Customer churn rate, also known as customer attrition rate or customer turnover rate, is a critical metric in subscriptions. Knowing how many customers are leaving your company lets you gauge your financial health and get actionable insights into subscriber behavior and preferences.

In this article, we’ll cover everything you need to know about churn rate–from its definition and calculation to its recognition and prevention–so you can start measuring it for your company. Let’s dive in.

What is churn rate?

Churn rate is the percentage of subscribers who canceled or didn’t renew their subscriptions in a given time period. Churn rate tells you how engaging your product is. The higher the churn rate, the more customers and revenue you lose–hurting your bottom line. 

How to calculate churn rate

You can calculate churn rate monthly, quarterly, or annually. The most basic calculation of customer churn rate is dividing your churned customers by the total number of customers in the month–or your given time period:

The basic churn rate formula:

Churn rate = Churned customers / Total customers

It seems simple, but the devil is in the details: How do you count the total number of customers in a month? 

Some companies use customers at the beginning of the month, while others wait until the month ends or take the average number of subscribers throughout the month. All of these scenarios can lead to confusion, especially for scaling brands.

Let’s picture it with an example. 

The basic churn rate formula

We’ve partnered to help you launch a new subscription business: Butter of the Month. Every month, each subscriber gets a delicious, new variety of butter to their home.

Butter of the Month starts in July with 1,000 customers. Of these original customers, 5% leave by the end of the month. But 500 new customers join the community—12 of whom leave by the end of July. By applying the basic formula, our churn rate is 6.2%.

Churn rate calculation table for July

Now, let’s imagine we have the same customer behavior in August. We start with the 1,438 customers from the end of July (of whom 5% churn), add 500 new customers and lose 12 of them. The basic definition produces a 5.8% churn rate in August.

screenshot-2014-08-22-12 1 (1)

As you can see, the monthly churn rate went down. August must have been a great month–but, in reality, there was no difference in customer behavior. We started August with more customers than in July, which just increased the denominator.

A metric that changes based on similar inputs is unreliable, and you don’t want to make important business decisions based on this data.

A better churn rate formula

Stephen Noble of Shopify proposes a better solution. Think of churn rate as a probability–how many customers churned, and how many opportunities did they have to churn?

Every day a customer keeps their subscription is another day they don’t churn. If they were your customer for seven days and churned on the seventh day, they had seven opportunities to churn and exercised that option on one of the seven days. 

We can aggregate that probability across all our customers and create a more accurate churn rate by calculating the total number of customer days in the month.

A customer day is one day that one customer has an active subscription. In this example, we’d count the number of days in July that each customer had an active subscription, then sum that number across the entire business.

For Butter of the Month, it would look like this: 

Butter of the Month churn rate calculation

The churn rate calculation formula starts with the number of customer churns in July–the same as before. Then, we divide by the total number of customer days in July, which gives us the total churns per customer day. 

Churns per customer day is a little difficult to unpack, so we multiply by the number of days in the month, which is 31 in this case. The result is a churn rate of 5.1%.

Where does the 0.5 in “customer days in month” come from? For Butter of the Month, we assume that the new subscriptions and churns constantly occur throughout the month. In other words, the net gain of customers is linear.

With that assumption (and the formula for the area of a triangle), we calculate the number of customer days:

Inline1 - test (to be updated)

Another way to think about the 0.5 in this formula is that the new and churned customers are, on average, active for half the month.

Remember that this assumption is just for our fictional company. At Recurly, we calculate customer days by summing the actual number of subscribers on each day.

So, how does this formula hold up in August?

screenshot-2014-08-22-12 (3)

As you can see, the monthly churn rates for July and August are now in line. Same behavior, same result.

This churn rate definition is indeed more complex than the basic definition. However, we believe it forms a better basis for comparing different time frames. And ultimately, it gives you a better picture of your monthly subscriber churn.

Get the guide: Start calculating customer churn correctly

Customer churn rate vs. revenue churn rate

Customer churn and revenue churn go hand in hand but aren’t always the same.

  • Customer churn = the number of subscribers you've lost

  • Revenue churn = the amount of profit you've lost 

Tracking these two metrics will tell you how many customers have left your company and how much money they’re taking with them. 

Let’s calculate Butter of the Month’s revenue churn rate to understand better. Imagine you have two different subscription plans:

  1. Basic Spread = 600 customers paying $50/month = $30,000 MRR

  2. Premium Spread = 838 customers paying $80/month =$67,040 MRR

Butter of the Month has 1,438 customers and $97,040 monthly recurring revenue (MRR) at the end of July. If we know that 62 customers are churning–40 basics spreaders, and 22 premium spreaders–we can calculate July's revenue churn like this:

  • Customers at end of month: 1,438

  • Basic plan revenue churn: 40 x 50 = 2,000

  • Premium plan revenue churn: 22 x 80 = 1,760

  • Total revenue churn: (2,000 + 1,760) / 97,040 = 3.87%

As you can see, we get a 5.1% customer churn rate but a 3.87% revenue churn rate for July. Even though 62 customers parted, the higher churn rate is at the basic tier, affecting less revenue–in this case.

How to track churn rate

Now that you’ve learned how to calculate churn rate, it’s time you learn how to track it for your subscription business. 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:

Inline3 - test (to be updated)

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.

Inline2 - test (to be updated)

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.

Answering your churn rate FAQs

What is a good churn rate?

Recurly’s benchmark report shows that 5.57% is the average churn rate in subscriptions. However, churn varies widely across industries and business models–make sure you know the standard in your industry and how yours compares. 

For example, Spotify–the music streaming service–has a reported churn rate of 4.8%, while Peloton–the exercise equipment and fitness subscription company–has an 8% annual churn rate, enjoying a 92% retention rate.

Can my churn rate be negative? 

Yes, it can. Negative churn occurs when your MRR from your current customers exceeds the revenue lost to cancellations and downgrades. 

What does a high churn rate mean?

A high churn rate indicates you’re struggling to retain subscribers. The higher your churn rate, the more customers you’re losing. 

Can you predict churn?

Yes–leverage data to understand customer behavior and identify zombie segments. Common patterns of changes in subscriber activity to track are:

  • Drops in engagement or interaction with your product or service

  • Lower dwell time or lower average spend

  • Sudden increase in visits to the pricing or cancellation page

Can you prevent churn? 

Yes, you can prevent both types of churn–involuntary and voluntary. Tracking subscriber behavior can give you actionable insights to better tailor your customer experience and reduce voluntary churn. Whereas for involuntary churn, a comprehensive payment decline strategy and intelligent retry model can help you recover as many failed payments as possible. 

Recommended reading: Minimize churn & maximize revenue to keep a good thing growing

Defeating churn is part of every C-suite agenda–calculating it is the first step. Once you understand how your churn rate behaves, you will start identifying opportunities to grow your recurring revenue faster, smarter, and stronger.