How to calculate churn rate - A better formula
Customer churn rate, also known as customer attrition rate or customer turnover rate, is a critical metric in subscriptions. Any business owner serving regular, loyal customers can stand at their window and estimate their company’s financial health by watching their customers. Knowing what percentage of customers might not return–and how much revenue they’re taking with them–is key to making informed decisions to improve the customer experience.
Keep reading to learn what churn rate is, how to calculate it, and the implications of a high churn attrition rate.
What is churn rate?
Your churn rate refers to how many consumers stop using your service over a given period. Think of it as the inverse of retention.
Customer churn can be calculated monthly, quarterly, or annually. While a monthly churn rate is useful for tracking short-term trends, your annual churn rate gives a broader picture of subscriber loyalty and attrition over a longer period.
Recommended reading: Everything you need to know about subscriber churn
What's the right way to calculate churn rate?
There are different opinions on how churn is calculated. The formula looks like this:
Churn Rate = Number of Churned Customers / Total Customers
It may seem simple, but calculating churn is related to how you count subscribers and activations. Some companies use the number of customers at the beginning of the month, while others will wait until the end or use an average number.
These definitions can lead to problems analyzing churn, especially for companies with many new customers. Let's look at an example where the same customer behavior in two different months leads to significantly different rates.
Churn rate formula example
Let's work with a fictional subscription business: Butter of the Month. Every month, they deliver a delicious, new variety of butter to their 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 they have the same subscriber behavior in August. They start the month with 10,100 subscribers, 500 consumers churn, and 600 customers join.
It seems like churn went down! But in reality, churn would slightly increase because the company grew, and new subscribers tend to churn at a higher rate.
Regardless of your methodology for calculating churn, the real value lies in cohort analysis and analyzing changes in churn over time. For example, you could segment Butter of the Month into subscribers less than six months old vs. older than six months and track the behavior for both cohorts.
What is a good churn rate?
Recurly's benchmark report shows that 5.57% 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.
What does a high churn rate mean?
A high churn rate indicates you're struggling to retain subscribers. High churn rates can translate into negative implications, such as revenue loss, reduced customer LTV, increased acquisition costs, and a lack of product-market fit.
Recommended reading: Why churn analysis matters and how to do it well
Measuring churn is an extensive task, especially when done manually. Leading subscription brands, like AllTrails and Output, rely on a subscription and billing platform like Recurly to automatically identify, analyze, and fight churn.
How can I track churn with Recurly?
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.
Want to know how to chop customer churn by 73%? This 30-minute session shares five best practices to help you recover more revenue and retain more customers.