What is Customer Churn?
Customer churn is the rate at which customers stop using a product or service. It’s often expressed as the percentage of customers that stopped using a product or service over a given period. It’s a key metric for businesses to understand, as you can use it to identify opportunities to improve customer retention and reduce churn (i.e., increase retention).
A high churn rate means you're losing customers, which can harm your bottom line and negatively impact overall business performance.
How to calculate Customer Churn rate
To calculate your customer churn rate, divide the number of lost customers during the time period by the total number of customers at the start of the time period. Then multiply that number by 100 to get a percentage.
Here’s a simple calculation you can use:
Customer Churn Rate = (Lost Customers During Time Period ÷ Total Customers at the Start of Time Period) x 100
For example: If you had 100 customers at the beginning of a month and lost 10 of them by the end of that month, your churn rate would be 10%.
Track Customer Churn alongside other important metrics
On its own, Customer Churn doesn’t provide a complete picture of your company’s performance. That’s why it should always be tracked alongside other service metrics.
And while tools like Zendesk are powerful, our experience has shown that customer service reps (CSRs) and managers find it way more convenient and powerful to access and analyze data in operating documents that they already know and love, like Google Sheets ❤️.
Getting high-quality data into an operating document like a GSheet isn’t necessarily easy, though. Especially if it requires you to spend hours manually downloading CSVs from different sources and copying the data into a rickety, VLOOKUP-filled spreadsheet 👎.
You can use the basic calculation above, but there’s a much more efficient way to calculate your team’s Customer Churn rate (and other important customer service metrics): the AirOps Service Metrics Toolkit.
This toolkit makes measuring your customer service function a breeze. In addition to Customer Churn, use it to easily track metrics such as:
- Lifetime Value (LTV)
- Customer Satisfaction Score (CSAT)
- 1, 2, and 3+ touch resolution rates
- Median first reply time
… and more! While Customer Churn is an important metric to measure, you need a more complete picture if you want to measure the overall performance and effectiveness of your product, your customer service team, and other important areas of the business.
Frequently asked questions about Customer Churn
What are the top causes of Customer Churn?
Customers can churn for a variety of reasons, including:
- Price: This is the most common reason for churn. Price-sensitive customers may search for a more cost-effective option if your company has a product that's too expensive compared to your competitors' offerings.
- Unresponsive customer service: If a customer has a problem and can’t get in touch with a real, live human for support, they're likely to give up and go to a competitor. For example, if a customer tries to call customer support and they end up on hold for ages, they're bound to become frustrated and take their business elsewhere.
- Poor Quality: When people don’t feel like they’re getting their money's worth, they're likely to churn. This is especially true if the competition offers a superior product or service.
- Lack of personalization: Customers are more likely to churn if they feel like they're not being treated as individuals. For example, if a customer service representative always gives the same generic response to a question, customers will feel like just another number.
- Lack of use: This one is fairly self-explanatory – if a customer isn't using a product or service, there’s no reason for them to stick around with your company.
What is a “good” Customer Churn rate?
This is a tricky question to answer – a “good” churn rate varies by industry, company size, the type of company (e.g., high growth, medium growth, low growth), and other factors.
According to an aggregate of data analyzed by Bloom, the average customer churn rate for SaaS providers is around 10% annually, but 5-7% is the ideal target to reach for.
Here’s some helpful context from the Bloom team:
“If you're a big, established SaaS company, on track for IPO or some other type of exit, your churn rate targets are crystal clear: you need to hit 5-7% annual churn.
It's a consistent hallmark of big, successful companies, and we've seen good reason to suggest you'll need similar to reach their heady heights.
But if, like most SaaS companies, you're earlier-stage, things aren't so clear. Even a successful SaaS company like Buffer still battles with 5% monthly churn rates, and if you're new to the world of Product/Market Fit, there's reason to believe those churn rates will be higher.
Though it's hard to give a precise benchmark, the six studies I've analysed suggest the same thing: a 5% monthly churn rate is pretty common, and as evidenced by the likes of Buffer, Baremetrics and Convertkit, not a clear-cut barrier to growth.”
How can I prevent churn and improve my organization’s Customer Churn rate?
While you can't eliminate all churn, you can take steps to reduce it. The most common advice is to improve customer service and make sure your product or service solves a real problem that your customers have. Always aim to deliver value.
Here are some additional churn-reduction tactics to consider:
- Analyze the reasons behind churn. Do customers tend to churn around the same time, like two months into using the product? Do they churn after using a certain product feature? Look at the data and take steps to correct the issues you find.
- Look at usage data and proactively reach out to customers who aren’t using all of the services and/or features that they’re paying for.
- Improve the onboarding experience so that customers have all the information they need to get the most out of their purchase.
- Ask for frequent customer feedback – confusion and frustration can easily cause a customer to churn, so this feedback can be an invaluable tool that will help you get ahead of potential problems.
- If a customer has a problem or concern, acknowledge the issue and work towards fixing it as soon as possible (within reason).
- Offer incentives, like loyalty programs or discounts. However…
- When addressing high churn, focus on your most profitable customers (not just any and all customers at risk of churning). This may seem counterintuitive but remember: The ultimate goal of a for-profit business is to increase revenue.
What are the effects of high Customer Churn on a business?
Not surprisingly, there are several adverse effects of high customer churn on a business, including:
- Reduced revenue, both from losing out on the revenue the churned customer-generated and from costs associated with acquiring new customers.
- Increased costs for the business in other areas. For example, the business may need to spend more money to improve its products and services to prevent future churn.
- A damaged reputation – when customers have a bad experience with a company, they may feel inclined to tell their network about the experience.
Churn can also hurt valuations for SaaS companies. When assessing a business, investors take a close look at Customer Lifetime Value (LTV) to determine the business’s financial health and standing in the market. High churn rates hurt LTV, so any SaaS company that hopes to attract (and retain) investors should pay close attention to churn.
What are the warning signs that a customer is about to churn?
Fortunately, there are a number of warning signs that indicate a customer is at risk of churning – and explicit customer dissatisfaction isn’t the only potential issue to look out for. Keep an eye out for these additional red flags so that you can get ahead of potential churn:
- A drop in communication and/or responsiveness
- Low customer engagement, including decreased usage
- Low customer satisfaction
- Requests for features that you don’t offer (if customers are asking for features that are out of scope or not part of the package, pay attention)
Are there any ways to win back lost customers after they’ve churned?
All hope isn’t lost once a customer has churned. To re-earn someone’s business, you can implement a win-back program. These programs re-engage lost customers by offering a “reward” when they make another purchase, reactive a subscription, or similar.
To implement a successful win-back program, you should:
- Personalize your win-back strategy to the customer. Customers churn for different reasons – a 15% coupon might work for a price-conscious buyer, but not for someone concerned with product quality or customer support.
- Focus your efforts on the “best” churned customers. For example, it doesn’t make much sense to spend time and money trying to reactive customers who won’t fit your ideal customer profile or those who only have a small impact on your recurring revenue.
- Carefully track the results of your win-back program and assess effectiveness frequently. Reactivation Rate is a helpful metric to track.
How is Customer Churn different from Revenue Churn?
Customer churn and revenue churn are two different metrics.
Revenue churn is the percentage of revenue that stops flowing to a company in a given time (month or quarter). On the other hand, customer churn is the percentage of customers who stop purchasing from a company in a given period (generally per month or per quarter).
For instance, if your monthly gross revenue was $100K and you lost 20% ($20K) due to customer cancellations, your annualized revenue churn would be 4%. If, however, you had 100 customers, but only 10% canceled their subscription plans, resulting in 10 cancellations, then your annualized customer churn would be 0.5%.
Recommended resources related to Customer Churn
How to design a winning metrics framework
15 common customer service metrics and how to use them
How to measure CSAT in Zendesk using AirOps
How to track Monthly Recurring Revenue (MRR) in Google Sheets using AirOps