Churn rate refers to the amount of subscribers or customers that cut ties with a business during a specified period of time. It’s important for businesses to keep a close eye on churn rate because it can drastically affect their business. In this article, we will dive deeper into churn rate by explaining how it can be calculated, its importance, and how business owners can handle it.
Churn rate is a metric that measures the rate a business is losing its subscribers or customers. These customers are said to have “churned”. Depending on the type of business you run, churn can refer to the cancellation of a subscription, the closure of an account, a buyer’s decision to shop with a competitor, or not renewing a contract with your business.
Churn rate can be a highly defining metric, as it can help to shed important light on a business’ growth. In order for a company to realize significant growth, its acquisition rate (number of customers attained) must be higher than its churn rate.
A change in churn rate can help companies understand how their customers are responding to changes in their business. For example, a sudden increase in churn rate might indicate that customers are dissatisfied with new pricing policies or products that are being offered.
Time and time again, it has been found that it is much more cost-effective for businesses to retain existing customers than to acquire new ones. Therefore, understanding your churn rate and developing an effective strategy to prevent churn can help to ensure your efforts for retaining existing customers are working.
In the simplest terms, churn refers to a deceleration in growth. A high churn rate will have a direct impact on:
If a business ignores its churn rate and doesn’t take measures to prevent it or counteract it, there is a huge risk that the business can end up going under.
The formula for calculate churn rate is as follows:
(number of churns within a certain time period) : (number of customers at the start of that period) x 100 = percentage of churn rate
For instance: 10 customers lost : 100 customers to begin with x 100 = 10 percent churn rate.
While the churn rate metric is best suited for SaaS businesses, it can certainly be modified and adapted to eCommerce businesses and customized for the specific goals that you are setting out to achieve. However, no matter what type of business model you are working with, you have to have a clear definition of what an active customer is and when it is that you consider a customer has been lost.
Find more statistics at Statista
Reducing churn rate is an on-going process, not a one-time action. The manner in which you can reduce churn rate depends largely on how your specific business defines active and inactive customers. It also depends on the problems that you can identify as the main causes of churning.
For eCommerce businesses, the methods for reducing churn rate that appear to be offer the best results include the following: