Customer Churn Rate (CCR)
Definition
Customer Churn Rate, usually referred to simply as "churn," measures the percentage of customers who stop doing business with your company during a specific period. It is mainly used in subscription-based businesses, such as SaaS companies, to gauge customer retention and long-term profitability.
Churn occurs due to cancellations or simply non-renewals. A high churn rate is problematic for long-term success and may indicate potential problems with customer satisfaction, product adoption and onboarding, or customer service.
Importance of Customer Churn Rate
Customer churn rate is one of the most important metrics to track for SaaS companies. Churn essentially shows you how often you need to replace your entire customer base. Here’s why churn rate matters:
Revenue Loss: Losing customers means losing revenue, which in turn affects growth prospects and your profitability.
Customer Lifetime Value (CLV): High churn reduces the average lifetime value of your customers, making it harder to justify high customer acquisition costs (CAC).
Business Predictability: A low churn rate indicates strong customer loyalty and long term predictable revenue streams.
Growth Planning: Only by including churn in your assessment can you start to develop your growth strategy for retaining existing customers while acquiring new ones.
How to Calculate Customer Churn Rate
The formula for calculating churn rate is pretty straightforward:
Churn Rate = (Number of Customers Lost During Period / Total Customers at Start of Period) x 100%
Example Calculation
If a company starts the month with 1,000 customers and loses 50 customers by the end of the month, the churn rate would be:
Churn Rate = 50 / 1,000 x 100% = 5% | This means that 5% of the customers left during that month.
Types of Churn
Customer Churn: Focuses on the number of customers lost during a specific period.
Revenue Churn: Measures the percentage of recurring revenue lost due to cancellations or downgrades.
Voluntary vs. Involuntary Churn:
Voluntary Churn: When customers actively choose to cancel or leave.
Involuntary Churn: When customers are lost due to payment failures or other external factors.
Not All Churn Is Created Equal
Not all churn is necessarily bad. The division of churn we like to make at RevFixr is (full article):
Healthy (The good): brings focus to the organisation
Preventable (The bad): should’ve been prevented
Inevitable (The ugly): unavoidable but still hurts
Churn Benchmark
While healthy churn is determined by many variables such as industry and contract size, we can benchmark churn rates from successful companies based on the Average Contract Value (ACV):
<€333 | €333–€3.3K | €3.3K–€33K | €33k–€333K | >€333K |
|---|---|---|---|---|
~ 50% | ~ 30% | ~ 15% | ~ 10% | ~ 7% |
Common Causes of Customer Churn
Understanding why your customers leave is the first step to reducing churn. Common reasons include:
Poor Onboarding Experience: Lack of guidance in the product, missing documentation, or lack of support can drive customers away.
Product Misalignment: If your product doesn’t actually meet the customer's expectations churn increases. It's critical you focus on your Ideal Customer Profile (ICP) and clearly communicate your added value.
Competition: Customers may switch to competitors offering lower prices, more functionality, or better service quality.
Pricing Communication: Poorly communicated price increases or perceived lack of value for money can lead to cancellations.
Lack of Adoption: Customers who aren’t using your product or service will churn over time.
Challenges in Managing Churn
While reducing churn is obviously essential, it doesn't come without challenges:
Root Cause: From usage data alone it can be difficult to pinpoint why customers may leave. You'll need to combine usage data with customer interviews.
Acquisition vs Retention: Most businesses focus more on acquiring new customers than retaining existing ones. This makes sense at the beginning, but over time companies should invest more in retention and expansion.
Segmenting Customers: Different customer segments may churn for different reasons, make sure you categorize your users before offering a solution.
Customer Churn Rate vs Related Metrics
Churn rate is closely related to other metrics like:
Customer Lifetime Value (CLV): estimates the total revenue a business can expect to earn from a single customer throughout their entire relationship.
Net Revenue Retention (NRR): represents a company’s ability to retain and even grow its existing customer base.
Conclusion: Why Is CCR Important?
Customer churn rate is vital for understanding how well a business retains its customer base and how sustainably it's growing over time. While the main focus will and should almost always be on customer acquisition, it's critical to maintain a healthy churn rate. By proactively addressing the causes of churn (e.g., poor UX, lack of adoption, competition) businesses can reduce churn rates and directly improve overall profitability.
Author
