In today's highly competitive business landscape, understanding and managing customer churn is crucial to a company's long-term success. But calculating churn isn’t a case of highlighting what’s wrong with a company. It’s not all doom and gloom – far from it.
When you calculate churn rate, when you identify this figure, you immediately provide a proactive metric that can be used to enhance other important factors like customer satisfaction, which has a knock-on impact on customer retention, advocacy and the overall customer experience.
In this article, we’ll cover:
- How to calculate your customer churn rate,
- The customer churn formula,
- A step-by-step guide on customer churn calculation,
- MRR churn, and
- Four strategies to reduce your churn rate.
But that’s not all. If you keep on reading you’ll see we’ve provided you with your very own churn calculator, so you can calculate your churn rate at your convenience, delivering an educational context to your business's churn rate.
So let’s get started!
What is customer churn?
Okay, let’s get the big one out of the way: what is customer churn? Customer churn is also known as customer attrition or customer turnover and describes the rate at which customers stop doing business with a company over a given period.
The lower your churn rate, the better! A low churn rate indicates higher customer retention and loyalty, whereas a high churn rate suggests customers aren’t happy with your product and service.
Knowing how to calculate customer churn rate allows businesses to identify potential issues, implement strategies to retain customers, and ultimately, increase revenue. Once you link customer success to revenue and provide the rest of the business with evidence that instead of losing revenue you can in fact drive revenue, you’ll turn a lot of heads.
The importance of calculating customer churn rate
Knowing how to calculate customer churn rate is an indispensable part of your customer success function for several reasons. It enables you to do the following:
- Identify problem areas: By monitoring your churn rate, businesses can get ahead of the game and realize potential issues through proactive risk identification, which might be causing their customers to leave. These reasons can range from poor customer service, unaffordable pricing, or subpar product quality. One of the most, if not the most, common reasons for customers churning is due to them not realizing product value.
- Improve customer retention: Not only does understanding churn rate help companies visualize what revenue is being lost, but it’s a proactive metric that allows businesses to implement targeted strategies to improve in other areas. When you increase your customer satisfaction this results in increased customer loyalty and reduces churn in the long run.
- Forecast revenue: A predictable churn rate enables businesses to accurately forecast revenue, allowing them to make informed decisions about budget allocation and growth strategies. (Side note: if you’re struggling to get buy-in from the wider business by proving the value of CS, having cold, hard, explainable data is the way to make them notice.)
- Evaluate performance: What’s neat with the churn rate metric is it allows you to segment your data and compare churn rates across different time periods, products, or customer segments. In fact, this metric helps you evaluate the effectiveness of your current retention efforts, as well as wider business efforts like marketing campaigns, the product development process and the sales-to-customer-success handover.
The customer churn formula
The customer churn rate formula is a simple calculation that can be applied to any business to determine the rate of customer attrition. The formula is as follows:
Customer churn rate = (number of customers lost during a period / total number of customers at the beginning of the period) * 100
Using this formula, we can calculate the percentage of customers lost during a specific period, such as a month, quarter, or year.
A step-by-step guide to calculating customer churn rate
To calculate your customer churn rate, follow these steps:
- Determine the time period: Choose a specific period for the calculation, such as a month, quarter, or year. The chosen period should be consistent with your business model and industry.
- Count the total number of customers at the beginning of the period: This is the starting point for your calculation and represents the total customer base before any attrition occurs.
- Count the number of customers lost during the period: Track the number of customers who have stopped doing business with your company during the chosen period. Be sure to consider factors such as contract terminations, subscription cancellations, and account closures.
- Apply the customer churn rate formula: Using the formula mentioned above, divide the number of customers lost by the total number of customers at the beginning of the period, and then multiply the result by 100 to obtain the churn rate percentage.
An example of customer churn calculation
To illustrate the process of calculating customer churn, let's consider a hypothetical example:
At the beginning of a quarter, a software-as-a-service (SaaS) company has 1,000 customers. During the quarter, 100 customers cancel their subscriptions. Using the customer churn rate formula, we can calculate the churn rate as follows:
Customer churn rate = (100 / 1,000) * 100 = 10%
This means that the SaaS company experienced a 10% churn rate during the quarter.
But don’t just take our word for it, use our handy churn calculator to work out your churn rate. 👇
Customer Success Collective’s churn calculator
Monthly recurring revenue (MRR) churn
While the basic customer churn rate formula provides valuable insights, businesses can also benefit from more advanced metrics, such as monthly recurring revenue (MRR) churn.
MRR churn measures the change in revenue due to lost customers, upgrades, and downgrades during a specific period, usually a month. By focusing on revenue instead of the number of customers, MRR churn provides a more accurate reflection of the financial impact of customer churn.
How to calculate MRR churn
To calculate MRR churn, follow these steps:
- Determine the time period: Choose a specific period for the calculation, usually a month.
- Calculate the starting MRR: Sum the monthly recurring revenue from all customers at the beginning of the period.
- Calculate the lost MRR: Sum the monthly recurring revenue from all customers who churned during the period.
- Calculate the gained MRR: Sum the additional monthly recurring revenue from existing customers who upgraded or purchased additional services during the period.
- Calculate the MRR churn rate: Subtract the gained MRR from the lost MRR, divide the result by the starting MRR, and then multiply by 100 to obtain the MRR churn rate percentage.
Easy peasy, lemon squeezy. 🍋
Example of MRR churn calculation
Let's consider another hypothetical example.
Say at the beginning of a month, an unnamed, totally figurative SaaS company has a total monthly recurring revenue (MRR) of $50,000. During the month, the company loses $5,000 in MRR due to churned customers. It happens, people leave. Churn is a very normal part of business, but you want to make sure that number is as low as possible!
Let’s say despite losing $5k in churn, this SaaS business also gains $3,000 in MRR from existing customer upgrades. Using the MRR churn rate formula, we can calculate the MRR churn rate as follows:
MRR churn rate = (($5,000 - $3,000) / $50,000) * 100 = 4%
This means that the SaaS company experienced a 4% MRR churn rate during the month.
Four strategies to reduce your customer churn rate
So, as we’ve covered, knowing how to calculate customer churn rate and MRR churn is essential for your business, but it's also important to actively work on reducing that churn rate.
If you’re in a rush here’s the topline information:
- Improve customer onboarding
- Monitor customer satisfaction
- Offer proactive customer support
- Analyze your churn data
If you’ve got a bit more time on your hands, here are those strategies and best practices to help you minimize customer churn in more detail. 👇
Improve customer onboarding
We know we bang on about onboarding a fair bit (we created a whole playbook on it!), but it’s for damn good reason. A weak onboarding process, one that’s left unattended and not constantly reviewed and optimized is a stale and pointless onboarding process. Essentially, you’re opening yourself up to churn by cultivating masses of ignored and unhappy customers.
It’s paramount that you ensure new customers have a smooth and efficient onboarding experience that is constantly updated. Listen to your customer feedback and how well-received certain parts of the process are.
If you find customers are constantly looking for self-service resources to help further explain your product, then signpost those resources clearly! Don’t make them search for it. If you leave the onboarding process as is, and don’t update it constantly, you open yourself up for the worst. Provide comprehensive training, support, and resources to help them get the most out of your product or service.
Monitor customer satisfaction
Again, this one seems like a no-brainer but we cannot emphasize the significance of customer feedback by checking in and finding out exactly how your customers are feeling. Through conducting regular surveys – either direct or indirect – you can gauge how satisfied your customers are, and can then identify areas for improvement. Address any issues promptly and effectively to prevent dissatisfaction from leading to churn.
Offer proactive customer support
Customer support is an essential business operation. Period. Customer success teams wouldn’t be able to function without them, and this is where cross-departmental collaboration really comes into its own. By feeding invaluable data insights to your customer support team, you can anticipate customer needs and provide support before issues arise.
This can include proactive communication, self-help resources, and proactively working with your responsive customer support team.
Analyze your churn data
Finally, regularly reviewing customer churn data to identify trends, patterns, and common reasons for attrition is the whole point of calculating churn! If you don’t, you’ve got a stagnant metric of misery that doesn’t help your business at all. Use these insights to help guide your customer retention strategies and drive continuous improvement.
To wrap up
Calculating customer churn rate and understanding the underlying factors that contribute to it are crucial for any business looking to improve customer retention and drive revenue growth. By mastering the customer churn formula, monitoring MRR churn, and implementing targeted strategies to reduce churn, you can ensure the long-term success of your company in today's competitive market.
Continue your churn education
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