How to calculate churn rate - A better formula
Any business owners serving regular, loyal customers can stand at their window and estimate their company’s financial health by watching their customers. The questions they might wonder are:
How many customers keep coming back?
What percentage of customers might not return?
How much revenue is lost if the customer base shrinks in a given time period?
At the root of those questions is a concept called churn.
For subscription businesses, understanding how to answer them can be the key to keeping a good thing growing.
What is customer churn?
While there is no single, industry-wide definition, churn refers to losing paying subscribers. Customers come and go. If you cancel a magazine subscription, lose an online service because of a credit card decline, or even turn off Netflix, you become part of that company’s churn.
Any subscription business knows churn is a critical metric of success. Think of it as the inverse of customer retention.
It’s usually measured over a period of time. However, the time frame and how you calculate it can tell you different stories about your business model, customer satisfaction and your opportunities to find expansion revenue.
In this blog post, we'll be discussing churn and how we calculate it at Recurly.
What is customer churn rate?
It’s a general measure of how many customers stop subscribing to your service over a given time period.
There are different opinions on how it is calculated. The most basic calculation of a monthly churn rate is the number of customers who churned in the month divided by total number of customers in the month.
What's the right way to calculate the customer churn rate?
The formula looks like this:
Monthly Churn Rate = Number of Customers Who Churned in the Month / Total Number of Customers in the Month
Calculating churn is related to how you count subscribers and activations.
End of Period Subscribers = Beginning of Period Subscriber - Churned Customers + Customer Acquisition
Some companies use the number of customers at the beginning of the month while others will wait until the end of the month. You could take an average number of customers at the start and end of the month.
All of these definitions can lead to problems analyzing churn, especially for companies with lots of new customers. Let's look at an example where the same customer behavior in two different months leads to significantly different rates.
The basic churn rate formula
Let's start a fictional subscription business: Butter of the Month. Every month, we deliver a delicious, new variety of butter to our customers.
Butter of the Month starts in July with 10,000 customers. Of these original customers, 500 leave by the end of the month. But 600 new customers join the community and are active at the end of the month.
As you can see, Butter of the Month has a 5% churn rate and 10,100 subscribers by the end of July.
Now, let’s imagine you have the same subscriber behavior in August. You start the month with 10,100 subscribers from the end of July, 500 consumers churn, but you earn 600 new customers.
Hooray, our churn went down! August must have been a great month. In reality, churn would slightly increase because the company grew, and new subscribers tend to churn at a higher rate.
Unreliable metrics change based on similar inputs, and we don't want to make important decisions about our business based on this data. There’s a smarter way to analyze churn rates.
Customer churn rate vs. revenue churn rate: What’s the difference?
Revenue churn rates reflect changes to your recurring revenue. Yes, customer churn rates can affect your revenue churn.
However, keep in mind that not all customers are equal sources of revenue.
What is revenue churn in a nutshell?
Revenue churn refers to the recurring revenue your business loses. It is not simply another way to measure churn. In fact, downgrades and pauses all can impact your revenue churn without touching your other churn metrics. What’s more common is that you lose two customers on the same day, but only one was a premium subscriber.
A high revenue churn can mean you’re losing your high-value subscribers, which will eat away at more of your revenue. Conversely, you won’t be able to solve a revenue churn problem by raising your customer counts. Instead, the answer lies in understanding your customer segments and finding the customer expectations you can meet. You may find additional revenue in your current customer count.
As you deploy new customer retention strategies, you may discover new layers of premium subscription your industry hasn’t served but consumers want. With more upgrades, you may get more monthly recurring revenue than the revenue lost due to canceling and downgrading customers. When that happens, you’ve reached a negative monthly churn. And that’s a good thing.
What's the right way to calculate revenue churn rate?
The formula goes like this:
Monthly revenue churn rate = Monthly recurring revenue at the beginning of the month / (Monthly recurring revenue lost that month – one-time revenue from existing subscribers)
One item typically overlooked in calculating your revenue churn rate is the one-time purchase. Customers for Butter of the Month who bought a new butter knife may bump a month’s revenue up. However, that shouldn’t be counted as recurring revenue.
What would be a good churn rate for my company?
Recurly's benchmark report shows that 6.85% is the average churn in subscriptions. However, churn varies widely across industries and business models. Make sure you know the standard in your industry and how yours compares.
Knowing how your business compares to others in your segment is an invaluable tool for gauging the health of your business. Additionally, by understanding the factors that contribute to subscriber churn, you can formulate effective strategies to defeat it.
Netflix has one of the lowest rates in the video streaming industry. Its monthly churn is strikingly low at 2.5%, meaning that more than 97% of customers choose to stay. Spotify has a reported churn of 4.8%, while Peloton–the exercise equipment and fitness subscription company–has an 8% annual churn rate, enjoying a 92% retention rate for the year.
What's an acceptable churn rate for your business? Start with an industry benchmark.
What does a high churn rate mean exactly?
It means you need to work on customer satisfaction. A high churn rate indicates you're struggling to retain subscribers. The higher your monthly churn rate, the more subscribers you've lost.
You only need to worry about your customer experience if your company's churn is higher than your industry's average churn rate. Some industries, like the niche butter subscription industry, tend to have a higher churn. B2B companies have less churn, and longer customer lifetimes, because businesses are less likely to change service purchases mid-year.
Monthly vs. annual churn rates
Get a different view of your business by studying longer time windows. Annual churn rates can flatten out the influence of seasonality or marketing campaigns. With that noise set aside, ask yourself about your business’s long-term story.
You may face customer retention challenges because of changing expectations for their customer experiences. While studying annual churn may not yield the granular answers of a monthly rate, you can set a benchmark for yourself with your annual churn rate.
Ultimately, you and your customers win when you solve your retention issues by improving the customer experience.
How can I track churn with Recurly?
Measuring churn is an extensive task, especially when done manually.
Leading subscription brands, like AllTrails and Output, rely on a subscription and billing platform to automatically identify, analyze, and fight churn. It’s the most convenient way to track your churn, as you get nearly real-time subscriber information and actionable insights from a single source of truth.
For example, Recurly Analytics helps you measure subscriber retention–based on plan and churn volume:
Our Plan Performance Dashboard lets you run cohort analysis to know the number of subscriptions that churned out of each plan–further broken down by involuntary vs. voluntary churn rates.
Additionally, our Subscriber Retention view of the Plan Performance Dashboard helps you track activity and churn volume from paying and active subscribers for the top five plans.
Get actionable insights to beat churn
For all businesses, especially subscription businesses, minimizing churn is a top priority and worth the time and resources.
Marketing and growth leaders across every industry want to know the latest churn rate benchmarks and how these numbers impact the trajectory of the subscription industry.
Recurly has compiled the data of over 2,200 leading subscription brands to inform your churn management strategy.
Check out The State of Subscriptions: The churn chapter to get the most recent trends, their overall impact in the industry, and Recurly's impact on our customers' churn rates.