by dividing the number of customers who left by the number of customers at the start of the period.
Definition
Churn rate turns the loss of customers into a figure you can follow. For a period such as a month, a quarter or a year, you count the customers you had at the start and the ones who left during that period. It is usually reported monthly for subscription products and annually for contracts.
The formula is: churn rate = customers lost during the period divided by customers at the start of the period, multiplied by 100. Customers acquired during the period are left out of the calculation, otherwise the figure would look better than reality. The same logic applies to revenue churn, where you divide the recurring revenue lost by the recurring revenue at the start. Keep the period, the definition of a lost customer and the segment identical from one measurement to the next.
A single global churn rate hides a lot. Break it down by customer segment, plan, acquisition channel and months since signing up: customers often leave early or at renewal. Beware of converting rates carelessly, too, as a monthly rate of 2% does not simply mean 24% over a year. Churn rate is also the basis of customer lifetime value, since the inverse of the rate gives an average customer lifetime.
Key points
- Formula: customers lost in the period divided by customers at the start, multiplied by 100.
- New customers won during the period are not counted in the calculation.
- Keep the same period and the same definition of a lost customer every time.
- Break it down by segment, plan and customer age to find where churn comes from.
- Revenue churn complements it by showing downgrades that a customer count misses.
Example
A company starts the quarter with 500 customers. During the quarter it wins 40 new ones and loses 15. Churn rate = 15 / 500 x 100 = 3% for the quarter. The 40 new customers are not in the denominator. The team then sees that 11 of the 15 departures happened within the first three months, which points to the onboarding.
Frequently asked questions
What is a good churn rate?
It depends on your business model, your customer size and the period used, so compare yourself first with your own history. In general a lower rate is better, and a falling trend is a good sign. Be careful with published benchmarks, as definitions differ.
How do I convert a monthly churn rate into an annual one?
You cannot just multiply by 12, because each month the base of customers changes. A simple approach is to track the customers of one cohort over twelve months and count how many are left. If you prefer a formula, an annual rate of 1 minus (1 minus the monthly rate) to the power of 12 gives a closer estimate when the rate stays stable.
What is the difference between customer churn rate and revenue churn rate?
Customer churn rate counts the customers who left, whatever their size. Revenue churn rate counts the recurring revenue lost, including downgrades. A company can lose few customers and still lose a lot of revenue if the departing ones were the largest.
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