We think about customer churn rates a lot here at Alignmint Growth Strategies. Many of our clients come to us because they want churn reduction strategies. That’s because having a good (or low) churn rate–whether it’s in terms of a good monthly churn rate or annual churn rate–is critical for their path to growth.
In fact, reducing customer churn is the single biggest opportunity for companies to grow.
For that reason, we created an easy way for companies to calculate their customer 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 churn is impacting your company.
Essentially, customer churn impacts companies in two different ways: revenue growth and valuation at the point of sale. But before we dive into how churn impacts companies, let’s explore how to calculate customer churn.
How Do You Calculate Annual Churn Rate?
When companies evaluate customer turnover, they often look at monthly churn rate vs. annual churn. There’s no right or wrong timeframe to use, provided you’re consistent across your calculations. However, there can be a misconception about monthly churn vs. annual churn that’s important to understand.
Monthly churn isn’t just 1/12th of annual churn. For example, if you have a 1% monthly churn rate, that doesn’t translate into a 12% annual churn rate because of the compounding nature of churn. In fact, a company with a 1% monthly churn rate actually has an 11% annual churn rate.
When companies evaluate churn they can miss important benchmarks that investors care about if they only look at monthly churn. Worse, they can misunderstand the true impact of customer churn on their company.
The churn rate calculator in The Churn Virus starts by showing the impact of annual churn on your company’s revenue and how your company could improve revenue over the course of a year if you reduce churn.
How Does Customer Churn Impact Your Path To Growth?
While it’s helpful to understand churn’s cost annually, or even year-over-year, the real eye-opener is seeing the impact of customer churn over time. The Churn Virus Calculator lets you enter dynamic inputs, including your revenue goal for a period of time.
For example, many venture-backed tech start-ups want to hit $100 million in revenue. The calculator lets you add your revenue objective as well as a number of years to achieve that goal. Once you enter your inputs, it’s easy to see what it takes to hit your revenue targets in your stated timeframe.
What’s eye opening for many people who use the churn rate calculator is that you can be on a revenue growth path that seems good – almost doubling annually. You can have great sales growth, too. But without a good customer churn rate, your company can still fall substantially short of its revenue goals.
What Is The Impact Of Churn On Company Valuation?
Your annual customer churn rate and path to growth are key inputs to a company’s eventual valuation at the point of sale. Companies with lower churn rates and, more importantly, higher net revenue retention (NRR) are more likely to get a higher revenue multiple when it’s time to exit.
Higher net revenue retention means the company is increasing the financial contribution from existing customers, with upsells outpacing downsells and churn. This is an important indicator of company health and growth potential—one that gets plenty of scrutiny from investors.
The Bottom Line For Calculating Churn Rate
There’s tremendous pressure to show investors and your team that your company has a good customer churn rate. But it’s also vitally important to be honest with yourself about your reality. Your ability to easily calculate churn rate and see the cost of customer churn helps you be realistic about the steps you need to take in order to grow and hit your goals. The calculator in The Churn Virus is a tool that will help, so grab your (free) copy.
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 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.