Churn Rates - Meaning, Formula, How to Calculate, & Examples
Every business acquires and loses customers regularly, which has nothing to do with the quality of the products or services offered, as having a basic churn rate is natural for every business. However, the lower the churn rate is, the higher would be the number of customers retained by the business.
An easy example would be online businesses that sell their services or products through mobile-based applications. While you can see millions of downloads of the app, the retention of users is low in the case of these app-based businesses.
In this article, you will read about the following:
- What is Churn Rate?
- What is the customer Churn Rate?
- What is Revenue Churn Rate?
- How to reduce the customer churn rate?
- Why knowing the churn rate is essential for your business?
- Statistics related to churn rate of app-based business
What is Churn Rate?
The churn rate meaning can be defined as the rate of customers leaving a business or withdrawing from using the products or services of a business. Churn rate is often referred to as attrition rate or customer churn as well. Let's understand this with an example. Suppose you have a business selling garments online, and you have designed an application for the same. Now, you see ten people downloaded your app on a fine Monday, but by the end of the day, six people deleted their account from the application, and two new people opened an account on your application. When expressed as a percentage, this can answer your question: What is the churn rate?
Now there can be different churn rates – customer churn rate, revenue churn rate, app churn rate and others. Here you will mainly learn about customer and revenue churn rates.
What is the meaning of customer Churn Rate?
Customer churn rate is a natural process of getting and losing clients/ customers in a business. Every business experiences churning irrespective of the kind of products/ services or quality of the same they offer.
How to calculate the customer churn rate?
The customer churn rate formula can be stated as
Customer Churn rate = (Customers at the beginning of the month – customers at the end of the month) /customers at the beginning of the month
So, for instance, you had 100 customers at the beginning of December 2022, and at the end of this month, the number of customers you have is 90. So, the customer churn rate will be
= (100-90)/100 = 10%
What is Revenue Churn Rate?
Now the revenue churn rate meaning can be stated as the loss or addition of revenue due to a change in the number of customers. A business's financial performance depends on the revenue churn rate to quite some extent. The lower the revenue churn rate is, the better it is for the business's growth.
How to calculate the revenue churn rate?
To calculate the revenue churn rate, you need to apply the churn rate formula using the monthly recurring revenue (MRR) which has been lost in that month and then deduct any additional revenue from existing customers and then divide the resultant figure by the MRR.
So, for instance, at the beginning of December 2022, your MRR was ₹500000, and at the end of the month, it stood at ₹400000. Existing customers upgraded to premium features which added ₹50000 to the revenue. So, the revenue churn rate would be
So this means there is an overall 10% loss in the monthly revenues of the business.
If you get a negative churn rate, then it is a good sign for the business, as that would mean growth in the overall revenue.
How to reduce the customer churn rate?
Every business wants to reduce its churn rates, and here are five ways to do the same:
- Firstly, you need to understand the mindset of your customer base as to why they are leaving your products or services. You can create a survey or have small interviews with loyal customers to know your strengths and weaknesses.
- Then comes helping the customers understand your products better. Often many great products and services fail to capture the market due to the unawareness of prospective customers. So, create simple tutorials or other resources to help the customers know and understand your products and services better. This will help you reduce the churn rates.
- Thirdly, you need to understand the right customer for your products. If you target the wrong customers, they won't stay long. So, you need to analyse the suitable customer base for your products to retain them.
- Another thing to consider is that most businesses focus on customer acquisition rather than customer retention. This way, they get new customers but cannot retain them and thus, the revenue generation doesn't grow as per their expectations or plan. So, it is crucial to focus more on customer retention plans than acquiring new ones.
- Finally, it would help if you had a plan or offers ready to bring back customers on the edge of leaving your business. Often you will see e-commerce websites sending your multiple offers when you do not open the app for a month or longer. This is their strategy to retain the customers who are losing interest in their products or services.
Why knowing the churn rate is essential for your business?
Understanding the churn rate is essential as it offers:
- Clarity on the performance of the business
- Understanding of customers' preferences and choices
- Help in peer-to-peer comparison
- Evaluates financial performance and stability
Statistics related to churn rate of app-based business
Now you may wonder how much churn rate is normal for your business or what a fair churn rate is. If we talk about app-based businesses, the churn rate is around 3.7% for a tenure of 30 days. So, if 1000 people download an app on their iOS or Android smartphone, only 37 people will retain the app after 30 days. So, it varies from one industry to another.
The lower the churn rate, the better it is for the businesses, and if the churn rate can be negative, then nothing like it. So, if your business is churning a lot of customers, it's time to reevaluate your marketing strategies and focus on retaining the customers for a longer tenure.