What does churn rate mean to a company’s ability to grow and hit its financial goals? Customer churn is the ultimate leaky bucket for companies. No matter how much you dump into the bucket (new customer acquisition), a churn problem means customers drop out, and you never fill the bucket. This is especially true for companies with a high churn rate.
The term, “churn rate” can be confusing, so let’s start with the basics to better understand why customer churn is such a big problem.
What Is Churn Rate?
The basic definition of churn rate is a measurement of customers who stop doing business with an entity. In subscription businesses, it’s evaluated as a percentage of subscribers who discontinue their subscription within a given time period.
Another way of thinking about this definition of churn rate is a measurement of logo churn. However, logo churn is only one way of tracking churn. The other way of evaluating churn is by looking at revenue losses. Logo churn and revenue churn provide different business insights. Logo churn treats all customers as equals. It lets you see how many customers are leaving. Revenue churn, by contrast, gives you visibility into the financial impact of your lost customers.
How Do You Calculate Churn Rate?
How you calculate churn rate is straightforward. Mathematically, it’s the number of churned customers divided by the number of total customers in a given timeframe (ie monthly, quarterly, annually) As a formula it 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
The formula to evaluate revenue churn is slightly different; we use Net Revenue Retention (NRR). NRR measures the total change in recurring revenue from existing customers over a specific period of time, taking upsells and downsells into account. Here’s how it looks mathematically:
Rather than talking about abstract math, let’s walk through an example of how it looks in a company.
Churn Rate Example
Let’s say a customer is paying you $12k a year for a subscription service. If that customer churns, your company has to make up the $12k loss AND win another $12K customer to stay on track.
Why the extra customer? Let’s break it down. For some subscription businesses the cost to acquire a new customer can be as much as 92% of the first year’s revenue. In other words, the lost $12k customer represents $11k in costs in addition to the $12k lost in the subscription.
Let’s say the company planned to acquire 10 new customers, each worth $12k. This would represent $120k in revenue and $110k in acquisition costs.
By losing just one $12K customer, the company now must spend $121K on acquisition costs. This loss will make it much harder for the company to achieve its financial goals.
But it goes even deeper, because revenue losses are only one impact to a company when they experience customer churn. Here are some additional impacts of a high churn rate:
- Lower margins
- Application of resources for justification exercises internally and with customers
- Negative word of mouth in the marketplace
- Negative impact to employee engagement and possibly even employee turnover
Bottom line: There are lots of reasons why improving your customer churn rate is beneficial to a company. And yet, some churn is inevitable, and sometimes customer churn can even be a good thing. Ideal customer profiles are important for enabling a company to target the services they deliver, so serving customers outside your ideal profile can take a company off course, strategically.
What is a Good Churn Rate?
The short answer is that acceptable churn rates can vary by market. 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.
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%. There are even differing churn rates by industry.
When the needle moves based on industry and client selection, you might ask yourself, “what is high churn?”
High churn is churn that prevents your company from growing as planned. Don’t know if you’re “growing as planned?” Go ask. Ask the CS leader or the sales leader or even your CEO. Your churn rate is a number you need to know.
This answer isn’t intended to be glib. There simply isn’t a “one size fits all” churn rate for companies. But it’s a question that should be answered for every company so that your targets keep you on track for your growth goals.
Alignmint Growth Strategies can help you identify your unique benchmarks. Get started by downloading The Churn Virus. The Churn Virus is a white paper with links to dynamic calculators that enable you to see the real-time impact of customer churn for your company. And it’s free! Grab your copy of The Churn Virus and let us do the number crunching for you.
Design your company’s path to next-level growth, with Alignmint Growth Strategies
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.