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Churn Rate Calculation Formula
Categories: Blog

Mastering Churn Rate Calculation Formula: Essential Insights for Business Growth

Musnad E Ahmed

Musnad E Ahmed

Last modified on May 8, 2024

Mastering Churn Rate Calculation Formula: Essential Insights for Business Growth

When customers mean everything, figuring out the churn rate becomes an essential metric for analysis. Churn rate, a metric that determines the rate of customer loss for a business will help figure out the wrong moves.

With data creating newer avenues for success, here are formulae for calculating various churn rates!

What is the Churn Rate?

The churn rate measures the rate at which customers leave or cancel their subscription service over a given period. It’s a critical metric for any subscription-based model, from SaaS businesses to online service providers, as it directly impacts revenue and growth prospects.

Importance of Calculating Churn Rates

Running a business is difficult when you see customers leaving in droves. It’s much worse when you don’t know how many customers have abandoned you, and the likely reason for their decision.

Calculating customer churn rates for your business will give you the exact results, and with monthly analytics, you could track back to why you may be losing customers.

Likely Reasons for Customer Churn

Likely Reasons For Customer Churn!

You may lose customers for a plethora of reasons. They can either be internal or external when it comes to influencing this metric.

Internal Reasons:

  • Poor product or service
  • High price compared to perceived value
  • Lack of customer support
  • Difficult or complex user experience
  • Lack of innovation and stagnation

External Reasons

  • Economic factors
  • Market competition
  • Changes in customer needs or preferences
  • Changes in technology
  • Unforeseen events

The Formulas to Calculate Churn Rate

1. Customer Churn Rate Formula

This formula is used to calculate the percentage of customers who have left your service during a specific period.

Customer Churn Rate = [math](\frac{Number of Customers Lost During Period}{Total Number of Customers at the Start of Period}) × 100[/math]

Example: If you had 200 customers at the beginning of the month and lost 10 by the end of the month, the calculation would be:

Customer Churn Rate = [math](\frac{10}{200}) × 100 = 5%[/math]

2. Revenue Churn Rate Formula

This formula calculates the percentage of revenue lost due to churned customers.

Revenue Churn Rate (%) = [math](\frac{Monthly Recurring Revenue Lost Due to Churn}{Total Monthly Recurring Revenue at the Start of Period}) × 100 [/math]

Example: If your MRR at the start of the month was $5000 and you lost $500 due to churn, the calculation would be:

Revenue Churn Rate = [math](\frac{500}{5000}) × 100 = 10%[/math]

3. Net Revenue Churn Rate

Net revenue churn takes into account the revenue lost from churned customers minus any upgrades or additional revenue from existing customers.

Net Revenue Churn Rate (%) = [math]\frac{Revenue Lost from Churn−Revenue Gained from Upgrades}{Total MRR t Start Of Period} × 100[/math]

Example: If you lost $500 in MRR but gained $200 in upgrades, with a starting MRR of $5000, the calculation would be:

Net Revenue Churn Rate = [math](\frac{500 – 200}{5000}) × 100 = 6%[/math]

4. Annual Churn Rate

Calculating the annual churn rate for businesses with annual subscriptions provides insight into yearly customer retention.

Annual Churn Rate (%) = [math](\frac{Number of Customers Lost During the Year}{Total Number of Customers at the Start of the Year}) × 100 [/math]

Example: If you start the year with 1000 customers and lose 100 by year-end, the calculation would be:

Annual Churn Rate (%) = [math](\frac{100}{1000}) × 100 = 10%[/math]

5. Cohort Analysis for Churn Rate

Cohort analysis involves tracking the churn rate of specific groups of customers (cohorts) over time, often used for more nuanced analyses.

Cohort Churn Rate (%) = [math](\frac{Number of Customers from Cohort Lost During Period}{Total Number of Customers in Cohort at the Start of Period}) × 100 [/math]

Example: If a cohort starts with 300 customers and 30 churns over the specified period, the calculation would be:

Cohort Churn Rate (%) = [math](\frac{30}{300}) × 100 = 10% [/math]

6. Probability Churn Rate

This advanced formula calculates churn as a probability, taking into account the likelihood of each user to churn over time. It’s especially useful for apps or services with rapidly changing user bases.

Cohort Churn Rate (%) = [math](\frac{Number of User Churns}{Total User Days}) × Days in Month [/math]

Example: If you had 50 churns over 15,000 user days in a 30-day month, the calculation would be:

Cohort Churn Rate (%) = [math](\frac{50}{15000}) × 30 = 10% [/math]

Conclusion

Churn rate is more than a metric; it’s a mirror reflecting the health of your business and the satisfaction of your customers.

By mastering churn rate calculations and deploying targeted strategies to reduce churn, businesses can ensure sustainable growth and a loyal customer base.

Stay ahead of the curve by making churn rate analysis an integral part of your business strategy. Here is our latest blog, where you find the best 10 tips to reduce your churn rate.

Sales organization and business process outsourcing specialist with over 15 years experience in building and running highly efficient sales and customer support organizations, and in providing board and project level consulting to the sales and service organizations of leading companies all over the globe. Developed and implemented staffing strategies and programs that improved operational outcomes and maximized the available staff resources. Specializes in client experience, business process re-engineering, business requirements development, contact center optimization, customer relationship Management, staff training and motivation, and organizational analysis. Has led multiple teams in the successful development and implementation of new business models in BPO industries.

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