Churn Rate- What is Means, How to calculate and Reduce It
What is Churn Rate?
Churn rate is a business metric that calculates the rate at which customers leave a product over a given period of time. For example, if a company has 100 customers at the beginning of the month &10 of them leave by the end of the month then the churn rate is 10%.
What is the Formula of Churn Rate?
Churn Rate = (Total Number of Customers at the Beginning of the Period / Total Number of Customers Lost During a Period) × 100
How to Calculate Churn Rate?
To calculate your rate of customer churn, divide churned customers over a specific period of time by the total number of customers you have at the start of that period. It is simple as we have discussed with formulas in the beginning.
According to multiple experts there are 4 main method of calculating churn rate-
The Simplest Way
The simplest way to calculate churn rate is by dividing the total number of churned customers by the initial number of customers on the first day of a specific month.
You should have two calculations to use simplest way:
Here, the challenge is that as your business grows both your customer base &churn can increase. While an increase in customers can lead to a lower churn rate percentage which is not a problem if your company has a stable customer base &consistent growth.
The Adjusted Approach
To account for significant monthly growth, we can use the midpoint of the customer count for the month instead of the count from the start of the month. In this method, we divide the number of churned customers by an adjusted average of the customer count over the period.
Pros
Handles Growth: This approach effectively addresses growth issues, providing a more accurate reflection of customer churn in growing businesses. Simplicity: It maintains a straightforward calculation method, making it easy to implement and understand.
Cons
Inconsistent Across Time Frames: This method does not scale well with different time windows. The same calculation can yield very different results when applied weekly, monthly, or quarterly. Potential Inaccuracy: By relying on midpoints, it might not capture sudden spikes or drops in customer numbers within shorter time frames.
.The Predictive Way to Calculate Churn Rate
This predictive model for calculating the rate of customer churn is developed by Shopify. By using this model businesses can predict when a customer will leave based on their behavior. It is very important for understanding customer retention.
Almost in all types of models the rate of customer churn is calculated after they left while in this model Shopify predicts the likelihood of customer churn on any given period of time. This model takes into account various factors that influence a customer ’s decision to leave like-
If you have the information that your customer is likely to churn within the next week. You can reach out to them with a special offer to keep them engaged.
The Shopify Way
Instead of just taking the average churn rate from the first and last days of the month, Shopify offers a more accurate approach. They suggest calculating the average rate of customer churn by considering every single day in the month. Divide your customer churn by the average number of customers you have each day in a month. Record the number of customers you have at the end of each day. Add up all the daily counts ÷ by the total number of days in the month to calculate the average churn. Divide the number of churned customers by this average to calculate the overall rate of customer churn. So, if accuracy is your goal then use this Shopify method and take the average of every day in the month.
Important Points to Consider While Calculating Churn Rate
The Difference Between B2B and B2C B2B &B2C companies have different churn which is mainly based on their market &target audiences. B2B Churn Niche Target Audience B2B SaaS (Software as a Service) businesses usually have a more specific target audience with clear, defined needs. Lower Churn Rate Since businesses are more likely to invest in long term solutions, B2B companies experience a low rate of customer churn. Adjustable Pricing Models The nature of B2B models forms closer relationships with clients which makes it less likely for customers to switch frequently.
B2C Churn
Broader Audience B2C companies serve a much wider &more varied audience, which creates a challenge to capture &maintain each customer ’s attention. Higher Churn Rate In the B2C industry customers can easily switch to other products due to various options available so on an average B2C companies have a high rate of customer churn. Frequency of Switching As in the B2C market end customers have more options which are available at a competitive price. So consumers in the B2C market frequently switch to get better products at a low price.
Churn Rates Vary by Industry
You have to understand that the rate of churning customers highly depends on the type of industry. You can easily find some businesses are successful even with higher churn rate while others with lower rate of customer churn are struggling. According to multiple reports the average churn rate for SaaS businesses is around 5%. While on the other side, industries like education services have different dynamics. The average rate of churn in this field is just under 10%. This might seem high at first glance but it is considered healthy due to the seasonal nature of the industry. Churn in education is heavily influenced by the school year. Rate of customer churn can sometimes indicate that businesses need to change their approach to challenges but again context is key. What might be a red flag in one industry could be perfectly normal in another.
Conclusion
Hope this blog gives you the complete idea of churn rate. Understanding it is very important from a business point of view. Whether you ’re in B2B or B2C, how &why your customers are leaving will show you the mistakes you are committing and how to address them. Here the important thing to consider is that different industries will have different benchmarks for churn calculation.
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