Imagine you’re reviewing the books at the end of the month only to see a devastating number of lost customers and contracts. What happened? How can you replace that lost revenue without spending a fortune to acquire new customers? Looks like it’s time to analyze your churn rate.
Churn rate measures how many customers stop doing business with you. The people who initially subscribed or bought from you, but for some reason, later canceled their subscription or never returned. Churned customers often behave similarly before they cut and run, so analyzing churn will help you prevent revenue loss and retain more customers.
What Is Churn?
Customer churn (or customer attrition) is the rate a company loses customers over months, quarters, or years. Most people refer to customer churn when discussing their churn rate, but you might also encounter the following types:
- Employee churn is the rate at which employees leave a business over a specific time, usually a year.
- Gross MRR churn is the percentage of monthly recurring revenue (MRR) lost to canceled subscriptions and downgrades.
- Net MRR churn is the percentage of revenue you gain or lose in a month due to cancellations and upgrades from existing customers.
Why Is Churn Important?
Understanding churn helps you pinpoint weaknesses in your business that lead to revenue loss.
A lower churn rate helps protect and grow your revenue because you retain more customers. Satisfied customers will likely make more purchases, consider add-ons, and upgrade their subscriptions. Forbes reports that 80 percent of your future revenue comes from just 20 percent of your existing customers, making them invaluable to your business.
Loyal customers are also more likely to refer your business to others. If you don’t have a referral program in place, now’s the time to build one because referred customers boost your margin by 25 percent and are four times more likely to buy from you. A low churn rate, therefore, helps you save on hefty customer acquisition costs while building a trusted reputation for your business.
Why analyze churn trends and patterns? To isolate the issues forcing customers to leave your business and then resolve them. Managing churn helps to protect monthly revenue streams as customers return or stay subscribed to your business.
Aside from revenue gains, predictability also impresses potential investors and buyers. Make your startup irresistible to interested parties by providing detailed reports on customer, gross MRR, and net MRR churn.
Now that you know why churn is essential to your business, let’s break down the key points you need to know. Below, we’ll address:
- How to calculate your churn rate
- What is a “good” churn rate?
- How to reduce churn
See how your business compares and you’ll be one step closer to minimizing your startup’s churn rate.
How to Calculate Your Churn Rate in 3 Easy Steps
Before analyzing your churn rate, calculate it with the following formula.
Customer Churn Rate Formula
To calculate your customer churn rate, pick a period you want to measure. Let’s go with monthly as an example.
Now, note the number of customers at the beginning of the month (BOM) and the number of customers at the end of the month (EOM). Here’s what the churn rate formula would look like:
The customer churn rate formula helps you see how many customers you lose in a month, quarter, or year.
Say you start the month with 5,000 customers and end with 3,500. Follow these steps to calculate customer churn:
- Subtract EOM customers from BOM customers
- 3,500 – 5,000 = -1,5000
- Divide that total by your BOM customers
- -1,500 / 5,000 = -0.30
- Multiply that number by 100 to create a percentage
- -0.30 x 100 = -30 percent
Positive numbers equal customer growth, while negatives indicate churn, so for that month, you would see a churn rate of 30 percent.
Gross MRR Churn Rate Formula
Measuring the gross churn rate is important because it shows where else you lose money aside from cancellations. Perhaps customers stop using a specific add-on or downgrade from the third-highest tier to the basic level (while skipping over the second-highest tier).
To calculate the gross churn rate, collect your total downgraded monthly recurring revenue (MRR), canceled MRR, and MRR at the beginning of the month. Your churn rate formula would look like this:
The gross MRR churn rate formula tells you how much monthly recurring revenue you lost, not including gains or expansions.
Imagine you lose $2,000 in downgrades and $4,000 in cancelations, and you start the month with $10,000. Complete these steps to calculate your gross MRR churn:
- Add downgraded MRR and canceled MRR together
- 2,000 + 4,000 = 6,000
- Divide that total by your MRR at the beginning of the month
- 6,000 / 10,000 = 0.60
- Multiply that number by 100 to create a percentage
- 0.60 x 100 = 60 percent
Once you’ve calculated the gross churn rate, track the percentages throughout the year to see when downgrades and cancellations are highest and what could’ve caused them.
Net MRR Churn Rate Formula
The net MRR churn rate formula follows the same steps as the gross MRR formula, but it adds one more variable to the mix.
In addition to your downgraded and canceled MRR (which we’ll combine into contraction MRR), collect your expansion MRR data from existing customers. Expansion MRR includes upsells, cross-sells, add-ons, and price increases. While gross churn measures only unhappy customers, net churn includes satisfied customers too.
Once you’ve grabbed your contraction, expansion, and beginning-of-the-month MRR, your calculation will look like this:
The net MRR churn rate formula reveals how much monthly recurring revenue you gained or lost based on MRR contractions and expansions.
If, for example, you contracted $3,000 but earned $5,000 in expansions, you’d do these steps to find your net MRR churn:
- Subtract expansion MRR from contraction MRR
- 3,000 – 5,000 = -2,000
- Divide that total by your MRR at the beginning of the month
- -2,000 / 10,000 = -0.20
- Multiply that number by 100 to create a percentage
- -0.20 x 100 = -20 percent
Unlike gross MRR churn, net MRR can depict a negative churn rate. What does that mean for your business? It’s good news – it means the MRR from existing customers is greater than the MRR you lost that month.
If you want to measure more encouraging benchmarks for your business, calculate your growth and retention rates too.
Churn Rate vs. Retention Rate vs. Growth Rate
Retention rate is the percentage of people who continue using your product or service over time. This measurement is the inverse of the churn rate, so if you know one metric, you can calculate the other.
Your retention rate indicates what people like about your business. If the retention rate spikes one month, you can analyze what products your retained customers gravitated toward or what software features they used the most. Understanding what your customers love helps you market to new customers too, increasing your customer growth rate.
The customer growth rate is the speed at which you earn new customers over a specific period. Ideally, your customer growth and retention rate will outweigh your churn rate, so the month or year won’t be a loss.
But how do you know if your customer churn rate is considered good or bad?
What is a “Good” Churn Rate?
Ideally, you’ll retain all of your customers each month and report a zero percent churn rate. It’s not impossible to achieve, especially if you form good relationships with your existing customers. But if you start losing customers and want to know how you compare to other businesses, measure your churn rate against industry averages.
Average SaaS Churn Rate
Annually, SaaS businesses should aim below a 5 to 7 percent average churn rate. Monthly, aim for less than 1 percent.
Compared to other fields, SaaS churn rates lean low. Why? Because more B2B businesses rely on SaaS products than ever before. About 78 percent of B2B companies invest in SaaS software, and in the last five years, the market has grown by nearly 128 percent.
Plus, SaaS businesses can quickly address customer concerns and ship releases over the cloud. No shipping or supply chain delays for product improvements. Customers who find problems with the software see almost instantaneous results from SaaS businesses that other industries can’t match.
If your churn rate rises, remember that you’re competing against roughly 25,000 other SaaS businesses. Customers will switch to competitors if they feel the competitor offers more value than your business or if they struggle to use your software. Check with your customers regularly and offer extensive onboarding so they feel supported and confident in using your software.
For more info on overcoming challenges like churn as a SaaS founder, check out our how-to guide.
Average Consulting/Professional Services Churn Rate
Annually, consulting or professional services’ churn rate averages 16 percent, though it can reach as high as 27 percent.
Average Logistics Churn Rate
Consulting firms work one-to-one with clients and must nurture deep, trusting relationships with them to keep contracts. In the past, though, firms tried a one-size-fits-all approach that turned customers who needed customization away. As more consulting firms personalize their customer interactions, the average industry churn rate will continue to fall.
Annually, CustomerGauge’s Benchmarks Report indicates that logistics companies average about a 40 percent churn rate.
The pandemic spelled disaster for the logistics industry as supply chains halted due to the threat of Covid. Transportation and shipping still struggle to meet customer demands to this day, which causes some companies to sever their contracts or subscriptions.
On top of that, the industry faces major employee churn. Over a quarter of junior employees say they’ll leave their logistics job within the next two years. Without sufficient employees, logistics companies will struggle to fulfill orders, let alone meet customer service needs. Customer churn will only rise as clients report poor experiences or provide feedback with little to no action from management.
Average Ecommerce Churn Rate – And Why It’s Not Often Used
Monthly, aim below a 75 percent churn rate for single-purchase ecommerce businesses but below the 5 percent average churn for subscription-based businesses.
While subscription-based businesses can track canceled subscriptions, single-purchase ecommerce companies can only track who returns to their shop to buy again. Since you can easily count returning customers, most ecommerce businesses focus on retention rates rather than churn rates.
For ecommerce, retention means how many people regularly buy from your store. The retention rate will vary depending on how often customers need to use your goods. People buy shampoo more often than a hair dryer, so it’s not unusual for customers to only buy once.
Single-purchase retailers can try to retain customers by sending out targeted marketing communications via email or text. You can draw people back to your shop with related products, updated models of previous purchases, or deals and discounts for your store.
Product subscriptions should track both retention and churn rate. You can lower your subscription churn rate by following the example of companies like HelloFresh. The meal delivery company makes their service seem invaluable to customers who can’t or don’t like to cook. Reinforcing your benefit to customers can help your subscription box thrive and lower your churn considerably.
How Do I Reduce Churn?
Reducing churn starts with improving customers’ experiences. If someone’s unsatisfied with your product or service, don’t expect them to return until you’ve resolved any issues. Keep track of customer complaints via feedback forms and offer alternatives to canceling like downgrades or discounts.
To learn more about reducing churn, check out our comprehensive six-step guide.
Why Do Customers Churn?
Most customers churn when they find little value in your business. Your pricing might be too high, the product poor, or the customer could have had a poor experience with your support staff. Maybe they struggled to navigate your website or no longer need your product or service. Some people might see more value in your competitors, or they could just be the wrong fit for your business.
Understanding why customers churn will help you develop strategies to retain them longer. Ensure they get all the help they need from your support staff and offer alternatives to cancellation. If your product isn’t working for them, improve it so future customers don’t face similar issues.
How Do I Win Back Churned Customers?
Before you start chasing after every churned customer, take a look at your user data. Pinpoint the customers who added the most value to your business and go after them first. There’s no point in pursuing a customer who will churn again within the next few months.
Got your list of target customers? Now put together a win-back program that pairs remedial actions with customers’ reasons for leaving. If your business was too expensive, offer coupons and discounts. For customers who struggled to use the product, create educational programs to onboard them.
How Do I Predict Churn Rate?
To predict your churn rate, compile past churn data and a usage baseline of your product or service.
The historical data shows you what churned customers have in common. Did they use the same features as other customers who left? Did more high-tier or low-tier customers churn? Use this data to find patterns in behavior and resolve the issues in those sections.
For SaaS businesses, gauge when a customer starts using your software less frequently by establishing a usage baseline. Once new customers become active, track their actions to see how engaged they are across your features. If you notice customers disengaging with the software, prepare for them to churn.
And don’t underestimate the importance of customer feedback. While not every customer explicitly voices complaints on feedback forms, it’s your job to check them thoroughly and address each potential concern. Open communication with your customers about their problems will help you gain their trust and potentially retain them.
Does Churn Mean Turnover?
Both employee churn and employee turnover refer to the number of people who leave a company. But turnover specifically means someone has replaced the vacated employee. Churn, on the other hand, covers all lost employees. The number of people who leave a job and are not replaced is called attrition, so churn encompasses both employee turnover and attrition rates.
Is Churn a KPI?
For most businesses, yes, churn is a KPI. Lost customers, employees, or revenue are important metrics to track and indicate how successfully your startup retains customers (or can win them back).
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