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