Need help choosing a plan?
Created with Sketch. 1800 917 771 Schedule a call
Need help?
We're here for you.
Schedule call
Created with Sketch.
A person is looking at a laptop while a person looks on.
Running a business

How to Calculate and Reduce Churn Rate

Businesses lose customers for various reasons. It’s simply a part of doing business. The rate at which you lose customers or subscribers is called the churn rate. 

As a business owner, you should understand this concept and not take losing customers too personally. However, you do need to ensure that you are tracking the rate at which you are losing customers since this will be an important calculation to give you various insights. 

What Is Churn Rate?

The churn rate, also known as the rate of attrition or customer churn, is the rate at which customers stop doing business with a company. But what does ‘stop doing business’ mean? In most cases, we think of churn rate in relation to losing monthly or annual customers for those businesses running a subscription model. We express the churn rate as a percentage of the service subscribers that discontinue their packages month to month.

However, churn rate can also refer to employee turnover, referring to the rate at which employees leave their jobs over a given timeframe. 

The Importance of Churn Rate

Focusing on churn rate as it relates to lost subscribers, a high churn rate is usually bad for business since it is likely to adversely affect profits and stifle any growth.

For companies who rely on customers who pay in monthly instalments through subscriptions, like many Software as a Service (SaaS) companies, a high churn rate could mean a typical customer leaves before the business can recuperate its average customer acquisition cost (CAC).


However, the fact that the turnover rate does not account for the categories of consumers who are departing is one of its shortcomings. For example, a business may have run a new promotion to gain a lot of new customers, some of whom subsequently left. A substantial percentage of these new customers leaving would not be as damaging to the business as longer-term customers leaving.

This is why a more measured understanding of a churn rate’s pros and cons is necessary.

Pros

  • Can give insights into the quality of your product/service/pricing strategy as a measure of customer satisfaction.
  • Can allow you to compare your churn rate to that of your competitors. Average churn rates can vary wildly across industries.
  • It is relatively easy to calculate.

Cons

  • Not enough clarity on the type of customer leaving means churn rate can be misleading.
  • Doesn’t take into account the types of companies of competitors (a startup will have different acceptable churn rates to a mature enterprise.)

Grow Your Business with QuickBooks

Churn Rate vs Growth Rate

You can calculate churn rate and growth rate to assess if there was overall growth or loss in a given time period. This will compare new customers to subscriber losses. The growth rate tracks new clients, whereas the churn rate tracks lost ones.

You experience growth if the growth rate is higher than the churn rate. The company lost customers when the rate of churn was higher than the pace of growth.

How to Calculate Churn Rate

Here is the formula to calculate churn rate:

(Lost Customers ÷ Total Customers at the Start of Time Period) x 100

For example, if your business had 500 customers at the start of the month and lost 25 customers by the end, you would divide 25 by 500. 

The answer to this calculation is 0.05. 

You then multiply 0.05 by 100, leading to a 5% monthly churn rate.

So, to calculate your churn rate, follow these steps:

  1. Choose a time period - monthly, quarterly, or annually.
  2. Find out the number of customers you had at the beginning of the time period.
  3. Determine the number of lost customers during the selected time period.
  4. Divide the number of lost customers by the number of customers at the start of the time period.
  5. Multiply that answer by 100.


How to Reduce Churn Rate

To think about reducing customer churn rates, you must examine the possible reasons why customers leave and aim to rectify those.

You can send surveys or conduct exit interviews with leaving customers if you have a close relationship, but often you’ll need to use some intuition to find out the underlying causes. Here are some potential reasons a customer might unsubscribe from your business.

1. A Poor Product or Service

If your product or service doesn’t solve a problem for the customer adequately, then they'll seek their solution elsewhere. Additionally, if there’s a perception that your product is not worth the price, that may also incite a customer to look elsewhere. To fix this problem, you must invest in your product or service right from the development stages to provide an offering that will satisfy your target audience.

2. Poor Customer Service Experience

Modern customers expect a personalised, efficient customer service experience with your business. One bad experience can cause consumers to look elsewhere to different brands. Talk and listen to your customers, identify their pain points, and ensure you address them in the service you provide. 

3. Poor Web Experience

Many businesses conduct most of their business online. In such a competitive marketplace, you can’t afford to provide a clunky, slow, web experience that is off-putting to customers. Your website should be user-friendly, intuitive and efficient.

4. Brand Reputation

Social proof is incredibly important to modern businesses in retaining loyal customers. Even if a customer hasn’t had a bad experience, noticing negative online reviews about your service can spread a negative perception of your brand reputation. In the world of social media reviews, your business’ reputation can diminish quickly. To combat this, you should ensure you address the customer’s needs as outlined in the three points above. However, you should also actively seek out positive testimonials and reviews to build social proof for your business offering. 


Final Thoughts

Customer churn is an important factor in determining a company's long-term performance. However, it's best to keep track of all crucial indicators and their connections with one another in order to get a holistic picture.

A single integrated solution like QuickBooks, that handles more of your business operations successfully streamlines the entire procedure. Automated processes facilitate data collection and organisation, enabling you and your team to quickly access that data and derive insights that can lower churn rates and boost your bottom line.


FAQs


Related Articles

Looking for something else?

Get QuickBooks

Smart features made for your business. We've got you covered.

Help Me Choose

Use our product selector to find the best accounting software for you.

QuickBooks Support

Get help with QuickBooks. Find articles, video tutorials, and more.

Stay up-to-date with the latest small business insights and trends!


Sign up for our quarterly newsletter and receive educational and interesting content straight to your inbox.

Want more? Visit our tools and templates!

By signing up you are agreeing to our terms and privacy policy.

A person is smiling and holding a laptop.