Churn and churn rate – what is this?
Churn means customer churn and occurs when subscribers stop their relationship with a company, product or service. Customer churn can cause a company’s growth to suffer (temporarily), which is why it is essential for companies to have a sufficiently defined method for calculating churn over a given period.
Churn rate is specifically the percentage of customers who stop purchasing products or services from a particular company, calculated for a specific period of time. This helps companies measure the number of customer churn. Churn rate is one of the most important metrics in marketing, customer management and customer relationship management.
Customer Acquisition Cost vs. Churn Rate
The cost of customer acquisition (CAC) is generally higher than the cost of maintaining existing customers, making churn an extremely important metric for measuring the success of a subscription business. Ineffective churn prevention can create unwieldy additional costs in the marketing budget. As a result, companies can develop retention strategies, new incentives, discounts, promotions and other measures to retain customers, improve customer lifetime value (CLV) and reduce their churn rate.
This allows companies to subsequently develop customer retention strategies, new incentives, discounts, promotions and other measures to retain customers and improve performance.
How is the customer churn rate calculated?
To calculate the rate, the number of terminations within a month must be divided by the number of assets in the same month. As shown here:
Churn Rate = (QA / QC) * 100
*Where QA is the number of active customers and QC is the number of cancelled customers.
Measuring customer churn is an important KPI for the success of a company and should be analyzed to the same extent as the number of new customers, MRR (Monthly Recurring Revenue) and other relevant company figures.
The question remains as to the relationship between the churn rate and the retention rate. In principle, the churn rate is one minus the retention rate percentage (i.e., 1-R%). If 80% of users returned from month 1 to month 2, the company would have 20% churn. The reason for calculating it this way is that it ignores the distorting effect of new users.
The ideal Churn Rate and Negative Churn
In addition to the direct impact on sales due to churn, there is also the risk of negative reviews from dissatisfied customers. This can weaken the brand and damage the company’s reputation. However, many factors ensure that customers can never be kept 100% stable. Optimized churn management must therefore keep the churn rate as low as possible in the long term.
A typical “good” rate for smaller subscription companies is 3-5% monthly. The larger the companies, the lower this rate should be.
In addition, there is also a negative churn rate. This occurs when a company succeeds in increasing sales to its existing customer base and billing exceeds the amount lost due to cancellations. Therefore, increasing the average shopping cart is one way to reduce the loss of revenue.
Conclusion: Elicitation of churn is critical for companies seeking long-term success
Whether or not the customer remains loyal to the company depends on a whole range of factors. Effective churn management along the entire customer journey is important. We have compiled 5 strategies for continuous and lasting churn reduction in our white paper.