What is Churn Rate?
Churn rate is a metric, which calculates the number of customers who leave the product over a specific period of time. This metric is important for businesses to increase the growth rate and develop strategies for a higher level of customer satisfaction. With a help of churn rate companies can also find out which employees leave their jobs within a certain period to improve working conditions.
The moment of churn can be defined in two ways: when the subscription renewal doesn’t happen, and at the moment when a customer cancels the subscription himself.
The churn rate is closely related to the growth rate, which calculates the number of new customers. If the growth rate is higher than the churn rate, the company’s profits are growing; on the other hand, if the churn rate is higher, the company experiences a loss in the customer base.
As an example, churn rates can help cable and satellite TV providers calculate the percentage of people that didn’t renew their subscriptions for the services.
The easiest way to calculate a churn rate is to divide the number of churned customers by the total number of customers. Usually, the scope for the formula is one month, so that enterprises can compare month to month churn.
However, when companies experience significant growth within one particular month, the churn rate will go down and the results will be unclear. For big companies with stable growth of the client ways, such way of calculating churn rate won’t cause major issues but startups and small businesses that have a different number of customers each month can get misleading results. For example, a company can start losing more customers through the month, but the churn rate will get better because during this month it got more clients. Therefore, some businesses come up with their own churn rate formulas or use an adjusted or predictive way to calculate their churn rates.
An adjusted way is used when companies experience significant monthly growth. Taking into account a period when the company had more customers, the number of churned customers is divided by an adjusted average of the number of customers throughout a certain period of time. This approach is effective when we’re speaking about normalizing changes in customer growth over the time window, but results for weekly and monthly churn will be different in this case. Such formula will look like this:
Companies can also use a predictive way to determine an average churn rate by dividing the number of inactive customers by the existing number of customers for the current month. However, this method requires data from at least two months, which is impractical if the business wants to have an up-to-date information.
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