What Is A Churn Rate? (With Importance, Merits And Examples)

By Indeed Editorial Team

Published 19 May 2022

The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.

Loyal customers are essential for a business to succeed and a low customer churn rate helps the business gain a competitive advantage. You can calculate this metric by looking at how many customers are supporting the business. Learning about this can help you understand how well the business has been performing and the ways to implement strategies that improve profits. In this article, we learn what a churn rate is, explore some of its advantages and disadvantages, learn how you can calculate it and review some examples.

What is a churn rate?

The answer to the question, 'What is a churn rate?' is that it is a rate that is defined as the percentage of customers who have stopped subscribing to a service. The industry also refers to churn rate as attrition rate, which helps a company measure the number of customers using their products or services over a period. In a workplace setup, the attrition rate also represents the rate at which employees leave a company. If this is higher, it shows that there are many customers and employees leaving a business.

A low attrition rate means that the services or products of the business satisfy the needs of the customers. Companies relying on customer subscriptions or memberships for most of their revenue may benefit from having a low attrition rate. When a customer cancels their subscription or does not renew it, it means they are churning from the business.

Related: What Is Attrition Rate And How To Calculate It

How to reduce customer churn

Here are some ways to reduce customer churn:

1. Offer the best customer service

A company's excellent customer service can enhance a customer's decision to use its services. By personalising communication with customers, businesses can foster positive relationships. Customers are more likely to subscribe to a company's service if they feel it cares about their needs.

2. Offer services that add value

A great way to improve the customer experience is to know what the customer values. One customer may find free exchange valuable, but another may prefer discount coupons. To enhance customer satisfaction, companies can tailor their approach to match the needs and preferences of their customers.

3. Personalise communication

Impersonal communications can seem irrelevant and boring to a customer. Instead of sending generic emails, companies can consider sending emails pertinent to customer needs. Communicating with customers should be engaging and conversational.

4. Create brand loyalty

Recurring customers are a great way for a business to thrive. A business may experience several challenges while building brand loyalty, but if done correctly, customers can prove to be an enterprise's most valuable asset. These loyal customers are less likely to churn, even in a competitive market.

5. Meet customer expectations

If a customer feels that a brand has not satisfied their expectations, they may start looking for alternatives. An enterprise can ensure customer satisfaction by resolving problems and improving the customer experience. A company may focus on improving customer onboarding, promoting discounts and freebies, offering memberships, improving social media engagement and improving product quality.

6. Take customer feedback

Taking customer feedback may help a business understand the various problem areas. The business can do so by sending feedback forms to its subscribers. It can collect the data and carefully examine the points that are dissuading the customers from renewing their subscriptions. The enterprise may consider creating different strategies that aim to enhance customer satisfaction.

Related: How To Calculate Growth Rate Using Different Methods

Why is churn rate important?

The rate of attrition can affect a business's finance and growth. Keeping this as low as possible helps the business decrease its acquisition costs, which are the costs associated with acquiring customers. Retaining existing customers and gaining new ones may require the business to spend an enormous sum on marketing and a lower churn rate means that its customers are choosing to stay with the brand, resulting in higher returns on their investments.

Advantages and disadvantages of churn rate

Here are some advantages and disadvantages of using this metric:

Advantages

It helps a business determine the value its services or products offer to customers. Calculating the rate of attrition allows the enterprise to know if the rate is high or low. For example, if the attrition rate is high, the enterprise knows that it is losing customers and can take steps to address the situation. After this, it may take feedback from customers using surveys and reviews. They may also assess their competitors and their strategies to find out what is working for them.

Calculating this may also help a business assess the fiscal health of its enterprise. It shows them how they have been improving the business over a period. It allows them to measure the success of their business.

Disadvantages

This metric does not take into consideration the different types of customers. Because of this, it may not be possible for a business to determine which customers left, the existing ones or the new customers. As a measure of loss, this does not always account for the customer growth in a business.

If the company offers subscriptions in varying price ranges and features, calculating this metric becomes difficult. The company does not make money from free trials. As a result, losing customers that used the product as part of the free trial does not have the same impact on the company as losing paying customers, but the attrition rate does not take that into account.

Related: What Is Financial Modelling? (With Benefits And Types)

How do you calculate the churn rate?

Here is a simple method that you may use to calculate the rate of attrition for a business:

1. Choose a time period

To measure the attrition rate, select a specific time period. This period can be a week, month, quarter, year, or since the time an enterprise first started doing business. It is convenient to measure this on a monthly basis for some specific operations.

2. Organise your data

A business may collect the data on how many customers they registered at the start of the selected time period. They can also include the number of customers who cancelled or did not renew their subscriptions. This may help the business determine the number of customers that it has lost. For example, a brand offers cloud storage subscriptions. At the beginning of the month, the brand had 2,000 subscribers, but in the same month, the business lost 500 users because of various reasons.

3. Apply the formula

Apply the data points into the attrition rate formula. The customer churn rate is equal to the number of customers lost during the time period, divided by the number of customers at the start of the time period. Below is the formula for determining churn rate:

Churn rate = Amount of lost customers during specific time/Total customers at the beginning of specific time

For example, to calculate the customer churn rate, divide the customers lost by the customers at the start of the month, which in this case is 500/2000 = 0.25.

4. Make it a percentage

Turning the result into a percentage may help a business understand the rate of attrition better. Multiply the churn rate value by 100 to get the percentage of it.

Churn rate percentage = Churn rate x 100

For example, if the number is 0.25, multiply it by 100, which is 0.25x100 = 25. This means the churn rate is 25%.

Related: What Is Business Development? Definition And Skills

Examples of churn rate

Here is how to understand the churn rate with the help of examples:

Example 1

Churn rate is an important measurement for online hotel aggregator companies. Online hotel aggregators are companies that onboard hotels or rental homes and list them on their online platforms for customers to book. If a hotel partner of such an aggregator removes itself from its online platform, that amounts to churn for the hotel aggregator. The rate of attrition helps the aggregator evaluate the value it is offering to its hotel partners. If a hotel aggregator lists 100 new hotel partners in the first month and 10 leave the platform in the same month, the rate of attrition would be 10%.

Example 2

Educational institutions like schools and private tuition centres utilise attrition rates to measure their students' dropout rate for each academic session. This enables educational institutions to plan their financial and human resources required to run their operations for the next academic year. Educational institutions also utilise this to evaluate the teaching capabilities and performance of their staff.

If an academic year for an educational institution starts with 100 students and by the end of the academic year 20 students decide to drop out for another institution, the rate of attrition for that year for the institution is 20%. Educational institutions give a lot of emphasis on the retention rate of their students. A higher than average churn rate affects the institution's performance.

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