Churn Rate

What is a Churn rate?

A churn rate is a metric expressed in percentages that measures the rate at which a business is losing its customers or subscribers within a specific time period. Depending on the nature of your business, customer churn can refer to a closure of an account, cancellation of a subscription, buyer decision to shop at another store or not to renew a contract with your business.

How is a Churn rate calculated?

When you decide what customer attrition means for your business, you can move on to doing the math. Although the churn rate metric is more suitable for SaaS business models, it can be adapted to eCommerce and customized for the goals that you want to achieve. However, you must have a clear definition of what an active customer means to you and when you consider that customer lapsed.

The simplest formula to calculate the churn rate is:

(number of churns during a certain period) : (number of customers at the beginning of that period) x 100 = churn rate %

For example:

5 customers lost : 100 starting customers x 100 = 5% churn rate

Why is a Churn rate important?

The churn rate can be one of the defining metrics (non-vanity metrics) that shed light on the actual growth of your business. To achieve significant growth, a company’s acquisition rate must exceed its churn rate.

Sudden changes in a company’s churn rate can provide feedback on customers’ response to new pricing, products, competitors, and policies and should be monitored constantly to prevent customer bleeding. It has been demonstrated time and time again that it is by far more cost-effective to retain an existing customer than to acquire a new one. A robust and holistic churn prevention strategy will help you ensure your efforts are laser focused on retaining and growing your customer base.    

How to reduce Churn rate?

Decreasing the churn rate is a process, not a one-time motion. It will largely depend on how your business defines active and inactive customers as well as what problems you manage to identify as the main drivers of churning and loyalty change. For eCommerce businesses, the methods that seem to be yielding the best results in fixing the churn rate include:

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Justas Markus: CEO & Co-Founder of GetFound XL and a blogger at Entrepreneur.com, Observer.com, Influencive.com and others. Catch up with Justas on Twitter.