What is a churn rate? A churn rate is the rate at which customers or subscribers stop doing business with a company during a specified period. Your churn rate helps you gauge the effectiveness of your customer retention practices and understand how business changes affect customers.
For most companies, churn rate is a critical metric to track. Even if you seem to be on solid financial footing, if you’re losing customers, you could be headed toward trouble. At a minimum, you need your customers to stick around long enough to recover the money you spent to acquire them (known as customer acquisition cost).
Companies typically calculate churn rates at least annually, although quarterly or even monthly calculations are often valuable. Since different customer groups defect at different rates, you may also need to calculate churn for various customer segments.
Common uses for churn rate
- Assess your company’s financial health
- Forecast potential future performance
- Analyze whether you are retaining customers on a month-to-month basis
- Determine the impact of a business change on customer retention
- Quantify customer lifetime value
Churn rate calculation example
The most straightforward way to calculate churn rate is by dividing the number of customers who churned during a period by the number of customers you gained during that time. Multiply the result by 100 to get your churn rate.
Imagine you offer subscription-based software and acquired 200 new users in the past month. However, you also lost 15 existing subscribers.
Here’s how to calculate your churn rate:
Churn Rate = (Churned Customers ÷ New Customers) x 100%
Churn Rate = (15 ÷ 200) x 100%
Churn Rate = (0.075) x 100%
Churn Rate = 7.5%
There are other churn rate formulas to consider if appropriate for your business needs. No matter the formula you choose, tracking your churn rate helps you know if you must accelerate customer acquisition or retention to meet your growth targets.