Customer Churn Rate: Explained

After defining the Customer Health Score, this week we will cover the Customer Churn Rate. Customer Churn Rate (Churn Rate), albeit a basic metric, helps customer success managers track the number of clients and users that have stopped using the product or service. In this post, we’ll touch upon the reasons that cause customer churn, how to calculate the churn rate, and what can be done about it. 

Customer Churn Rate is not to be confused with Customer Revenue Churn. The latter monitors the amount of revenue made in a specific period, while the Churn Rate measures the percentage of customers that are not using your service anymore . In this article, we’ll explore Customer Churn Rate, go over various calculation methods, and touch on some industry benchmarks.

This is part of an extensive series of guides about AI technology.

What is Customer Churn Rate?

Customer Churn Rate is an important metric that measures the rate of how many people have canceled their subscriptions or downgraded within a predefined time frame. This performance indicator can help SaaS-based businesses that work with subscriptions. If customers opt out before compensating the costs of acquisition, you should probably rethink your strategy and revisit your playbook. 

With ongoing Churn rate monitoring, businesses can:

1. Invest in recurring subscriptions, not customer acquisition: Acquiring new customers is every company’s holy grail, but retaining existing users doesn’t just lead to renewals, but also to upsells and cross-sells.
2. Determine your market position: You can assess your market position by calculating your Churn Rate and comparing it to your competition. Learning where you rank can help you create a better customer success strategy. 
3. Get valuable insights with no effort: The Customer Churn Rate formula is pretty straightforward and easy to apply to any business model. The calculation does not take too much brain power, yet delivers helpful inputs. 

Like with any customer success metric, multiple factors can affect your Customer Churn Rate. Here are some commonly-found factors customer success managers need to look out for when things start going south:

• Something about your product or company has changed – It could entail different factors like the addition of new features, redesign projects, changes in company values, or sudden pricing structures revisions.
• There are better alternatives in the market – The most common reason for users leaving the product is the discovery of a better, cheaper, or faster alternative. CSMs need to constantly keep an eye on the competition.
• Poor user experience – Sometimes users sign up for a new product and then abandon it because of its cumbersome onboarding and poor navigation. A bad Churn Rate is often because of unexpected friction at key touchpoints. 

Related: Customer Success KPIs: What You Need to Track in 2022

How to Calculate Customer Churn Rate?

There is no universal formula to calculate your Churn Rate. Let’s take a closer look at four different ways to calculate Customer Churn Rate today. You can either use multiple methods or simply pick the one that matches your use case the most. 

1. The simple method

Formula: Churn/Customers 

Divide the number of churned users by the number of users you had on the first day of the set period. The best quality of this formula is its simplicity. On the other hand, small companies and startups might benefit more from more complex calculations. The simple formula does not account for significant growth which results in an inaccurate representation of the churn rate. 

2. The adjusted method

Formula: Churn/Midpoint of the customer amount

Add the number of customers on the first day and on the last day and divide by two to receive the midpoint value. This method normalizes the growth changes which makes the results more accurate than the aforementioned simple method. The downside of this formula is its inconsistency, meaning that each time frame like a week, month or quarter will deliver different results. 

3. The predictive method

Formula: nΣi=1 (inactive)/nΣi=1 (customers)

This calculation predicts the possible Customer Churn Rate on any given day of the set period. The sum of inactive customers determines how many users are active on day i and will be inactive on the day i+n, for example, in one month. Add the number of inactive customers on the day i (1 May) to the number of users lost on the day i+30 (1 June) and divide by the total number of customers in May. 

The main issue with this method is having to wait till the next month to calculate the rate for the current month, which goes against the predictive purpose of the formula.

4. The up-to-date method

Formula: churn/nΣi=1 (customers/n)

Take the customer average of every day to generate a more precise Churn Rate formula. Divide the number of churned users by the number of customers on any particular day from i to n. This approach is preferred by many customer success managers since it resolves the issue of rapid growth (scaling up) as well as provides up-to-date insights into the Customer Churn Rate trends. 

Related: CS Strategy: Identifying the Blind Spots

Customer Churn Rate Example and Industry Benchmarks

Let’s look at a SaaS company with 400 customers at the start of April 2022. By the end of month it loses 40 of them. So how can we determine the CRR of this business with the simple and basic formula? Let’s take a closer look.

• CRR = (Churn ÷ Total Customers) x 100
• Customer Churn Rate = (40 ÷ 400) x 100
• Customer Churn Rate = (0.10) x 100
• Customer Churn Rate = 10%

The aforementioned business has a Customer Churn Rate of 10%.

What about current industry benchmarks?
In the SaaS world, a good annual churn rate is 4.79% and lower. Netflix had a Customer Churn Rate of around 2.5% in 2021, while direct competitor Hulu was hovering around the 5% mark. Popular networking platform Zoom reported a Churn rate of 2.1% last year. Make sure to differentiate between monthly and annual Churn rate, since the annual rate will always be higher than your monthly rate.

Customer Churn Rate FAQs

• Why is Customer Churn Rate important?
  Monitoring the churn rate can help you assess the costs of customer acquisition (CAC) and ensure the company is not spending more on CAC than is feasible.
• Does customer churn rate help with customer segmentation?
  Unfortunately, your Customer Churn Rate cannot shed any light on the age of churned clients (new vs old), making it challenging to get actionable insights.
• Is Customer Churn Rate good as a stand-alone metric?
  As evident in this article, all Churn Rate calculations are good indicators, but have inherited shortcomings that need to be taken into consideration.

See Additional Guides on Key AI Technology Topics

Together with our content partners, we have authored in-depth guides on several other topics that can also be useful as you explore the world of AI technology.

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• Customer Intelligence: Benefits, Challenges, and Best Practices
• The Top 9 Product Analytics Tools 
• Customer Intelligence Platform: What Is It and How to Leverage It

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• Large Language Models (LLMs): Technology, use cases, and challenges
• Transformer Neural Networks: Ultimate 2023 Guide 
• Zero Shot Learning: Use Cases, Techniques & Impact on LLMs

Generative Models

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• Generative Models: Types, Concepts, and Popular Applications
• Generative AI vs. Predictive AI: 4 Key Differences
• LLM vs. NLP: 6 Key Differences and Using Them Together

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