Churn Rate: Meaning, Formula & Example Calculation | HRMantra

Churn Rate: Meaning, Formula & Example Calculation | HRMantra

6-8 minutes 

In the fast-paced world today, a grasp of customers and how to manage them is something every business needs to sustain growth and maintain profitability. With the market being highly competitive, churn rate is one such important metric used by businesses to measure customer acquisition and identify the purchase patterns of the customers.

Churn rate is not an entrepreneurship buzzword; it is one of the most important metrics in Attrition & Retention Analytics. It can constantly be scanned for better decision-making and a look into financial foresight.

• What makes the churn rate so essential and alarming?
• What is the churn rate formula?
• How to calculate the churn rate?
• What is a good churn rate?

Everything you need to know about the churn rate is explained here in this blog.

What is Churn Rate?

So, to answer that one must get into the meaning of the term. Churn rate or attrition rate, as it may be called, is defined as the percentage of customers terminating their transactions with the company in a specified period of time.

Simply put, it is the number of customers to a company that is no longer consuming any purchased goods or services that the company deals in. It is one important measure to determine customer satisfaction, brand loyalty, and the well-being of a company overall.

High attrition rates may suggest problems with the product or service, problems with customer service, or pressure from competitors. On the other hand, low rates of customer churn typically depict satisfied customer retention.

What is the Churn Rate Formula?

Understanding what the churn rate means would give an idea about the broad issues above customer acquisition. However, to conduct a mere or just analysis and make wise financial decisions for the future, it is a must to know the churn rate formula.

The formula to calculate churn rate is as follows:

Churn Rate =

No of Customers Lost during a Time Period / No of Customers during the Start of the Time Period × 100

Therefore, when the result of the number of customers lost during a time divided by the number of customers during the beginning of the time, multiplied by 100, it gives the churn rate.

How to Calculate the Churn Rate?

Calculating the churn rate is a step intrinsic process. It is comparatively an easy calculation that is based on two factors:

• The time period can be stated using weeks, months, quarters, or years.
• The total number of customers at the start of the period indicated and those lost within the stated period.

By applying the technique, a churn rate that is more accurate will have to be gotten for the business. A notebook company started the month of May with 2000 customers and lost 86 customers by the end of the month.

Therefore, based on the formula, the churn rate for the notebook company becomes:

Churn Rate =

86 / 2000 × 100 = 4.3%

The rate at which customer attrition occurs identifies how many customers have been lost for a specific period. A high churning rate indicates poor customer retention and problems associated with the product or after-sale services, whereas a low rate expresses higher retention and a maximum acquisition of customers.

What is a Good Churn Rate?

A good churn rate obviously has to be undoubtedly lower. The lower the churn rate, the better it is for businesses. Usually, the churn rates are high for new companies since the products might require certain improvements that can be determined only once it is present in the market. A good churn rate ranges from 2% to 8%, though it varies from company to company.

Annually, the rate that should be sustained for a SaaS business is less than 10% and 4% monthly, and an E-commerce brand, the rate of attrition shouldn''t be more than 7%. The only exception is with the subscription-based companies, which show the annual churn rate to be 20%, treated as an aced performance.

Strategies to Scale Down the Churn Rate

Higher churn rates certainly mean a terrible reputation in the industry and a loss of business. Other than that, by no means is the company in a dead end. There are measures adopted to change and reduce churn rates, helping businesses gain the loss using certain calculative measures.

The strategies to reduce higher churn rates are:

Customer Insights:

When the end product is going to be experienced by the consumers, it''s also relevant to know what they felt after using the product. Contacting consumers for feedback and making sure that their queries are answered on time can be helpful to recognize the consumer patterns and the well-being of consumers in continuing the market.

When there is any communication gap that has been there, then it should be compensated to bring the trust of the customer towards the company.

Strengthening Marketing Strategies:

Often, the flaws in the marketing plans are overlooked, which can have impacts on the churn rate. The targeting of the right potential customers is an imperative factor for the increase in sales and number of buyers.

For instance, it would be the work of futility to market dog food in communities where there are few to no pets, compared to being effective by promoting to pet owners and lovers. Thus, the churn rate can be brought down with the help of adopting strategies to reach out to more and more people through social media, website advertisements, and email marketing.

Product Modification:

Sometimes the product might have a few problems that may reduce the desirability to be able to deliver the desired output. In addition, it should also be researched whether or not the products could solve and aid the buyers.

In the face of any dissatisfaction among the consumers, upgradation in the commodities is suggested immediately. This not only helps retain the consumers but can also increase the quality of the product. Hence, it will eventually lead to necessary modifications and timely upgradation, thereby helping consumers build trust in the brand and also reduce the rate of attrition.

A very crucial metric in the business of consumer retention is the churn rate. With new knowledge of how to derive the churn rate and what would be a good churn rate for the industry, some important information will be gotten about consumer satisfaction and business performance.

It helps improve the customer loyalty of enterprises, maximize the rate of retention, analyze attrition seamlessly, and continue with sustained success by applying well-planned and optimized ways of attaining attrition reduction.

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