Churn Rate

What is Churn Rate?

Churn rate is the percentage of customers that cancel or don’t renew their subscription to your service within a given time period.

When a customer signs up for your service they’re effectively agreeing that your product is worth their time and money. But, what about when they cancel their subscription?

It’s really common for companies to offer a ‘free trial’ of their service at the start of a business/customer relationship. But many customers use this to dip their toe in the water and figure out if your service is for them.

If they find anything that means they’re less than satisfied - they’ll unsubscribe without even paying the first monthly fee. And I think we’ve all done it at some point.

screenshot spotify premium free trial - what is churn rate?

As a business, your goal is to gain customers’ attention, push them through that sales funnel until they ultimately convert. So if they cancel before they’ve even paid one month’s worth of subscription then you just missed the mark!

Ideally, each customer needs to provide you with enough money in sales to make up for the ‘cost of acquisition’ that you’ve already spent enticing them in.

And of course, churn doesn’t occur after a free trial as they haven’t paid anything yet. You would have a longer term customer - subscribed for months, maybe even years - and then they cancel leaving you wonder why they did.

These are the individuals that affect your churn rate.

How to Calculate your Churn Rate

Calculating your churn rate is easy. You need to start by deciding what time frame you’re going to focus on. 

Do you need to know your annual churn rate? Quarterly? 

Next, calculate how many customers signed up in total during this time period.

Then, the number of customers that left - whether they cancelled or just didn’t renew a subscription. These are your churned customers.

You now need to divide the number of churned customers by the number of total customers.

Multiply the figure by 100 and this is your churn percentage.

Here’s our (fictitious) example:

In the course of a year, we signed up 30,000 customers. However, we lost 1,575.

1,575 ÷ 30,000 = 0.053

0.053 x 100 = 5.3

We have a churn rate of 5.3%.

What is A Good Churn Rate?

Churn rates vary depending on the maturity of your business but can often be between 2-8%

Young businesses could see a much higher churn rate whilst they are still establishing themselves in the market which is understandable and something that they (hopefully) grow out of eventually.

As a rule, leading companies tend to aim for a churn rate of 2% or lower.

How to Improve Churn Rate?

There are a few things you could do to improve your churn rate however, they largely come down to great communication.

1. Ask for Feedback

You won’t be able to prevent every customer from leaving. But you can ask them why they left, either through a survey or by reaching out via email. 

You then need to earnestly listen to their feedback and try to improve in areas that are frequently mentioned.

2. Be Present for their Experience

Have you ever tried to reach out to a company, whether via email or through social media, and just heard nothing back? It’s so disappointing.

It’s 2020 - we have the best technological resources for communication that we’ve ever had. If you’re not present for your customers when they need you then you’ll potentially lose people who would have stuck around for the long haul.

Try to be vigilant on social media, especially Twitter, and respond to customer queries as often and quickly as possible.

3. Provide Value

Give your customers a reason to stick around.

Provide a genuinely great service and make your paying customers feel valued.

Benefits for long term customers are a great idea to retain clients for months, maybe even years on end.

screenshot h&m membership benefits - churn rate

4. Know WHY A Customer Churned

As well as gathering feedback from customer who left of their own free will, know that sometimes the churn is occurring because of people’s cards expiring. 

It would be helpful for them, and for your churn rates if you send an email or other communication with your customer to allow them to update their details in order to continue with their subscription.

Just Reach Out

There is some discussion as to what point in time a customer leaving is considered the ‘churn point’ - whether it’s the moment someone cancels or the moment when their subscription runs out. 

This is because you could potentially persuade them to stay between the time after they cancel but before their subscription runs out by giving them an incentive such as a discounted cost or other benefits.

Whatever it is that you believe is sending your customers packing, don’t be afraid to just talk with them - the conversations could prove invaluable.

How Can We Help?

Think your churn rate is higher than it should be? Why not book a chat with us to see if we could pair you with a team who can help solve that! It might just be us.

Alternatively, head over to our training courses to learn more in your own time.