It’s important for all companies to evaluate their churn rate. Understanding why customers choose to leave your company can provide insights that help you hone your product, improve your customer success/customer service processes, or rethink your marketing messaging.
That said, there’s a debate about which kind of churn to prioritize: monthly churn rate or annual churn rate.
Pros and Cons of Calculating Your Monthly Churn Rate
When you’re trying to decide between using monthly churn rate vs. annual churn rate there are many factors to consider. Monthly churn rate identifies the percentage of customers who have quit, canceled or otherwise stopped working with you each month.
Monthly churn rate allows you to react more quickly to changing conditions. In most companies, but especially those with high-growth, quick pivots can be valuable. Plus, a monthly churn rate mathematically yields a lower number. In the world of positioning for investors (and bragging rights) it’s just sexier to cite your low, low churn rate.
Looking at monthly churn can gloss over realities you must face and address in order to hit your revenue targets and growth goals.
Monthly churn rate is a fine metric to track. For most companies, shifting your focus from monthly churn to annual churn as the primary metric is an important step in the maturity of your company’s customer churn reduction strategy. By using annual churn as a metric companies can:
- Smooth seasonality impacts
- Evaluate ideal customers strategically
- Reduce reactivity that can result in companies over-rotating toward the wrong customers
What Does Annual Churn Rate Mean?
For the purposes of your company’s growth goals, annual churn rate means your company is evaluating the number and percentage of customers who leave on a year-over-year basis vs. a month-over-month basis.
At Alignmint Growth Strategies we talk a lot about annual churn rate formulas. For a quick refresher, here’s what the churn rate formula:
- Number of customers at the beginning of the given time period (X)
- Number of customers churned over the same time period (Y)
After finding this information, use the formula below to determine your customer churn rate as a percentage – in this case, the percentage is represented by the letter Z.
(Y/X) x 100 = Z
What’s important to understand about annual churn rate – especially in comparison to monthly churn rate – is that they yield very different impacts to your path to growth.
Let’s say a company has a monthly churn rate of 5%. Sounds good on the surface, right? But that means you’re losing 5% of your customer base each month. If you play that monthly churn rate out over the course of the year, you’d be looking at an annual churn rate of 46%.
Suddenly, that doesn’t seem like such a good outcome. And this example is precisely why it’s so important to use annual churn rate as the primary number to track and measure.
We’ve gone deeper into the impact of customer churn in Alignmint Growth Strategies’ white paper The Churn Virus. In our white paper, we walk through the cost of churn by looking at it annually, over time, and how churn hits a company’s eventual valuation at the point of sale. The Churn Virus even lets you run your company’s real-time numbers in our handy annual churn rate calculator. It’s a great tool – and free – for those who are interested in understanding the impact of churn on their company’s revenue.
Average Churn Rate By Industry
Knowing your churn numbers is important, but you also need context to understand what those numbers mean. Every company experiences some churn, so what’s a good churn rate for your industry?
If you’re looking for a good churn rate for B2C companies, this article provides some great benchmarks. At Alignmint, we tend to help companies that rely on renewals for growth. These subscription-based companies may be in technology, retail, and even education.
So what’s a good annual churn rate for these companies? Again, it varies.
Here’s where that monthly vs. annual churn issue comes up. It’s not uncommon to see SaaS (software-as-a-service) companies report churn in the single digits. That’s well within the best practice industry guidelines of a churn rate lower than 10%. What we often find is that this number doesn’t match reality for a variety of reasons. Sometimes, it’s because the company is only tracking monthly churn and doesn’t translate the monthly number to annual. In other cases, teams subconsciously gravitate to the most favorable churn rate they remember. It’s a great example of the “peak-end rule.”
No matter what the cause, without data that’s grounded in real-world customer outcomes, companies suffer substantial consequences.
The Bottom Line For Annual Churn Rate
There are a couple key takeaways for understanding annual churn rate and why it’s important:
- Monthly churn rate and annual churn rate may both be calculated as a percentage, but they are not apples to apples.
- Focusing on annual churn rate provides your company with richer data so you can make clear decisions for churn reduction strategies
- Churn rates vary by industry, so get benchmarks from similar types of companies and don’t get distracted by seemingly low churn rates at other companies unless they have the same business model as yours.
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.