Article

How to calculate customer churn rate

Customer churn rate is one of the most important metrics for businesses to track. Find out what is is and why it matters.

By Kenza Moller, Contributing Writer

Published April 22, 2020
Last updated November 9, 2021

Customers can be a fickle bunch—happy one day, gone the next. That’s why it’s important for companies of all shapes and sizes to monitor when customers leave or “churn.”

While customer churn is often considered to be a measure of failure rather than success, it is one of the most important metrics to track. (After all, what’s a business without its customers?) Churn also impacts nearly every aspect of a company, from the product and revenue to customer loyalty and customer satisfaction.

In this guide to customer churn rate, you’ll learn:

What is customer churn rate?

Customer churn rate is the percentage of a company’s total customers that stop doing business with the company over a specified period of time.

When evaluated alongside other key customer retention metrics, churn rate is a powerful way to assess what a brand is doing well and where it needs to improve. Depending on the nature of the business, churn rate may be monitored on an annual, quarterly, monthly, or weekly basis. Fast-moving SaaS companies—with user bases that fluctuate rapidly and dramatically—might even look at this data daily.

While all companies strive to have a loyal customer base and a churn rate of zero, the reality is that customers come and go. But that doesn’t mean churn isn’t worth tracking. Once businesses determine their customer churn rate, they can determine why customers are leaving and identify customer retention strategies that could help.

When evaluated alongside a company’s other key metrics, a company’s churn rate is a powerful way to assess what a business is doing well, and where it needs to improve.

Depending on the nature of a company’s business, churn rate may be monitored annually, quarterly, monthly, weekly, or in the case of some SaaS companies, even daily. While all companies strive to have loyal customers and a churn rate of zero, the reality is that customers come and go. Therefore, it’s important for companies to come to grips with what is causing customers to cut ties with their business and consider customer retention strategies that could help.

Why is churn rate important?

Customer churn is an important metric to track because lost customers equal lost revenue. If a company loses enough customers, it can have a serious impact on its bottom line. Another reason it’s critical to improve customer retention and reduce churn is that it’s generally more expensive to find new customers than it is to keep existing ones. So, companies that lose customers aren’t just losing the revenue from those customers—they’re also stuck with the high cost of finding new customers.

No matter how good a company’s product or service may be, it’s essential that they monitor their customer churn rate. Once businesses know and understand their churn rate, they can work on finding ways to bring it down.

How to calculate churn rate

To determine your company's churn rate, choose a period of time you want to measure and identify the following values:

  • Number of customers at the start of the time period (X)
  • Number of customers lost during that time period (Y)

Then, use the following formula to determine your customer churn rate (Z) as a percentage.

Customer churn rate formula: (Y/X) x 100 = Z

For example, if a business had 100 existing customers at the start of the month and lost 10 customers by the end of the month, then it would have a monthly churn rate of 10 percent.

customer churn rate formula

This simple formula can be used across any time period, whether that’s a year, a month, or even a day. But companies may face situations that require more complex churn rate formulas.

How to calculate customer churn rate as a high-growth company

In the formula above, we calculated churn rate by using a snapshot of the number of customers a company had at the beginning of a time period and the number of customers that left during that entire time period. But for companies that are scaling quickly, the number of customers at the start of the month might be drastically different from the amount at the end of it. A business might have a seemingly bad churn rate but a high influx of customers that offsets these departures.

Fortunately, there’s a way to tweak the usual customer churn formula to account for this high growth rate. To calculate your adjusted customer churn rate, you’ll need the following values:

  • Number of customers at the start of the period (W)
  • Number of customers at the end of the period (X)
  • Number of churned customers during that time period (Y)

Then, use the following formula to determine your customer churn rate (Z) as a percentage.

Adjusted customer churn rate formula: (Y / [ (W+X) / 2 ] ) x 100 = Z%

Let’s take a look at what that means with a real-world example. Let’s say a dog treat subscription box was growing quickly but wanted to account for both lost and acquired customers within the month. At the start of March, the company had 15,000 customers. During the month, 5,000 new customers sign up to get their pups the latest tantalizing treats, and 5 percent of the total customers (1,000) unsubscribe.

adjusted churn rate formula

If we were using our original formula, the churn rate for March would seem to be higher—at 6.66 percent—since the new customers wouldn’t be accounted for. But when using our adjusted customer formula, which accounts for the new customers acquired, the churn rate drops to 5.71 percent.

To be useful, a customer churn rate formula needs to figure in all facets of a business as it changes—including the customers it’s successfully gained. The adjusted customer churn rate formula accounts for this growth while also providing an accurate picture of those who’ve dropped off.

How to calculate customer churn as a seasonal business

Aside from quick growth, another factor that can easily skew customer churn rates is business seasonality.

“Churn” is never a positive word in business, but a higher churn rate in a seasonal business is par for the course. A small tutoring company, for instance, will likely have a much higher churn rate at the end of the school year than it does in October or February when students are still in class. Its growth rate will also likely be much higher in August and September than it will be in June.

Luckily, a seasonal business can still use a fairly straightforward formula to calculate churn. Since their growth and churn rates differ drastically throughout the year, these types of businesses will want to make sure they take these fluctuations into account when calculating churn.

To calculate a seasonal business’ customer churn rate, choose a period of time you’d like to measure and identify the following values:

  • The total number of customers you had during the busy period (W)
  • The churn rate during your busy period (X)
  • The total number of customers you had during the slow period (Y)
  • The churn rate during your slow period (Z)

Then, use the following formula to determine your revenue churn rate (A) as a percentage.

Seasonal customer churn rate formula: { [ (W x X) + (Y x Z) ] / (W+Y) } x 100 = A%

Let’s take our tutoring company as an example and say that, from August through May, it usually has around 100 customers and a churn rate of 5 percent. At the end of each school year, the vast majority of its customers—approximately 80 percent—will churn. Twenty percent might stay on throughout the summer months to support their summer school learning or work on subject areas that need improving, but there’s a small churn rate of 5 percent. In August, the number of students in tutoring will generally balloon back up to 100 or more and stay fairly steady.

seasonal churn rate formula

If we were to calculate the tutoring company’s annual customer churn rate (from January to December) using the simplified churn rate formula, its churn rate would appear artificially high. The 80 percent churn rate in May would pull the yearly average churn rate from up to 11 percent. Using the seasonal churn rate formula above, however, we get a weighted average of 5 percent.

Because we’re grouping customers into two cohorts—those in the high season and those in the low—we get a more realistic view of the success of the business.

How to calculate revenue churn rate

While a straightforward customer churn rate formula might work well for a company whose customers bring in an equal amount of revenue, not every business is structured that way.

A corporate networking SaaS platform might offer clients several tiers of service, such as free, premium, business-level, and enterprise-level subscriptions. The simple churn rate formula might indicate the business has a 10-percent customer churn rate. But considering that customers are bringing in dramatically different amounts of revenue each month, it’s not clear how much value that 10 percent actually represents.

That’s why most businesses will want to look at revenue churn rate in addition to their customer churn rate. To calculate revenue churn, choose a period of time you’d like to measure and identify the following values:

  • Churned revenue (X)
  • Total revenue (Y)

Then, use the following formula to determine your revenue churn rate (Z) as a percentage.

Revenue churn rate formula: (X/Y) x 100 = Z%

Let’s say our corporate networking SaaS platform wanted to calculate its monthly revenue churn rate, knowing it had a customer churn rate of 10 percent. If the company’s churn was mostly made up of enterprise customers, that 10-percent customer churn rate might be costing them $30,000 in monthly recurring revenue (MRR).

If the company’s total MRR was $120,000, its monthly revenue churn rate would be a whopping 25 percent. That’s a much bigger hit to their revenue than their 10-percent customer churn rate might lead you to expect—and a sign that the company might want to take a closer look at its enterprise offering.

revenue churn rate formula

For any business with variable pricing, calculating revenue churn is going to be just as important as understanding customer churn. The more granular a company is with churn analysis, the more effective it can be when working to reduce churn with its customers.

5 tips to reduce customer churn

Knowing your customer churn rate is an important first step, but it’s just that—the first step. Once you determine how many customers churn, you need to find ways to minimize churn and grow your business.

  1. Listen to customers

    Your average customer will generally have good reasons for leaving. It’s important for you to evaluate why this is happening by listening to your customers—often in the form of surveys, feedback forms, and other customer satisfaction indicators. You can also proactively monitor third-party review sites, community forums, and social media to understand where you might be failing customers.

    You should also look inward and consult metrics from all the different touchpoints in the customer journey to find ways to improve the customer experience. If you’re a SaaS business with a high churn rate, look at your customer onboarding process to see if new users are struggling to see the value of your product. Ecommerce startups might want to look at their products’ average shipping times or how successful customers are when searching for a product.

    To get started, here are a few avenues to guide your inquiry: At what point in the customer lifecycle are customers usually churning, and why? Does your customer onboarding process do a sufficient job of educating the customer? What are the most common pieces of feedback your customer success team receives?

  2. Identify at-risk customers

    If you want to focus on customer retention, it’s important for you to understand which customers are most likely to leave. Of course, that’s easier said than done, but you should consider the metrics you have available to you and look for patterns that could indicate a customer is at risk.

    These risk factors might be the amount of time since they’ve been in contact with sales, visited your website, or placed an order. Other factors could include negative feedback, product returns, or a poor interaction with customer service.

    Once you identify who may be at risk, target those customers with special offers or enhanced support to regain their trust and loyalty.

  3. Give customers a good reason to stay

    While giving at-risk customers special incentives to stick around is important, it’s equally important for companies to offer loyalty incentives to customers from the start.

    According to Harvard Business Review, companies with strong loyalty marketing programs tend to grow at a rate 2.5 times faster than those without loyalty programs. Consider building out (or improving) a customer loyalty program that encourages buyers to stay for the long term and increase their spending with you.

    There are many ways to structure a successful loyalty program: You can base your customer rewards on the amount of money they spend, how often they use your service, or how many people they refer. No matter what you choose, make sure you maintain a customer focus, and you’ll be well on your way to building a loyal fan base.

  4. Double down on your best customers

    Even with the best plans in place, it’s nearly impossible to get a customer churn rate down to zero. That’s why it’s also critical for your company to identify and take care of its best customers. When you maximize customer lifetime value through your brand champions, your business can grow in a way that helps offset the inevitable churn it experiences down the road.

    If you offer multiple tiers of service or a variety of products, consider how you can upsell your most loyal customers and increase their lifetime spend with your company. By bringing in extra money through upsells, you can increase customer loyalty and bring in more dollars to make up for revenue lost due to customer churn.

  5. Invest in service and support

    According to the Zendesk Customer Experience Trends Report 2021, about 50 percent of customers will stop doing business with a company after just one bad interaction with customer service. Eighty percent will leave after multiple negative experiences. So, companies that want to cultivate customer loyalty and maintain long-term relationships with their buyers can’t afford to deliver sub-par customer service and support.

    One way you can ensure your company delivers fast, personalized service is to use help desk software or customer relationship management software. These tools enable your agents to support customers across multiple channels, glean insights on customer issues, and proactively maintain customer relationships.

Turn the churn around

Customers are the lifeblood of any business, so companies need to understand churn if they want to grow and adapt to meet their buyers’ needs.

While it can be a scary metric to face, knowing your customer churn rate is the first step to improving your business and managing profitable long-term relationships with customers.

Improve the customer experience

Find out how to create great experiences that will lead to loyal customers, improved word-of-mouth promotion, and increased revenue.