Churn Rate 101
Your churn rate is the amount of customers or subscribers who cut ties with your service or company during a given time period. These customers have "churned."
Churn rate calculation
The calculation of churn can be straightforward to start off with. Take the number of customers that you lost last quarter and divide that by the number of customers that you started with last quarter. The resulting percentage is your churn rate. As an example, a company that started last quarter with 100 customers and lost three over the course of the quarter would have a churn rate of 3%.
In the above example, we calculated churn rate as a percentage of customers lost, but there's more than one way to calculate churn. You can also calculate churn based on:
- The number of customers
- The value of recurring business lost
- The percent of recurring value lost
Regardless of how you choose to represent it, tracking your churn rate is essential to success. It's almost always cheaper and easier to retain customers than it is to acquire new ones. Monitoring churn is the first step in understanding how good you are at retaining customers and identifying what actions might result in a higher retention rate.
Churn is a growth decelerator. Here's an example to help you think through the impact of your churn rate today on your business over the next five years:
Let's say that today you have monthly recurring revenue of $15,000, and that every month you add another $2,000 to that. However, you have a churn rate of 3%. If all of that persists for the next five years, you'll end up generating almost $2.6 million. Not bad at all.
However, let's say you're able decrease your churn rate by 10%, to 2.7%. That gives you an extra $100,000 in revenue. If you're able to reduce your churn by 30%, that's even better. Your revenue goes up to $3 million dollars! Reducing your churn rate dramatically accelerates your revenue growth.
Churn rate for ecommerce
While churn rate has traditionally been used by businesses that rely on recurring revenue models, many of today's leading ecommerce companies are also adopting the metric.
Calculating churn for ecommerce is trickier, but doable, and well worth the effort. The key difference for non-subscription-based ecommerce companies is that they need to define what constitutes a churn event. For example, if a company knows that most of their customers who will make a repeat purchase do so within 90 days, they may choose to mark any customer who has not made a purchase in that time period as being "churned."
Whether you are a subscription- or non-subscription-based ecommerce store, maintaining a handle on your churn rate helps ensure the long-term growth and health of your business.
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