Article | 10 min read

How to calculate churn rate: Definition and formulas

Customer churn rate is a key metric for businesses looking to scale. A low churn rate indicates you can continue business as usual, but a high one might mean it’s time to shake things up.

By Kenza Moller, Contributing Writer

Published April 22, 2020
Last updated September 7, 2022

Customers want the best. And if they’re not getting it, they may move on. That’s why all companies need to monitor when and why customers leave, or “churn.” After all, what’s a business without its customers? Customer churn rate is often considered to be a measure of failure rather than success, so it’s one of the most crucial metrics to track. Churn also impacts nearly every aspect of a company, from the product and revenue to customer satisfaction and loyalty.

In this guide to customer churn, you’ll learn:

What is customer churn rate?

Customer churn rate is the percentage of customers that stop doing business with a company over a specified period of time. 

Depending on the nature of your business, churn rate may be monitored: 

  • Annually
  • Monthly
  • Weekly
  • Daily (for fast-moving SaaS companies)

The reality is that customers come and go. But when evaluated alongside other customer retention metrics, churn rate is a powerful way to assess what a brand is doing well and where it needs to improve. Once businesses determine their rate of customer churn, they can figure out why customers are leaving and identify customer retention strategies that could help.

The difference between customer churn rate and revenue churn rate

The difference between customer and revenue churn rates boils down to what exactly you’re losing—revenue or customers. Simply put:

  • Customer churn rate = percentage of customers you lost
  • Revenue churn rate = percentage of revenue you lost

Losing two customers who pay $5 per month as opposed to one customer who pays $100 per month will mean different things for your company. Though losing more customers will increase your churn rate, you may lose less revenue than you would if a higher-value customer churned.

Both of these metrics influence the longevity of your company and can give you valuable insights into which changes you need to make.

Why is churn rate important?

Churn rates are important because losing customers means losing revenue. So, the bottom line is that high churn could affect your bottom line. 

Another reason it’s critical to improve customer retention and reduce churn is that it’s generally more expensive to find new customers than it is to keep existing ones. Companies that lose customers aren’t just losing the revenue from those customers—they’re also stuck with the high cost of finding new ones.

Customers are the lifeblood of any business, so companies need to understand churn if they want to grow and adapt to meet their buyers’ needs. While it can be intimidating to face, knowing your customer churn rate is the first step to improving your business and managing profitable long-term relationships with customers.

What is a good churn rate?

A good churn rate is 5 percent or below, according to venture capitalist David Pakman, former CEO of eMusic and co-creator of Apple’s Music Group.

But not many companies are quite there yet. On his website, Pakman admits: “Almost all of the consumer subscription businesses I have evaluated as potential investments have churn rates higher than this, and in some cases, much higher.”

Identifying the whys when it comes to customer churn is a key step in getting your percentage close to that 5-percent ballpark. 

Free customer experience guide

Find out how to create great customer experiences that will lead to loyal customers, improved word-of-mouth promotion, and increased revenue.

How to calculate churn rate

When making the churn rate calculation, you’ll need different values for different formulas. The formula you use will vary depending on the nature of your business, but let’s dive into the most common ones.

Customer churn rate formula:

(Y/X) x 100 = Z

  • X = Number of customers at the start of the time period 
  • Y = Number of customers lost during that time period 
  • Z = Churn rate percentage

This is the simplest churn rate formula. You can use it across any time frame, whether that’s a year, a month, or even a day.

For example, if you had 100 customers at the beginning of your measured time period and you lost 10 of them, your churn rate would look like this:

customer churn rate formula

Adjusted churn rate formula:

(Y / [ (W+X) / 2 ] ) x 100 = Z

  • W = Number of customers at the start of the period 
  • X = Number of customers at the end of the period 
  • Y = Number of churned customers during that period 
  • Z = Churn rate percentage

High-growth companies may require a more complex formula to get a realistic picture of their customer churn. For example, businesses that are scaling might see a significant number of customers leave while offsetting that number with new customers. So, a churn rate formula that accounts for only lost customers wouldn’t be accurate.

Seasonal churn rate formula:

{ [ (W x X) + (Y x Z) ] / (W+Y) } x 100 = A

  • W = Total number of customers you had during the busy period 
  • X = The churn rate during your busy period 
  • Y = Total number of customers you had during the slow period 
  • Z = The churn rate during your slow period 
  • A = Annual churn rate percentage

Many companies experience lulls during certain parts of the year. For example, people are more likely to visit a kayak rental place when it’s sunny and warm than when it’s snowing.

To take seasonality into account when calculating churn rate, use the simple formula to find your rate for the busy season and slow season. Then, input those values into the seasonal churn rate formula to determine your annual churn.

Revenue churn rate formula:

(X/Y) x 100 = Z

  • X = Churned revenue 
  • Y = Total revenue

Not every single customer brings in equal revenue. For businesses with some customers who pay more than others, revenue churn rate can provide valuable insight into how customer churn is affecting profits.

The revenue churn rate formula is much like the basic customer churn rate formula, but revenue takes the place of customer totals.

For example, if your total revenue for your measured time period was $120,000 and you lost $30,000 of it, your revenue churn rate calculation would look like this:

revenue churn rate formula

Real-world churn rate examples

We’ve compiled the customer churn rates of some of the world’s biggest companies.

1. Netflix: 3.3%

At the end of March 2022, Netflix had a churn rate of 3.3 percent. Netflix has traditionally had a low rate but saw an increase in cancellations after raising its prices. 

2. Peloton: 1%

Peloton has a churn rate of less than 1 percent, as of 2021. Peloton uses a connected fitness churn rate, which only counts people who’ve physically purchased a bike—not those who are digital subscribers. 

3. Spotify Premium: 3.9%

Spotify’s churn rate fell from nearly 5 percent to 3.9 percent at the end of 2021. It’s estimated that this is partly due to the rising popularity of podcasts, which Spotify hosts on its platform.

5 ways to reduce churn rate

Knowing your customer churn rate is a critical first step, but it’s just that—the first step. Once you calculate it, you need to find ways to minimize churn and grow your business.

  1. Understand the why 

  2. Customers generally have good reasons for leaving (or at least, reasons that make sense to them). The easiest way to figure out why someone churns is to ask them what they like and dislike about your brand—usually in the form of surveys, feedback forms, and other customer satisfaction indicators. 

    You should also look inward and consult metrics from all the different touchpoints in your customer journey. If you’re a SaaS business with a high churn rate, assess your customer onboarding process to see if new users are struggling to understand the value of your product. Ecommerce startups might want to evaluate their products’ average shipping times or how successful customers are when searching for a product.

    Here are a few questions to guide your inquiry: 

    At what point in the customer lifecycle are buyers usually churning, and why?
    Does your customer onboarding process do a sufficient job of educating the customer?
    What are the most common pieces of feedback your customer success team receives?

     

  3. Identify the signs of at-risk customers

  4. If you want to focus on customer retention, you need to understand which customers are most likely to leave. Of course, that’s easier said than done, but you should consider the metrics you have available to you and look for patterns that could indicate a customer is at risk of churning.

    These risk factors could include: 

    A long amount of time since they’ve been in contact with a sales rep, visited your website, or placed an order
    Negative feedback
    Product returns
    Poor interactions with customer service

     

    After you identify who may be at risk, target those customers with special offers or enhanced support to regain their trust and loyalty.

  5. Prioritize customer loyalty

  6. While it’s important to give at-risk customers incentives to stick around, it’s equally important for companies to offer loyalty rewards to customers from the start.

    According to Harvard Business Review, companies with strong loyalty marketing programs tend to grow at a rate 2.5 times faster than those without loyalty programs. These programs allow you to maintain a customer-centric business model while giving buyers something to look forward to. 

    There are many ways to structure a successful loyalty program. You can base your customer rewards on:

    The amount of money customers spend
    How often customers use your service
    How many people customers refer 

     

  7. Take care of your best customers

  8. Even with the best-laid plans, it’s nearly impossible to get a customer churn rate down to zero. That’s why it’s also critical for your company to identify and take care of its best customers. When you maximize customer lifetime value through your brand champions, your business can grow in a way that helps offset the inevitable churn it experiences down the road.

    If you offer multiple tiers of service or a variety of products, consider how you can cross-sell or upsell your most loyal customers and increase their lifetime spend with your company. By bringing in extra money through cross-sells and upsells, you can strengthen customer loyalty and bring in more dollars to make up for revenue lost due to customer churn.

  9. Invest in customer service and support

  10. According to the Zendesk Customer Experience Trends Report 2022, 61 percent of consumers will stop doing business with a company after just one bad interaction with customer service. If that wasn’t enough: 76 percent will leave after multiple negative experiences.

    So, companies that want to cultivate customer loyalty and maintain long-term relationships with their buyers can’t afford to deliver sub-par customer service and support. 

    To help ensure your company delivers fast, personalized customer service, use help desk software or customer relationship management software. These tools enable your agents to support customers across multiple channels, glean insights into customer issues, and proactively maintain customer relationships.

Grow through change

Change is inevitable, but that doesn’t mean you need to accept it without questions. With buyer behaviors and customer expectations constantly in flux, it’s more important than ever to monitor customer churn to see how you’re faring.

Calculating customer churn rates can help you evaluate overall customer satisfaction and provide insight into how buyers feel about your business. Then, you can take steps to improve your customer experience and reduce churn. 

Free customer experience guide

Find out how to create great customer experiences that will lead to loyal customers, improved word-of-mouth promotion, and increased revenue.

Free customer experience guide

Find out how to create great customer experiences that will lead to loyal customers, improved word-of-mouth promotion, and increased revenue.

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