10 Rules for Calculating Churn

Customer Churn

What really matters is growing the ARR base. Any reduction from churn needs to be made up by new ARR if the business is going to grow. Despite the importance of churn, there isn’t a consensus over how to define it. This article lays out 10 rules for developing a water-tight definition.

Having a measurement to calculate churn is increasingly important it continues to become harder to build new customer relationships, increasing pressure to avoid churn from existing customers.

What Is Customer Churn Rate?

Customer churn rate is when customers stop doing business with a company. A churn rate can also refer to the number of subscribers who cancel or fail to renew their subscriptions. A higher attrition rate means a business has more customer turnover, while a lower churn rate means greater customer retention. The lower the churn rate, the more successful the company is at retaining customers.

What Is the Importance of Knowing Churn Rate?

Knowing the churn rate of a company is essential for evaluating marketing effectiveness and customer satisfaction. While a company’s churn rate may seem like a simple data point, many businesses have experienced a decline due to their inability to retain customers. Some ways knowing churn rate can benefit a company include:

• Growing the customer base: Converting a new customer to a business is significantly more expensive than retaining current customers. Understanding how to retain customers will reduce churn rate and overall costs.
• Evaluate product-market fit: If churn rate increases each month or quarter, it could mean the company targets the wrong market for the product. They may need to revamp or improve the product to make it more relevant to their target audience.
• Accurate financial health: For businesses with a subscription-based model, knowing churn rate can help determine an accurate picture of financial health.

How to Calculate Churn Rate With a Formula

Use the following steps to perform a churn calculation:

1. Choose a monthly, quarterly or annual period.
2. Determine how many customers the company had at the beginning and end of the period.
3. Divide the number of lost customers by the number of customers present before the churn.
4. Multiply the quotient by 100.

Rules for Calculating Churn Rate Correctly

Whether a churn rate is positive or negative for a company depends on the organization and its specific needs. Some ways to determine accurate churn rate for a company include:

• Customer churn or annual recurring revenue (ARR) churn: At its most basic level, one can define churn rate by the number of customers or subscribers who leave a company. Customer churn indicates customer loyalty, but it can overstate the impact customers leaving has on financial performance.
• ARR doesn’t equal ATR: Including multiple-year contracts may not offer an accurate picture of churn rate. Multiple-year agreements does not mean they are available to renew (ATR) and can lower the overall churn rate.
• Timing of churn: A company can align their churn with the time frames in which customers must renew their contracts. Determining churn rate outside these periods may result in a forced churn and a negative churn rate.
• Renewals for less than 12 months: Customers commonly renew their subscriptions for less than 12 months. Instead of reporting this as the loss of a customer, a company can determine if the customer pays the same amount annually, leading to no changes in churn rate.
• Co-termination: If customers consolidate multiple contracts into a single document with the same start and end date, this can affect churn rate. Only calculate churn rate if the ARR declines across the consolidated contracts.
• Re-racks: If the customer chooses a subscription greater or equal to their original purchase, it will not affect the churn rate.
• Change in product: Companies will also need to consider if a customer returns their product or subscription in favor of a different product in their churn rate calculations. All resale transactions do not affect the churn rate.
• Change in partner: Customers can purchase technology through partners and decide to change which partner they buy from without changing the actual product they purchase. In this instance, the company should calculate churn at a customer level, not a partner level.
• Dealing with OEMs: Vendors typically have little visibility into who their end users with OEM subscriptions are, making it challenging to track churn. To accurately calculate churn, treat the OEM partner as the customer and follow any ARR decreases or increases.
• FX changes: Companies can use filters such as the original purchase date and when the churn occurs to determine the exchange rate.

What to do Following Calculations of Churn Rate

After performing a churn calculation, the next step is determining ways to lower the percentage. Some ways to decrease churn rate include:

Improve the Customer Service Team

It is natural for churn to happen, and when it does, it becomes an opportunity to dig into what caused the customer to leave. One way to use churn rate to benefit the company is to dive into individual customer support representatives and manager performances. This approach allows you to identify any challenges with customer service and possible solutions.

Revamp the Onboarding Process for New Customers

One of the best ways to prevent churn is creating a comprehensive onboarding process. For example, elements such as a customer welcome email and online customer onboarding can demonstrate to customers how to get optimal value from a product or service.

Invest in Training Opportunities

A sales representative’s job is to sell the true value of a product or service. Customer support employees should also be able to manage any issue that arises so customers remain satisfied. By investing in training, the sales team will be able to help customers effectively and reduce the overall churn rate.

Ask for Feedback

Asking for feedback across the customer experience is a great way to identify which customers are likely to churn. It’s important to remember that customer feedback can take the form of a negative review, and it is best to respond as quickly as possible.

Communicate With Customers

Communicating with customers encourages them to view a company as a trusted partner. When you reach out with exciting content or helpful tips, customers will learn they can depend on the company for advice and a reliable product.

Offer Exclusive Perks for Current Customers

Keep current customers happy by offering exclusive perks. Some ideas include a rewards program, personalized touch points and streamlined methods of providing feedback.

Use Feedback From Free Trial Customers

Churn can also occur from free trial customers who decided not to pay for a full subscription. Survey customers after their free trial ends to learn why they chose not to purchase. Then, use this information to help convert free trial participants into paying customers.