If your company can’t answer the question, “what is your churn rate,” it’s much more difficult to solve the problem of customer turnover. Knowing whether you have a high churn rate or something more aligned with industry averages is vitally important for your ability to hit key growth goals. Incredibly, research at Harvard Business School has shown a company that reduces churn by as little as 5%, can increase profits by up to 95%.
In this article, you’ll learn how to mathematically calculate your churn rate.
Before we jump into the math, it’s important to differentiate between the two types of customer churn: logo churn and revenue churn.
These two types measure different outcomes for churn, meaning when you use these calculations you learn different lessons about why customers are leaving your company.
The Difference Between Logo Churn Rate and Revenue Churn Rate
Your logo churn rate calculates the percentage of entities that stop doing business with your company over a given period of time. It’s called “logo churn,” because a single entity might represent more than one individual.
For example, companies that sell business-to-business might count a company as a customer. When they churn, so do all of the users from that company (as represented by a logo). Hence, logo churn.
Logo churn is an important metric because it evaluates all customers as equivalent, independent of their financial contribution. Understanding logo churn can expose valuable trends across market segments and offering tiers. These lessons can help companies be strategic in creating future product and service offerings, targeting market segments, and more.
Revenue churn rate measures the financial impact of losing a customer. At Alignmint Growth Strategies, we focus on Net Revenue Retention (NRR) as the most complete metric for revenue churn rate, as it takes upsells, downsells, and churn into account.
By evaluating the financial impact of churn, companies learn what is required to hit key sales goals. A high churn rate can mean companies miss their financial targets, which can mean unhappy investors and even lower valuations, which are particularly costly when companies are positioned for sale or IPO. You can learn more about the cost of churn, and use dynamic churn rate calculators, at The Churn Virus.
What is the Formula for Churn?
Fortunately, churn rate formula is relatively straightforward, so let’s dig into how to calculate churn.
To determine your logo churn rate, you only need two inputs: the number of customers who have churned and the total number of customers during a given timeframe. The time frame can be anything, but most companies tend to look at churn monthly, quarterly or annually.
The calculation itself is simply the number of customers divided by total number of customers. It looks like this:
Logo churn rate = # churned customers/total number of customers
The calculation for revenue churn, as measured by Net Revenue Retention (NRR) is a little more involved.
To calculate NRR, you need the following inputs across a given time period:
- Annual Recurring Revenue (ARR): The amount of money earned from subscriptions or renewal-based purchases in a year
- The amount of money earned from upsells, which can come in the form of one-time purchases, set-up fees, or upgrades from existing customers
- The amount of money from downsells, which occur when existing customers spend less money with you
- The money lost from customers who have churned during that time period
The math for Net Revenue Retention (NRR) looks like this:
For both logo churn and revenue churn, the time frame you use doesn’t matter, provided that all of the numbers you use in your calculation represent the same amount of time. There are benefits to looking at annual churn. More data means richer analyses, which are particularly helpful for seeing trends. Monthly churn provides a more immediate picture and can help companies see when there’s a problem that requires immediate attention.
It’s advisable to track your churn data and capture that data in a tool for tracking and measuring so you can evaluate trends. When you can calculate churn in your CRM, you’ll get actionable insights with increasingly refined processes to reduce customer churn over time.
What is a Good Churn Rate?
People often ask what is a good churn rate, and the answer is not cut-and-dried. Churn rates vary by industry and the type of customer you serve. The short answer to the question is that a good churn rate is one that enables you to grow effectively and hit your revenue targets. A high churn rate generally makes it harder to grow in alignment with goals.
The bottom line is that with more churn, risk increases. That churn risk comes in the form of financial losses, negative word-of-mouth and more.
Run your company’s numbers and see the impact of churn at The Churn Virus.
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.