From our article, you will learn what the Churn Rate depends on, how is the churn rate calculated and how it can be reduced.
For far-sighted entrepreneurs, not only the indicator of the influx of customers is important, but also their outflow – the Churn Rate. This value is one of the key marketing metrics that opens up wide horizons for forecasting and planning.
What is Churn Rate? Why is it so important
Churn Rate (CR) is a metric for measuring the churn of customers, users, or subscribers who stop using a company's product within a specific time period. For example, they stop buying its products or services, leave channels, groups or communities, unsubscribe from paid subscriptions, newsletters, etc.
The churn rate is especially important for those companies that sell their products on a subscription basis – various telecommunications companies, SaaS services, etc. The volume of their revenue and profit directly depends on how many customers regularly pay for a subscription, so their outflow immediately reduces the profitability of this business.
However, the Churn Rate is important for any business, because if this indicator is higher than its opposite growth rate (Growth Rate), then sooner or later the number of active customers will simply decrease to zero.
What is it like?
It is believed that there are three types of Churn Rate:
- Natural. A natural churn occurs when a customer stops using a company's product for personal reasons. For example, he has radically changed his tastes or preferences, changed his place of residence, his children have grown up and they need children's goods more, etc.
- Motivated. Motivated customer churn is caused by some common external cause. For example, they chose a competitor's similar product because of its quality, convenience, or price. Or they have found an alternative way to satisfy their needs, so they no longer need the original product / service.
- Hidden. With hidden churn, the consumer does not completely abandon the company's product, but begins to buy it less often or in smaller volumes. Formally, he still remains an active client, but the income he brings is reduced and may soon become zero altogether – in this case, he goes into the second category.
How to calculate Churn Rate
The level of customer churn is usually considered not for the entire period of the company's activity, but for a specific period of time: a month, a quarter, a half year, a year, etc.
Churn Rate is calculated using a fairly simple formula: C1 - C2 / C2 * 100%. Here C1 denotes the number of customers at the beginning of the reporting period, and C2 is the number of customers at the end of the reporting period. For example, if you had 100 customers on the first day of the month, and 95 customers left on the last day, then the CR value would be 5%.
The maximum allowable CR value varies depending on various factors, including the field of activity, size and age of the company. For a large offline business that has been operating for a long time, it is 1-2%, for an online business - up to 4-5%, for suppliers of consumer goods - up to 8-9% monthly. The highest acceptable churn rates are observed in the field of online television (11-12%) and subscription to online services (10-12%).
If you want the calculated Churn Rate to be as reliable as possible, then you need to determine in advance which customers are lost and which are active. Some consumers place orders irregularly, for example, every few months, half a year or a year. Accordingly, when calculating CR on a monthly basis, they will either be taken into account in this indicator, or not taken into account. Because of this, the actual counting results may be inaccurate. To solve this problem, it is recommended to measure the customer churn rate only for fairly long periods of time: from a quarter to a year.
What is a Good Churn Rate
Reducing the churn rate is a very real task for both a large corporation and a small startup. To achieve this goal, follow these guidelines:
- Increase the value of the product. Feel free to remind your customers about it and at the same time describe as many of its advantages, benefits, additional features and capabilities as possible. Tell about the product in all available ways: through blog articles, email newsletters, messenger and SMS mailing lists, social media posts, etc.
- Watch your clients. Study user behavior on a website, online service, store or other point of sale. Watch how they interact with your product, what causes them difficulty, at what stage they most often abandon a purchase, etc. Ask why they decided to cancel the order or unsubscribe. By eliminating the causes of customer inconvenience, you will significantly reduce their churn rate.
- Promote loyalty. Equally important is to regularly encourage customers to buy your products or services. Thank regular and new customers for staying with you by providing them with discounts, gifts, sweepstakes, promotions and other marketing offers.
- Train and engage new clients. The highest Churn Rate rates are most often observed among new users: those who have not yet figured out the product and have not understood all its advantages. Onboarding, a set of measures to educate, engage and familiarize a new audience with all the features and benefits of your product/service, will help reduce the outflow of users from this group.
Сonclusions. What is Churn Rate
The Churn Rate helps you calculate the number of customers who stop using a product over a given period of time. Regular calculation of this value is especially important for companies selling digital products or goods/services by subscription. You can reduce your CR by educating and engaging your users, encouraging their loyalty, and eliminating the hassle of buying or using a product.
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