What is churn rate, why it matters & how to calculate it?

Churn rate. 

Two words capable of striking fear into the hearts of businesses – subscription-based businesses, in particular – everywhere.

Basically, churn rate measures how quickly you’re losing customers. So, for many businesses, it’s a metric they’d rather sweep under the carpet and avoid thinking about.

But understanding churn rate is vital. Because the more you understand churn, the more you can do to reduce it – and prevent its draining impact on your business’s long-term aspirations.

Below, we’ll define gross and net churn rate, and explore the different types of churn. We’ll look at how to calculate churn rate, and at the industries and business types with the highest – before our top tips for reducing your churn rate with Checkout.com.

What is churn rate?

Churn rate (also known as the rate of attrition) is the rate at which a business loses customers.

It’s typically calculated as a percentage, measuring the rate at which customers cancel their subscription to – or discontinue a service with – a business during a specific period of time.

Think of churn rate as the polar opposite of growth rate. If the churn rate is positive, the growth rate will be negative. If the growth rate is positive, it means you gained more customers than you lost, and that your churn rate was negative.

Which, in business, is always a good thing!

Types of churn

Churn comes in many different shapes and sizes. Get to know the different types of churn below – from the customer intent, to what it’s measuring, to why it happens,

Voluntary churn

Voluntary churn is when a customer actively decides to stop using a product or service you offer. This could be for a range of reasons, including:

• A switch to another provider.
• Financial constraints.
• Changing needs.
• Dissatisfaction with your product or service.

Involuntary churn

Involuntary churn is when your business loses customers to factors beyond their control.

Your customer may, for instance, want to continue paying for the product or service you provide. But – due to administrative or technical reasons, perhaps – they aren’t able to do so, and their subscription is canceled. Some factors that can lead to involuntary churn include:

• Credit card decline (due to expiry or incorrect details).
• Payment issues.
• Accidental cancellations.

Involuntary churn may also happen when a card is declined due to suspected fraud. If a red flag is raised – either correctly or incorrectly – the transaction may be stopped, the subscription canceled, and a potentially legitimate customer cut adrift.

Want to know more about fraudulent transactions – and what your online business can do to combat them? Explore our guide to how to detect fraud online.

Customer churn

Customer churn is the rate at which customers discontinue their relationship with your business.

As the name suggests, it measures the amount of lost customers. 

Revenue churn

Revenue churn’s focus is on the revenue lost as a result of customer churn.

It takes into account the cost to your business of downgraded plan tiers, canceled subscriptions, and returned items.

Downgrade and upgrade churn

Downgrade churn – particularly relevant for SaaS (Software-as-a-Service) providers – is when a customer downgrades their plan, or subscription tier, to a lower-cost level.

Upgrade churn – the opposite – is a little more complicated. This type of churn occurs when a customer upgrades their plan to a more expensive tier. Which, in theory at least, should be a good thing for churn – right?

Not always. That’s because often, more affordable plans have a lower cost structure for a business. They’re cheaper, sure. But they also require fewer resources – such as time, money, and staff attention – to service. When a customer upgrades, the revenue this switch generates doesn’t always compensate for the loss of that customer on the lower-tier plan they were on.

When this happens, a net churn (which we’ll cover in greater detail below) effect takes place.

Reactive churn

Reactive churn happens when, as a business, you react to customer issues or complaints – rather than addressing them, proactively, before they happen.

As a result, customers become frustrated or disillusioned with your business, and decide to leave. Some reasons for reactive churn include:

• Slow or poor customer service and support.
• Inadequate issue resolution.
• Unaddressed customer feedback.
• A lack of personalization in the sales, payment, or support processes.

Why is churn rate important?

Understanding your churn rate is vital.

Customers are, after all, the lifeblood of your business. Meaning you need to know how many you’ve got, how many you’re losing, and – crucially – how quickly you’re losing them.

A high churn rate indicates that a large portion of your customers are choosing to end their relationship with your company. And, while you can reasonably expect your customer numbers to fluctuate on a monthly basis, the long-term impact of a high churn rate can be severe: and have detrimental knock-on effects on your business’s growth and profitability.

Your business can use churn rate for a wide variety of reasons, including to:

• Understand the health of your customer acquisition and onboarding processes.
• Identify unprofitable customer segments.
• Improve your customer targeting strategies.
• Boost customer retention and solidify long-term revenue streams.

A proper churn-rate understanding is particularly important for ecommerce businesses – especially those that rely on a subscription revenue model.

In this case, customers choosing not to cancel their subscription with you is the only thing keeping you in business – so it pays to get to grips with the amount of customers who, for whatever reason, are choosing to cancel.

We’ll get to the question of how to calculate churn soon. But first, let’s unpack the key churn rate metrics your brand needs to know about.

CLTV

Customer Lifetime Value (CLTV) measures the projected revenue you can expect from a customer – throughout their entire relationship with your company.

CLTV and churn rate are closely related. That’s because, as your churn rate increases, the average duration of your customer’s relationship with your company does the opposite. This, in turn, reduces the revenue you can expect from that customer – leading to a lower CLTV.

It works the other way, too, because CLTV is a handy way of using historical data to predict a customer’s future revenue potential. With a strong understanding of CLTV , you can identify high-value customers, and – by focusing your efforts on retaining them – minimize churn.

CAC

Customer Acquisition Cost (CAC) is the total cost you incur to gain a new customer.

CAC encompasses any and all expenses involved in attracting a new customer, including:

• Marketing expenses.
• Advertising costs.
• Sales team salaries.

Like churn rate, CAC is directly related to how profitable your business is. If both CAC and churn rate are high, it becomes hard to recover those lofty costs of acquiring new customers before they leave.

MRR

Monthly Recurring Revenue (MRR) is the predictable revenue your business can rely on every month from recurring payments made by subscription-based customers.

Churn rate has a direct impact on your business’s MRR. When customers cancel their subscriptions (or, put in even simpler terms, “churn”), the revenue they were contributing towards your MRR is lost – and, as a result, the MRR decreases.

To calculate your MRR, first take the total revenue from active subscriptions at the end of last month. Then, subtract the revenue lost from churned customers – and add the revenue gained from that month’s new customers.

MRR isn’t to be confused with Annual Recurring Revenue (ARR) – another important metric for subscription-based businesses.

How do you calculate churn rate?

For the most basic way of calculating churn rate, use the following formula:

(Number of customers lost during the period / total number of customers at the beginning of the period) x 100

Let’s say, for example, that you measure your churn rate by month. If you began October by 1000 customers, and finished it with 950, you’d have lost 50 customers.

Your gross churn rate would be:

(50 / 1000) x 100 = 5%.

As we mentioned earlier, churn rate is the opposite of growth rate. So, if you have a positive churn rate (as in the example above) your customer base has shrunk. Conversely, if your churn rate is negative, that only means one thing – that your total number of customers grew!

It’s important to remember, though, that how you calculate churn rate will depend on your business model, objectives, and industry – as each has unique customer behaviors, revenue structures, and retention strategies that impact how you’ll measure and interpret churn rate.

• Subscription-based businesses, for example, typically measure churn rate on a recurring basis (that could be monthly, quarterly, or annually) because customers can cancel at any time – and to take a more long-term view of customer retention.
• In the absence of subscribers, one-time purchase companies and some B2C businesses tend to use specific customer behaviors – such as customer returns, non-repeat purchases, or ‘defections’ to other brands – to calculate churn rate.
• B2B companies – which tend to have fewer, but more high-value customers – may measure churn rate in terms of lost recurring business relationships or contracts.
• Industry-specific factors are at play, too. For mobile apps and online services, churn rate tends to be tied to user engagement and activity levels; in the telecommunications industries, it’s influenced heavily by contract durations and early termination fees.

Gross vs net churn

The only issue with the formula for calculating churn rate we outlined above? It only takes into account customers your business has lost – not ones it’s gained, too. That’s because that formula is only for figuring out gross churn – not net churn.

Gross churn measures the percentage of customers your business lost during a specific period – without considering any of the new customers it brought in.

To calculate gross churn, use the formula we outlined above. As you can see, this metric is useful for understanding how many customer ‘churned’ – but it doesn’t tell the whole story.

For that, you need net churn.

Net churn considers both customer churn and customer expansion – weighing up customers lost and customers gained in a specific period to offer a more nuanced understanding of your customer retention efforts. Net churn also takes into account upsells and cross-sells to reflect the changes in value of existing customers – not just the loss or gain of them.

To calculate net churn, you’ll need a slightly different formula:

((Lost customers’ revenue - expansion revenue) / total revenue at the beginning of the period) x 100

In this formula:

• “Lost customers’ revenue” is the total revenue lost because of customer churn. (If you lost 100 customers, for example, and each was on a $20/month subscription, this figure would be $2000 in the time period.)
• “Expansion revenue” is the extra revenue your business has gained from existing customers, who either expanded their usage (by upgrading to a better subscription tier or plan, for example) or purchased additional products or services during the period.

What is the best churn rate?

In an ideal world? The best gross churn rate is zero, zilch, nothing – 0%.

A gross churn rate of 0% implies that your business lost no customers or subscribers in the defined period. This would be lovely – though of course, it’s not a reality. Businesses losing customers is the exception, rather than the norm – and in an ecommerce world dominated by stiff competition, high return rates, and rapidly evolving customer expectations, it’s inevitable.

As for net churn rate, the best churn rate would be less than zero – 10%, 20%, 50%, or more. That’s because net churn rate takes into account customers and revenue gained, not just lost – so the lower the net churn rate is, the better your business is doing and the better you can rely on unearned revenue for future financial planning.

Churn rate benchmarks by industry

The ‘best’ churn rate is 0%. But, since that’s not realistic in practice, what are the average churn rates – across different industries and business types?

According to Recurly Research, the average overall churn rate – across all industries – is 5.57%.

The average churn rate for B2B businesses, at 4.91%, is lower than the 6.77% of B2C businesses – a disparity we can put down to the longer, more considered purchase processes B2B services and subscriptions demand.

At 3.95%, voluntary churn rates are higher than their involuntary counterparts (1.38%), while the research also showed a marked churn rate variation across different industries:

• 7.55% for consumer goods and retail
• 7.22% for education
• 6.59% for business and professional services
• 6.42% for digital media and entertainment
• 6.03% for healthcare
• 4.75% for software

With the highest churn rate, consumer goods and retail reflects an industry where defection and return rates are higher than ever. Conversely, software’s low churn rate is a testament to how indispensable effective software solutions have become in the lives of businesses and consumers.

How to reduce churn in business

As discussed, a high churn rate can be damaging for your business’s short-term prospects – and, in the long run, damning.

So how can you reduce churn, and the associated ill-effects on your brand and bottom line?

Reducing voluntary churn

• Increase customer satisfaction: regularly seek feedback from your customers about what it’s like to work with your business. Then, implement as much of this as you can to make sure your customers are satisfied. Communicate clearly with them at all times – and ensure you’re responding to queries, issues, complaints, and feedback (good and bad!) with the speed and empathy they deserve.
• Optimize your signup and payments processes: by making it easier for your potential customers to sign up and pay – initially, then on a subscription basis ongoing – you boost the chances of them sticking with your brand. A well-optimized, friction-free payments process – like the one Checkout.com offers – is also important for reducing involuntary churn.

Reducing involuntary churn

• Prevent payment declines: one of the biggest causes of involuntary churn, payment declines happen for a number of reasons. These could be insufficient cardholder funds, an unverified customer, an expired card, or suspected fraud. To learn more, explore our guide to the top 5 reasons why card payments are declined.
• Support card-on-file payments: card-on-file payments enable you to store the cardholder’s credit or debit card information ‘on file’, and use it for future transactions ongoing. By supporting these types of payments, you can combat involuntary churn by making the payment process simpler and more seamless for your customer.
• Analyze subscription data: by staying on top of your customers’ subscription and payment data, you can identify when cards are coming to the end of their lifecycle, and when cards need to be replaced. A real-time account updater service – typically provided by your payment processor – can help with this. The service monitors credit and debit cards you have on file for changes, and automatically updates these records – boosting the chances that each monthly subscription payment will come through.

Reduce churn with Checkout.com

Churn rate shouldn’t simply be a metric you’re aware of, or track. But something you take steps to actively improve – every day.

Here at Checkout.com, we can help you do just that. Our payment processing service allows you to analyze your payments data from a single, central source of truth.

You’ll be able to dig deep into the most granular of payment information and statistics to understand the state of your subscriptions and transactions. Then act on that knowledge to minimize churn – and its damaging impact on your business’s long-term prospects – as well as using that payment data to unlock your business’s next, exciting phase of growth.

Plus, by optimizing your payments performance now – by reducing the amount of declines, and supporting smoother card-on-file payments – you’ll not only improve your churn rate. You’ll improve acceptance rates now, and down the line: safeguarding your business not only from the effects of churn, but from a range of other consequences, too.

For this, check out our recurring payments solution for subscription businesses. It’s a secure, easy-to-use payments processing service for businesses that rely on regular, reliable payments from their customers. It also offers access to advanced data and analytics, watertight security measures, higher authorization rates – and lower compliance costs.

Want to know more? Reach out to the team here at Checkout.com. With a wealth of knowledge around payment declines, subscriptions, fraud detection and more, we can help you with the tips and tools you need to reduce churn – and set your business up for success.