There’s a really popular nightclub down the street from our office. The management claims that 700 people from the neighboring offices unwind there every Friday night.
There are never more than 400 of them there at a given time, however…
Although there are constantly people pouring in, there are always people leaving to go back home to their families (or their outside-of-work friends).
There are others leaving because they live on the other side of town.
Still, others leave with newly-made “friends”.
Others leave simply because they are just tired from working hard the whole week.
Some have just spent enough. Or have had enough to drink.
Some people just leave because they cannot take any more of their terrible, overplayed music.
There are people leaving for various reasons, even while there are people coming in.
It's a lot like that with your customers. Although there’s more and more coming in (or so we hope!), there's always going to be some dropping off the bandwagon.
It's not necessarily always about you (like people leaving the club in the example is not always about the club’s terrible music). But it's good to know the number you’re losing so that you can adjust targets to keep overall revenue at an optimal level and constantly on the incline.
There’s a term for that figure of drop-offs. It's called churn rate.
What is Churn Rate?
Simply put, churn rate is the rate at which you lose customers, represented as a percentage.
This metric is what you might call the opposite of customer retention.
In a subscription business model, there will always be a certain number of customers who do not renew their subscriptions or who cancel their subscriptions altogether during a given year.
The percentage of such customers who end up leaving your product over a given period of time determines your business’s churn rate.
As you can imagine, a high churn rate is injurious to the bottom line of a business. The higher the churn rate, the higher the revenue loss.
It gets worse: An exceedingly high churn rate might indicate product/ service dissatisfaction or a lack of product/ service value. This is a huge red flag and an indicator of bigger business issues to come. A lack of customer value could result in a business failing altogether and should definitely be addressed by the company’s stakeholders.
You can use the universal churn rate formula to figure out your product’s churn rate. For the sales team, the goal of using a churn rate formula is to help sales heads figure out revenue projections and targets for the next period.
The churn rate formula is easy to use and remember:
Simply count the lost customers and divide it by the total customers at the start of the time period. Then multiply the final value by 100.
⚡️Select the time frame (monthly, annual, or quarterly) beforehand.
⚡️Compare the monthly churn rate with the annual churn rate
Churn rate formula = (Lost customers ÷ total customers at the start of time period) x 100
For example, let’s say that your SaaS business was catering to 500 customers at the beginning of the quarter. And after the quarter ended, your business lost 50 customers.
So using the churn rate formula we have,
(50 ÷ 500) x 100 = 10%
Your monthly churn rate is 10%.
We can say that your SaaS business is losing customers at the rate of 10% each quarter.
There are a few points to pay heed to when you go about calculating your churn rate.
Points to ponder on while calculating churn rate
Although using the churn rate formula is fairly straightforward, some inherent factors can send the resulting metric out of whack. You need to take a closer look, or you risk having a skewed perspective.
Your subscriber base represents a dynamic figure
A customer might leave your business either by canceling a subscription or by deciding not to renew a subscription.
You should try and find out what made them cancel the renewal.
However, amidst that dialogue, you must be careful not to include yet-to-renew subscribers (or subscribers who have canceled but you’re in dialogue with) in the “total number of customers” in order to prevent your churn rate from being distorted.
The time period chosen can tip the scales
You can choose between a week, month, quarter, or year as the time period for your customer churn rate calculation. The time frame you choose will have a strong bearing on your churn rate.
An incorrect time frame can produce inaccurate insights and lead to a distorted sales forecast. Ideally, use a time frame that offers a realistic picture - preferably one that ties in with your targets.
If you have quarterly targets, it might make sense to use a quarterly time frame for your churn rate calculations.
Sample sizes can be misleading
When churn rate calculations estimate a rate of 10% churn, you must stop to ask
“Did that value come from 100/1000?”
“Or simply from 1/10?”
Although churn rate can help us predict customer retention, it does not shed light on the actual number of customers and how the customers behave over time.
As a result, the churn rate is not ideal for an apples-to-apples comparison between two companies or two solutions unless all the underlying numbers are similar. Use churn rate in context to get the most out of it.
Market segments behave differently
Most businesses have at least a handful of different customer segments. When measured separately, they can produce monthly churn rates with a big difference, like a 15% monthly churn rate vs. 0%.
Additionally, failing to separate B2B and B2C customers is not ideal. Losing five individual customers and losing five enterprise-level clients will impact your revenue in drastically different ways.
To get a more realistic picture, you want to calculate the churn rate for individual segments.
Seasonal demand (or the lack of it) impacts churn rate
You need to account for the fact that customers are likely to not interact with your business in the off-season (if your business is seasonal).
For example, let's say that you sell heaters. You wouldn't typically expect customers to be buying new heaters or servicing their existing heaters during the summer, right?
As a result, churn rate should be analyzed over several seasonal cycles to produce accurate results that take into account the big picture.
Remember to account for not just weather-related seasons, but business seasons too. For example, businesses are probably not going to switch over to new accounting software in the middle of a quarter - it's more of an end-of-the-quarter thing.
Bottomline: Remember to compare not only monthly churn rates but also annual churn.
Now you know how to calculate your customer churn rate. But do you really need this metric?
Let’s look at the significance of churn rate.
Impact of customer churn rate calculation on your business
Investing in new customers is between 5 and 25 times more expensive than retaining existing ones. - HubSpot
Your customer churn rate is an important metric that helps you derive useful analytical insights.
By analyzing your churn rate, you can derive insights into how well customers are adapting to your product and whether your retention strategy is working well. For example, when you optimize your product and services, your churn rate should automatically reduce. In other words, it tells you whether your retention strategy is working.
Churn rate is not just an isolated figure that measures attrition; it has a fairly heavy impact on other metrics such as MRR, LTV, and CAC, all of which link to your profitability. Let's look at how to churn rate impacts these:
Monthly recurring revenue (MRR): Monthly recurring revenue analysis is the quickest indicator of year-on-year growth and long-term viability. Churn directly hurts revenue, which means that you need to keep your churn rate in check to protect your MRR.
Customer lifetime value (LTV): When the customer leaves, there is no more revenue that they can bring to your SaaS business. The higher the churn rate, the lower your customer lifetime value.
Customer acquisition costs (CAC): Think about all the time and resources spent on acquiring customers. When a customer cancels you before contributing enough to your revenue to justify the cost of acquiring them, the cost of resources and time spent on acquisition starts eating into your profits.
To keep your CAC at optimal levels you need to keep a tab on the churn rate.
So what’s the ideal situation with regards to churn rate?
Well, it's called net negative churn, and it's a situation where customers keep coming in and never leaving. Wow. Wouldn’t that be nice?
Well, people quit jobs, move, and find new contexts (which might render your product out of context), so it may not always be possible to achieve a churn rate that is 0. But you can work towards it and at least come close.
The point is to minimize revenue loss emerging from cancellations and downgrades.
To sum up: the customer churn rate deserves your attention.
Churn Rate Examples
Here are some extremely successful SaaS companies in the B2C space who boast a churn rate that is close to 0.
Netflix: 2.5% Monthly Churn Rate
With a 2.5% monthly churn rate, Netflix ensures that more than 97% of customers choose to stay. The streaming platform has the lowest churn rates compared to its competitors due to the vast original content and its well-established brand.
Disney+: 4.3% Monthly Churn Rate
Disney is another such company in the video streaming industry that has maintained a low churn rate of 4.3%.
Spotify: 4.8% Monthly Churn Rate
Spotify has a reported churn rate of 4.8%. It is a market leader in the music streaming industry with an expansive library.
Hulu: 5.2% Monthly Churn Rate
Although Hulu is one of Netflix’s principal competitors with a 20% market share, it has a comparatively higher monthly churn rate of 5.2%
Peloton: 8% Annual Churn Rate
Peloton is a fitness subscription company that has reported an 8% annual churn rate. Peloton’s churn rate increased when the lockdowns were lifted, and people were able to go back to prior methods of working out (like jogging outdoors or visiting a gym).
Apple TV+: 15.6% Monthly Churn Rate
Apple TV+’s monthly churn rate is at 15.6% - 20%. Customers have reported dissatisfaction related to a limited content library and non-original content.
Bring your customers closer with Wingman
When you understand your customer, your retention rate automatically increases. Wingman helps you get close to your customer as an intelligent sales analytics software.
It transcribes your sales calls and delivers actionable metrics that help you understand your customer and their frustrations (which could contribute to them canceling a subscription). Moreover, Wingman offers live, in-call, real-time prompts to your sales team and makes an actual difference in helping them improve their performance.
Wingman seamlessly integrates with your CRM, video conferencing applications, messaging apps like Slack, and other business tools. With powerful two-way integrations, there’s no need to copy data manually from one tool to the other.
You can also dial back to the transcripts of old sales calls and figure out what went wrong because Wingman maintains indexed, searchable archives of your calls. You can go back to sales calls with a customer who dropped off the bandwagon and check, “did we deliver what we promised?” If you didn’t, you know exactly how to appease the lost customer.
With Wingman, you have actionable insights. And when it comes to reducing your churn rate, you need to take the right action and get back on the customer’s good side. Why wait anymore? Book a demo and try out Wingman today.