The longer your business can keep customers for, the more revenue you will earn per customer. In order to know how effectively you are keeping customers, you need to know your customer churn rate.
In this article, we’ll look at what churn rate is, how you can measure it, and what a good churn rate is.
Customer churn rate is the percentage of customers who stop using your product or service over a defined time period. It is the opposite of customer retention rate, which shows how many customers stay with you in a given period.
If you have a low churn rate, it suggests customers are happy with your product and find enough value in it to continue using it.
A high churn rate suggests customers are not getting the value they expected to get from your product. This can point to issues with your product, service, or sales strategy that may otherwise be hidden by metrics like revenue growth or total number of users.
Churn rate is an especially useful measurement for products sold on a subscription basis. For example, SaaS products, media providers, gyms, or utility contracts. The longer businesses in these industries can keep customers for, the more revenue they will bring in.
Measuring churn rate is easy to do. You first need to define the time period you want to measure churn rate over. Commonly, this is done per month, quarter, or year.
Next, tally the total number of customers you had at the start of this period and the number of customers that left. You then divide the second number by the first to get the churn rate.
For example, if you had 1,000 customers at the start of the month and lost 50, you’d divide 50 by 1,000 to get a churn rate of 5 per cent.
Deciding what constitutes a good churn rate is difficult. Studies on the subject have reported average annual churn rates of anything from under five per cent to over sixty per cent. Because of this, what defines a good churn rate for your business will depend on several factors.
First up is how much it costs to acquire customers. If your average cost per acquisition is £60 and your monthly subscription is £20, you need customers to stay for an average of three months, not including other costs, in order to break even.
On the other hand, if you make a profit as soon as a customer signs up, it’s not quite as devastating if they leave after a month.
Also, different industries will have different average churn rates. Businesses that provide key B2B services like payroll solutions are likely to have lower rates of churn than B2C products like Netflix. This is because it isn’t as easy for businesses to switch to another payroll provider as it is for an individual to switch from Netflix to Amazon Prime.
The length of your billing cycles will also affect your rate of churn. Companies that bill by month will likely have a larger monthly churn rate than those that bill by quarter or by year because customers have fewer chances to leave the service.
The tactics you use to get customers to sign up may also increase your rate of churn. For example, free trials or first-month money-back guarantees may be good for increasing your customer base, but they might result in a higher churn rate.
Measuring your churn rate over time can tell you whether the steps you are taking to increase customer loyalty are paying off. While some rate of churn is inevitable, reducing this number by even a small amount can result in a serious profit boost for your business.
