What is churn and how to calculate it?
Valentin Huang 06/14/2023 Glossary
3 Minutes

How can you prevent or reduce customer churn? How can you identify the reasons why customers leave and what you can do to keep them satisfied and loyal? And how can you measure and improve your customer retention rate?

In this blog, we will explore the concept of customer churn and why it is important to track it correctly.

Churn - The Basics

Customer churn is also known as customer attrition. Simply put, it is the loss of a company's customers for any reason. It is significant for businesses to track and measure churn as a percentage of customer loss over the aggregate number of customers over a given time. It is very likely that the churn rate will change by industry, and it is absolutely important to understand the market to alleviate churn. When companies face a high churn rate, their monthly recurring revenue data also decreases, implying a general dissatisfaction with a particular product.


Calculating Churn – All you Need to Know

The simplest calculation of the churn rate is to find out the percentage of customers lost during a given period of time, compared to the customers at the beginning of the period. For example, if a company had 1000 total customers over a month and 100 customers were lost throughout the period, the monthly churn rate would be calculated as follows:

(100/1000) * 100

Customer Churn Rate = 10%

However, it should be noted that the formula does not provide a complete and lucid picture. To create a more in-depth understanding of how churn influences the business, a deep statistical model must be created. When the results from the formula and the analysis are studied under each other’s light, a complete picture of past and future churn can be created. Some of the decisive factors for using the company's churn results are the company size, the sample of customers and the goals. 

The Need for Churn

There are a number of reasons why customer churn exists.

  • Customers may no longer value the product being sold by the company. This may be due to a change in the product design, or a change in consumer preferences.

  • The motivation for buying the product may no longer exist because the problem the product was used to address has been solved.

  • Customers may be annoyed with the overall experience of using the product, resulting in high dissatisfaction. The problem may be due to deteriorating performance, lack of features and incessant bugs. 

  • The product may not offer the functionality or capability required by the user. On the other hand, the customer may not be well informed or trained to use and access the functions offered by the product. 

  • The customer may stop using a certain product because there may be an alternative solution to it in the form of: direct and indirect competitors and alternatives.

  • Product reputation can be damaged by widely discussed performance issues, cybersecurity complaints or the notorious reputation of the company's employees.

The Use of Churn for Product Managers

For SaaS product managers, customer churn may prove to be one of the most crucial metrics, particularly due to its ability to measure the perceived value being delivered by the product or service. The product experience is the predominantly decisive factor regarding how long, and how many consumers will stick around the product itself.

Product managers make use of two significant strategies to mitigate churn.

  1. They proactive and pre-emptively address product flaws and shortcomings.

  2. They conduct rigorous user research to recognize customer behaviors.

When product managers gain a deep understanding of usage patterns that predict likely attrition, they facilitate future churn forecasting and incorporate the account management function and prioritize product enhancements for users. These changes in product features are intended to respond to consumer concerns, with the ultimate goal of eliminating the reasons for churn.

Ways to Reduce Churn

  • The basic approach to reducing churn is to increase the perceived value proposition of the product. There are several ways to achieve this objective. 

  • Companies need to ensure that consumers derive various benefits from product use. To achieve this, large-scale investment in customer training, proactive online and offline consumer support, embedded tutorials and contextual help is urgently needed.

  • It is also important to understand how not all products may be suitable fits for all customers. Product managers should closely collaborate with marketing and sales departments to attract prospects. The messaging should be precise and accurate in nature, and try to keenly highlight the product benefits and exciting features.

  • The product pricing should be based on the perceived value of the customer. A customer-centric pricing strategy is key to reducing churn because customers are hardly interested about revenue targets, profit margins for the business, or growth rate.

  • Without breaking or eliminating the functioning aspects of the product, new and upgraded features should be continuously added to the product. Precise care and caution should be taken on the fact that existing functionality and user experience should never be compromised for adding new features.

  • Customers should never be taken for granted. Customers should be frequently engaged in the process so the business can gain a better understanding of their preferences and how their overall experience could be improved.


Frequently Asked Questions

Does churn rate affect retention?

The churn rate is identified as the inverse of customer retention. A lack of customer retention translates to customer churn.

What is a good churn rate?

A good churn rate may depend on the industry average or the prior year’s results. A low churn rate is favorable because it means that customers are satisfied with the value being provided by the business. Average churn rates could be between 2% - 8% of the MRR. For younger companies, this could be between 4% - 24%, and for companies more than 10 years old, it could be around 4%.

What is customer churn?

This is the percentage of consumers who stop using the product during a given period of time.

Why does customer churn matter?

Customer churn rate is a critical metric for the company because it highlights and informs on what is going right and what is going wrong in the business model.



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