Why should you care about, let alone calculate your company’s annual churn rate? Generally, companies want to understand the extent to which customers are canceling subscriptions, discontinuing service, or ending their relationship to track things like revenue gains and losses. Smart companies want to go farther–they want to know why those customers are leaving. Leading the pack, best practice companies use that information to create and implement churn reduction strategies that work.
Churn reduction strategies are best practice because reducing churn is the single biggest opportunity for companies to grow.
That said, many companies look at churn on a monthly or quarterly basis vs. looking at annual churn rate. There are benefits to evaluating churn over a shorter time frame, but for right-sized responses to issues related to customer turnover, it’s critically important to understand annual churn rate.
Let’s start with the basics of the calculation itself.
How Do You Calculate Annual Churn Rate?
There are two ways to calculate annual churn rate. The first is based on the number of customers you’ve lost over a given year. We call that “customer churn,” because it refers to the percentage of customers lost. The second is called revenue churn.
The calculation for annual churn rate based on lost customers is straightforward. Mathematically, it’s the number of churned customers divided by the number of total customers over a year. Churn rate is stated as a percentage, and the formula looks like this:
- Number of customers at the beginning of the year (X)
- Number of customers churned over the same year (Y)
The formula below determines your annual churn rate, which is a percentage represented by the letter Z.
(Y/X) x 100 = Z
Here’s an example of how the formula works in the real world: Let’s say a company has 1000 active customers at the beginning of the year and loses 100 customers by year-end, their annual churn rate that year would be 10%.
For what it’s worth, the calculation for annual employee churn rate is the same. It’s valuable to look at your company’s employee churn rate, as well. Employee turnover is often correlated with a company’s customer churn. What’s interesting (and often overlooked) is that the strategies for customer churn reduction and those for addressing employee churn are often aligned. But let’s stay focused on the customer side for now.
Customer Retention Rate
The flip side of churn is retention. Your annual retention rate shows the percentage of customers you’ve kept over a given year. Curious about how to calculate annual retention rate? Once you have your churn rate, it’s easy. To calculate annual retention rate, simply subtract your annual churn rate number from 100%. So for the example above, the company’s retention rate would be 90%.
Revenue Churn Rate
You can also calculate annual churn rate based on the revenue associated with lost customers over a given year. At Alignmint Growth Strategies we prefer to use Net Revenue Retention (NRR) as a churn rate formula. NRR measures the total change in recurring revenue from existing customers over a year. NRR is a more robust way to analyze customer churn because it accounts for upsells and downsells from existing customers, in addition to revenue from lost customers. This can provide a deeper understanding of the impact of churn on the overall business. Here’s how it looks mathematically:
What Is A Good Customer Churn Rate?
If you want to know whether your company has a good customer churn rate, you’re not alone. However, there’s no simple answer to that question because the definition of “good customer churn rate” differs by industry and other factors like the profile of your customers.
For example, Product-Led Growth (PLG) models are designed for low prices and a higher number of customers. The nature of the business model means they can tolerate higher churn rates, which could be greater than 10% annually. Generally speaking, the average churn rate by industry for SaaS (Software-as-a-Service) aims for less than 10% annually.
In contrast, offerings positioned for large, enterprise-level sales generally provide fewer, higher-service deliverables. Companies with customers that spend more for white glove services should aim for a churn rate closer to 0%.
At Alignmint Growth Strategies, we created an easy way for companies to calculate your company’s annual churn rate. It’s part of a whitepaper, called The Churn Virus that walks through the cost of customer churn for a company. In The Churn Virus you can find a dynamic churn rate calculator to see exactly how customer turnover is impacting your company.
Design Your Company’s Path To Next-Level Growth
Your company may have great product-market fit, a well-designed product, and sales/marketing teams that regularly bring in new customers. But when those wins are met with a churn problem, it becomes impossible to grow and meet revenue targets.
Successful churn reduction strategies align your company to boost customer lifetime value…aka retention.
At Alignmint Growth Strategies, we deploy churn reduction strategies so that you hit your revenue targets and maintain momentum.
Customers spend more, stay longer, and refer like crazy. Employees feel connected to your vision and confident they can be successful in their work. And leaders focus on progress and growth.
Discover the churn rate reduction strategies that work best for your company by making an appointment with Alignmint Growth Strategies. Connect with us today.