Ah, the mystical world of churn rate!
In the realm of business, understanding and taming this beast is the key to unlocking success.
Churn rate, or customer attrition if you want to be fancy, holds the secret to retaining your precious customers and fueling growth.
At its core, churn rate refers to the percentage of customers who stop using your product or service during a certain period of time.
It is like a leaky bucket, slyly draining away your hard-earned clientele.
This metric is a reflection of customer dissatisfaction, changing needs, or competitive pressures that result in the loss of revenue and potential growth opportunities.
Fret not, we will be helping you get to the core of churn rate.
Let’s start with understanding why churn rate matters for businesses like yours.
Why does churn rate matter?
Because churn rate suppresses growth.
As we mentioned earlier, consider it like a bucket that’s leaking. Users drip out of it and you struggle to refill it with new users. With this, it gets expensive really fast.
- Acquiring a new customer is 5x-25x more expensive than retaining one.
- Reducing churn by just 5% can boost profitability by 75%.
- Improving retention has a 2-4x greater impact on growth than acquisition.
- The probability of selling to an existing customer is 60-70%, but only 5-20% for prospects.
Then too, it’s not all,
Churn rate plays a major role in informing metrics like CLTV and customer retention rate.
Together all these numbers will help you to build more accurate forecasts for revenue, growth, and scaling efforts.
So, now as you know the importance of churn rate, let’s dig deeper into…
Types of churn rate
Understanding the various types of churn rates and how to calculate them is vital for gaining a comprehensive view of your customer attrition.
Let’s explore the different types and the formula used to calculate churn rate.
User churn rate
How much % of paying customers you are losing every month is your user churn rate or customer churn rate.
As of today, a 10% customer churn rate implies, 10% of the total active paying customers you had 30 days ago have canceled within the last 30 days.
Revenue churn rate
How much % of the revenue you are losing every month is your revenue churn rate.
As of today, a 10% revenue churn rate implies, you lost 10 % of your MRR within the last 30 days to the MRR it stood 30 days ago.
How to calculate churn rate?
Based on the simplified churn rate definition at the start, we will apply the formula and see how to derive churn rate.
User churn rate
Let’s crunch the numbers.
As of Feb 1, 2023, you had 100 paying customers. By Feb 28, 2023, only 95 customers remained, indicating a loss of 5 customers. Calculating the churn rate:
User churn rate = (5/100) * 100 = 5%
Revenue churn rate
Let’s break this down now.
As of February 1, 2023, you had 100 customers, each paying $100, resulting in an MRR of $10,000. By February 28, 2023, 5 customers
downgraded to the $80 plan and 5 customers canceled their subscriptions.
This led to a loss of $100 (20 * 5) due to downgrades and $500 (100 * 5) due to cancellations.
MRR as of February 1: 100 customers * $100 = $10,000
MRR as of February 28: $10,000 – ($100 + $500) = $9,400
Now, let’s calculate the churn rate for February.
Revenue Churn Rate = (600 / 10,000) * 100 = 6%
You experienced a churn rate of 6% in terms of revenue for February.
Annual churn rate
In 2020, Company X had 52,000 customers up for renewal, with 3,000 customers churning during this period. They generated a total revenue of £501,000, with £44,408 revenue canceled.
Customer Churn Rate Calculation:
Churn rate = (3,000 / 52,000) * 100 = 5.76%
Revenue Churn Rate Calculation:
Revenue churn rate = (£44,408 / £501,000) * 100 = 8.86%
The revenue churn rate is slightly higher than the customer churn rate, suggesting potential challenges in maintaining subscriptions at higher price points. Re-evaluating the pricing structure may help reduce revenue churn.
Probability churn rate
To calculate your monthly churn rate, divide the number of users who churned in a month by the total number of user days for that month. Multiply the result by the number of days in the month to obtain your monthly churn rate.
But how does all these affect other SaaS metrics? Let’s find out.
How does churn affect other SaaS metrics?
Churn rate acts as a vital indicator for your product or service. To combat churn, regular optimization and customization of your offering are necessary. Consider these factors:
- Monthly recurring revenue (MRR): MRR is crucial for long-term viability. Minimize user churn to protect your revenue.
- Customer lifetime value (CLTV): Churn decreases CLTV as it reduces revenue and value.
- Customer acquisition costs (CAC): Churn increases CAC, affecting your profitability. Reduce churn to recover acquisition costs.
- Net Negative MRR Churn: Lower user churn enables achieving net negative MRR churn, a powerful growth strategy.
By proactively managing these factors, you can optimize your SaaS business, mitigate churn, and lay the foundation to drive long-term growth.
How to handle complex churn cases?
The above example of revenue churn showed a simple calculation.
But you will add customers, lose customers, and see customers migrate from one plan to another frequently.
Moreover, there will be a lot of free or unwanted users who may convert or leave the service.
You would also have customers on annual or quarterly plans.
Hence as the business grows, calculating churn rate will become a nightmare for you.
So, how would you arrive at the accurate churn rate considering all cases?
Don’t worry, we have a solution – click here.
Reasons to make it easier for yourself
When churn calculation complexity is reduced, you get many benefits:
- It is easily understandable – Anyone in your company is able to understand that number effortlessly. This is absolutely essential for a key metric. No one can actually act on your number unless and until they understand it.
- It is easily comparable – Do not add complexity as it will be harder for you to compare your churn calculations. Just create consistency by taking straightforward and simple paths. Hence, it will be easily compared then.
- For deeper analysis, it is a starting point- you are able to comprehend things such as; what your number accounts for or what it doesn’t and at which place you’re needed to dig in more to learn. Along with complex calculations, the first step of yours will remind you how to calculate it.
We kept it simple, your time can be spent in churn analysis of the number, taking a deeper dive on churn by cohort, etc. you won’t be spending your time calculating how you arrived at your number.
This method did work for many of our customers and it will also work for B2B SaaS companies or your subscription business as well.
Now, let’s find out how you can achieve higher accuracy while calculating churn rate.
Get accurate churn rate for your business
Putler provides a total of 15 subscription metrics including your user churn rate for Stripe, PayPal, WooCommerce, and Authorize.Net.
Simply connect your payment gateways, and eCommerce systems and Putler will take care of all calculations and cases. However complex data your business deals with, Putler will handle that efficiently.
Along with subscription metrics, you also get:
- Sales and transactions data
- In-depth customer profiles
- Product metrics and performances
- Visitor analytics
- In-built web analytics
and a lot more…
Thousands of eCommerce and SaaS businesses rely on Putler daily to monitor and grow their business.
Conclusion
Churn is bad!
You constantly need to improve your product, user experience, customer service and be active in the market. Still, there will be some who won’t like you and it is ok. You have to observe your customer’s behavior constantly and act upon it to sustain them.
And to observe your customer’s’ behavior and keep a check on your churn rate, use Putler.
FAQs on churn rate
Churn is quite a tricky subject that is why we get lots of the same questions on it again and again. So, Here are the frequently asked questions on churn with our answers.
What’s a good churn rate?
Average churn rates vary between 2% – 8% (of MRR), according to our churn studies. Hence, low churn rate i.e. 2% would be considered good. Yet it depends on the company’s age too; for 10+ year old companies 2-4% churn and for younger companies 4% – 24%.
What’s the negative churn rate?
Negative churn rate is considered to occur when added revenue generated from new customers surpasses lost revenue generated from churned customers. It is generally caused by: add-ons, service options, upgrades, etc.
Does churn rate impact retention?
As churn rate is the inverse of retention so we can say that it does affect retention. The customers that are not retained are churn by default.