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How to Calculate and Reduce Churn Rate

March 13, 2020

Persuading a customer to buy your product is one thing, but convincing them to remain loyal to your business is another.

Customers stop using certain solutions for a variety of reasons. Whether they switched to a competitor or they don’t have enough room in their budget, when a customer stops buying your solution, that loss of business contributes to your churn rate.

Churn rate is an important sales metric for B2B companies that use a subscription-based pricing model. Whether they collect payment for their solution every month, quarter, or year, they depend on that recurring revenue stream.

So long as the customer continues to use and pay for the solution, the business is in good shape. When a customer decides to discontinue their subscription, however, that is known as churn, and it’s a bad sign for business.

A high rate negatively affects businesses because it means that customers are consistently canceling their subscriptions. Whether they cancel because they switched to a competitor of yours or simply decided they no longer have a need for the solution, it’s bad for profitability and growth.

You can have a solid monthly revenue, but if your customers aren’t sticking around long enough for you to recover from your acquisition cost, your business is in trouble.

How to calculate churn rate

The churn rate formula is as follows: subtract the number of users at the end of a period from the number of users at the beginning of a period. Then, divide that number by the users at the beginning of the period.

churn rate formula

You can measure for the month, quarter, or year.

Whatever you decide, make sure you’re consistent with the time period when pulling the number of customers. If you go back and forth between two different time periods, your calculations will be inaccurate.

How to count customers

To accurately calculate your customer churn rate, you need to first define what a customer is in the eyes of your business.

We all know that a customer is someone who pays for our solution. It’s a pretty simple concept. What isn’t simple, however, is defining the exact moment at which a person officially becomes a customer.

There are a lot of different identities that a person can embody during their time as a potential buyer in the sales pipeline (prospect, lead, opportunity, etc.). But when do they actually become a customer?

It’s important to choose a point in your sales cycle where you officially consider someone to be a customer – and stick with it. It might be when they agree to buy, when they sign a contract, or when they make their first payment. Whatever you decide on, be consistent.

How to define the moment of churn

The same goes for defining the moment of churn. There are a lot of different times that seem appropriate to consider as the point at which a customer churns. Here are a few options:

  • The moment of cancelation
  • The moment the subscription ends and the customer doesn’t renew for the next time period
  • The moment the end of the subscription period arrives after they haven’t renewed

Whatever churn moment makes sense for your business, as always, be consistent.

Churn rate example

Let’s go over an example of how a business would calculate their churn rate.

Fake Company ABC started Q1 with 500 customers. At the end of Q1, they had a total of 450 customers. Using the equation above, this would mean that Fake Company ABC would have a customer churn of 10% for Q1.

(500-450) / 500 = 10%

In Q2, Fake Company ABC started with the 450 customers that were remaining after Q1, and then ended Q2 with 425 customers. Their customer churn for Q2 would be 5.5%.

(450-425) / 450 = 5.5%

Because their churn rate decreased, Fake Company ABC did a better job at retaining their customers in Q2 than they did in Q1.

Churn rate calculator

If you don’t have the time to run all of those numbers, don’t worry. Use the churn rate calculator below. 

 

Why churn rate is important

Churn rate directly reflects how satisfied your customers are with your business and has the potential to suppress your growth. As customers or subscribers leave, you simultaneously lose out on revenue, or revenue churn, and opportunities to develop your business.

Retention rate is related to churn in that it represents the amount if existing customers your business was able to resign for another contract.

If that’s not a good enough reason to care and measure it, here are a couple of other reasons why you should always be tracking it:

  • Provides insight into long-term company health
  • Shows whether or not the business is improving in customer retention
  • Helps identify areas of improvement in attempts to retain customers
  • Determines which customers are seeing the most success with your product
  • Offers insight when forecasting key areas of sales performance

At the end of the day, your churn indicates whether or not your customers are happy. If you look at each customer solely as an opportunity to make a quick buck, they’ll notice and won’t give you the time of day.

However, if you offer a personalized experience and treat each customer as an individual with unique needs that your business can solve, they will feel a connection to your business, increasing the chances of them becoming loyal.

Related: The point of offering a solution to customers is so they can use it successfully to meet their needs. Customer success software can conduct an analysis of customer behavior to see where problems might arise, determine how to solve those problems, and increase customer retention.

6 ways to reduce customer churn

Now that you’ve got a good understanding of your customer churn rate, you might be looking for some ways to reduce it. It all comes down to offering a valuable product, treating your customers well, and outdoing your competitors.

Here are a couple of actionable steps you can take to reduce your customer churn.

1. Understand why customers churn

Whether it’s because they’re switching to one of your competitors or they no longer have a need for the solution, some of your customers are bound to churn. Instead of moping about another lost customer, use it as a learning opportunity.

Dig into the reason why the customer left. Were they unsatisfied with the product or service? Was the solution too expensive? Were they not receiving the support they needed to succeed?

Whatever the case may be, find the explanation and take action to prevent a customer from churning for the same reasons.

2. Make a good first impression

A good first impression can go a long way. Use it to work on reducing churn from the second you gain a new customer.

Send a personalized welcome email, offer a constructive onboarding process, and provide educational content surrounding the best ways to gain value from the solution they bought. These small gestures can go a long way in your customer relationship.

Jonathan Aufray of GrowthHackers stresses the value of setting expectations from the beginning of your interaction with the customer.

“To reduce customer churn, it’s important to show at the beginning of the collaboration what they will be getting and the results they can expect,” Aufray says.

3. Offer training and support

It seems as if B2B solutions are constantly growing in complexity, and you don’t want your customers to have to guess how to troubleshoot their problems with your product.

Your customer support team needs to be well-equipped to handle a variety of issues that users could potentially run into. Make sure they have established processes and the resources they need to succeed.

Ensuring your customer support team is ready for any situation and can execute when presented with a problem will boost customer satisfaction and reduce churn rate.

4. Ask for feedback and take action

You can’t understand how the customer feels about your solution if you don’t ask. Make sure you’re regularly asking for feedback from customers after certain milestones and periods of time.

Asking for feedback not only shows customers that you care and gives you constructive criticism to bring to the drawing board, but it also re-engages users.

For example, if you’ve identified that customers tend to churn after a certain amount of time without logging into the tool, nudge them and ask for feedback at that particular point. Maybe there is a reason they have left it sitting there unused.

Quincy Smith from Ampjar talks about the importance of sending a personalized review when a customer wants to leave and analyzing how they used the platform, opportunities they might have missed, and big wins since they started using the product. Then, they reach out to the customer.

“We can explain how they can get better use out of the product. We stop about 10% of customers from churning and always come away with great insight into how to better educate our users,” Smith notes.

5. Communicate proactively

Consistently reaching out to customers proactively is a great way to build a positive and mutually beneficial relationship.

Whether you’re sending educational content or informing them of an opportunity to update their solution, they see you as a trusted advisor that truly cares for their success. In turn, they remain a loyal paying customer. It’s a win-win.

Never leave customers in the dark if an issue arises with your solution. Be proactive in alerting them of the situation and offer support where you can. This will help them know they can trust and depend on you.

6. Let some customers churn

This one can be difficult to get on board with, but sometimes it’s best to just let some customers go. This doesn’t mean you shouldn’t focus on retaining customers, because you absolutely should. All this means is that the time may come to let a customer walk, and it’s your responsibility to recognize when that moment comes.

Take a look at the situation with profitability in mind. If a customer buys your more expensive offerings, advocates for your brand on social and review sites, and has established themselves as a loyal customer, those are people more worth hanging on to.

Learn your lesson

Regularly measuring your business’ churn rate is important; however, it’s even more essential to gather insights from the results. Your churn speaks directly to your customer satisfaction rates.

Once you have your churn rate measured, don’t just let it sit there. Use it to analyze the details of your sales process and take action to make it more pleasing for your customers. After all, without them, you don’t have a business.

It’s possible that your customers are churning because they simply aren’t the ideal buyer for your solution. Use G2’s Buyer Intent Data to learn about the companies researching your business so you can target those customers.

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