Churn rate: What it is + how to calculate it

Customers want the best, and if they’re not getting it from your business, they may look elsewhere. According to the Zendesk Customer Experience Trends Report 2023, 73 percent of consumers will switch to a competitor after multiple bad experiences. This can involve bad customer service, unmet expectations, or a lack of personalization—all resulting in customer churn.

Customer churn rate is a crucial metric that can shine a light on a company’s shortcomings and reveal areas of improvement. In this guide, we’ll cover the basics of customer churn, how you can track and reduce it, and how it contributes to the customer experience (CX).

More in this guide:

• Importance of understanding churn rate
• How to calculate churn rate: 4 formulas
• Examples of churn rate
• How to reduce churn rate in 5 steps
• How to track churn rate
• Frequently asked questions
• Reduce customer churn rate with Zendesk

Importance of understanding churn rate

Customer churn rate is an important metric to understand because lost customers mean lost revenue—and the higher the churn rate, the more your bottom line will suffer.

Churn impacts nearly every aspect of a company, from the product and revenue to customer satisfaction and loyalty. Understanding this crucial metric can lead to several benefits:

• Improved customer retention: Oftentimes, when you reduce churn rate, you improve customer retention. An increase in customer retention leads to increased profitability and more long-term relationships with your customers.
• Enhanced outreach: You can use churn rate to help evaluate the impact of outreach campaigns and determine if your messaging resonates with your audience. A lack of engagement or increased churn could indicate a shift in campaign strategy is needed.
• Improved product: When unveiling new product features, keep an eye on the churn rate to determine how your audience feels about the changes. A lower churn could indicate your audience appreciates the new features.
• Reduced costs: It’s common knowledge that acquiring a new customer costs more than retaining an existing one. So, companies that lose customers aren’t just losing the revenue from those individuals—they’re also burdened with the cost of finding new ones.

Being fluent in your customer churn rate is the first step to understanding your customer base, improving your business, and creating long-term consumer relationships.

Customer churn vs. revenue churn vs. growth rate

When evaluating the level of churn in your organization, there are a few different terms to be aware of:

• Customer churn rate: The percentage of customers you lost.
• Revenue churn: The percentage of revenue you lost.
• Growth rate: The percentage of customers who start doing business with an organization over a specified time.

It’s important to note the distinction between these metrics because they mean different things for your business. For example, Company A lost two customers who paid $5 per month, while Company B lost one customer who paid $100 per month. Company A’s customer churn rate is higher, while Company B’s revenue churn is higher.

While churn rate measures how many customers a business lost, growth rate measures how many customers a business gained. Overall, these three metrics influence your company’s longevity and can help you measure customer satisfaction.

How to calculate churn rate: 4 formulas

Calculating your churn rate is the first step to improving customer experience and retention. There are a few different formulas you can use to calculate churn depending on the nature of your business, but here are four of the most common.

1. Customer churn rate

Customer churn rate is a simple yet crucial customer experience key performance indicator (KPI) to measure. You can use this formula to analyze churn across any time frame, whether that’s a year, a month, or even a day.

As an example, let’s say you want to measure your churn rate for January. At the start of the month, you had 100 customers, but by the end, you had 90. First, subtract 90 from 100 to get 10. Next, divide 10 by 100 to get 0.1, and then multiply that by 100. So, your monthly churn rate for January would be 10 percent.

2. Gross revenue churn rate

Customer churn rate can determine the number of customers lost, but not every customer brings in equal revenue. Some individuals spend more than others, and the gross revenue churn rate can provide additional insight into how customer churn affects profits. This metric is especially beneficial for software as a service (SaaS) companies and other businesses that focus on subscribers and measure monthly recurring revenue (MRR).

As another example, imagine you want to measure your revenue churn rate for September. Your business has an MRR of $100,000, and during September you lost $5,000. First, divide $5,000 by $100,000 to get 0.05, and then multiply that by 100. So, your gross revenue churn rate for September would be 5 percent.

3. Adjusted churn rate

If your business grows rapidly, you’ll need a more complex formula to get a realistic picture of your customer churn. For instance, scaling businesses may experience both a significant increase in new customers and customer churn in the same period. In this case, they could have a positive increase in total customers, so a formula that only accounts for lost customers wouldn’t provide an accurate picture.

The adjusted churn rate formula gives a growing business a better idea of its customer health than the churn rate alone. This can contribute to a more relevant and comprehensive customer experience strategy.

4. Seasonal churn rate

Many businesses experience lulls during certain parts of the year—waterparks, for example, are busier in the summer, while ice skate rental businesses are busier in the winter. First, use the customer churn rate formula to find your churn rates for busy and slow periods. From there, input those figures into the seasonal churn rate formula to determine your annual churn.

Examples of churn rate

Churn rate varies from business to business and industry to industry. Here are a few examples of churn rates to give you a better idea of how this metric affects different organizations.

E-commerce churn rate

The average churn rate for e-commerce brands can be as high as 70 to 80 percent. With so many options available for consumers, businesses in this industry need to prioritize customer loyalty to build long-term relationships. This number, of course, can be higher or lower depending on business strategy. Wayfair, for example, recorded a 65.5 percent retention rate in 2020, meaning it experienced a customer churn rate of 34.5 percent.

SaaS churn rate

SaaS business models often rely on subscriptions, and churn rate is a crucial factor in determining success. The median gross dollar churn in the SaaS industry is 14 percent, so SaaS companies should aim to keep their churn below that figure. Streaming giant Netflix, for instance, has traditionally had a low rate but saw an increase in cancellations after raising its prices. The company had a monthly churn rate of 3.3 percent in March 2022.

Logistics churn rate

Organizations in the logistics industry experience volatility in daily operations and when retaining customers. The average logistics churn rate is 40 percent, meaning businesses in this industry should focus on building relationships with their customers to ensure repeat orders.

How to reduce churn rate in 5 steps

Knowing your churn rate is a critical first step, but it’s just as important to know how to minimize it. Here are five steps to reduce churn and grow your business

1. Adopt a customer-first mindset

If you want to reduce the number of customers leaving your business, you need to know how to keep them happy. One of the most effective ways to keep your customer base happy is by adopting a customer-first mindset.

Being a customer-first business means putting the customer at the center of organizational decision-making, rather than products or profits. Companies looking to take this approach should focus on customer needs to personalize offerings, proactively address issues, and understand customer expectations.

2. Identify the signs of at-risk customers

Another way to combat customer churn is knowing which customers are more likely to leave. There’s no flashing neon sign that gives businesses a list of at-risk customers, but there are strategic metrics and patterns you can leverage to help identify these consumers.

A few risk factors to look for include:

• Reduced communication or interaction with your business

• Negative reviews

• Multiple product returns or refunds

• Poor interactions with customer service

• A drop in customer engagement metrics

There may be other signs specific to your business, so it’s important to create a system that can help your team identify at-risk consumers. After determining who may be at risk, you can target those customers with special offers or enhanced support to regain their loyalty.

3. Prioritize customer loyalty

Another important tactic in the battle against churn is prioritizing customer loyalty. You can entice consumers to build relationships with your company in various ways, like providing good customer service, personalizing CX, and fostering an emotional connection.

While it’s important to execute these “behind the scenes” tactics, another successful and more customer-facing strategy is to launch a customer loyalty program. A loyalty program rewards consumers for making purchases, leaving reviews, referring friends and family, and more. This can entice individuals to make repeat purchases with your brand and to stick around long-term.

4. Take care of your best customers

Even with the most successful strategy, it’s virtually impossible to get your churn rate to zero. That’s why it’s also critical for you to identify and take care of your best customers.

Reward these individuals through loyalty discounts, special prices, and other customer retention strategies. Additionally, if you offer a variety of products, consider how you can cross-sell or upsell to your most loyal customers and increase their customer lifetime value (CLV). The higher your CLV, the less the customer churn will affect your bottom line.

5. Invest in the customer experience

According to our CX Trends Report, more than half of consumers will switch to a competitor after only one bad experience. With stakes this high, companies can’t afford to deliver subpar customer service and support.

To help your organization provide an outstanding customer experience and fast, personalized service, invest in help desk software, customer relationship management (CRM) software, and similar tools designed to improve CX. With these platforms, your support agents can deliver comprehensive, proactive support time after time.

How to track churn rate

By now, you know why churn is important and the steps you can take to calculate and reduce it. But to comprehensively reduce churn, you need a system for tracking it. Tracking this metric may look different from business to business, but consider these key principles:

• Determine a time frame: Establish if you want to monitor your churn rate for a certain period or if you want a rolling calculation that keeps track of churn over time.
• Define churn for you: Choose which type of churn is most important. It may be standard churn, gross revenue churn, adjusted churn, or a combination.
• Track performance: Use tools like customer experience software to track customer feedback, churn rate, and other customer retention metrics.
• Review and adapt: Keep track of your short-term and long-term performance to identify areas that need improvement. For example, if your churn rate increases when your customer satisfaction score (CSAT) decreases, you may need to upgrade your customer support processes.

By implementing these steps and iterating when needed, businesses can comprehensively understand their churn and take targeted actions to enhance customer retention.

Frequently asked questions

Reduce customer churn rate with Zendesk

If left untreated, a high customer churn rate can be the downfall of a business. Organizations need to adopt a customer-first mindset, prioritize customer loyalty, and identify at-risk customers to minimize churn. That said, one of the most impactful ways to reduce churn is to focus on the customer experience.

At Zendesk, we provide a comprehensive CX solution that helps businesses of all sizes understand and delight their customers, leading to lower churn rates and greater long-term loyalty.

Try us for free today to reduce churn and develop customer relationships.