Churn Rate and How It Affects Companies

Churn can be measured either in terms of lost customers (customer churn rate) or lost revenue (revenue churn rate). The customer churn is the rate at which customers stop doing business with an entity, while the revenue churn is the rate at which a company loses revenue as a result of customers not subscribing or downsizing their subscription. In this article, we will deep-dive to understand how the different types of churn rate are calculated, the importance of churn rate as well as how it affects company revenue.

Calculating Churn Rate

For detailed steps on calculating churn rate, please refer to Fig. 1 below.

The customer churn rate is calculated by taking the number of customers who unsubscribe during the period over the number of customers at the start of a period. It is most commonly expressed as the percentage of service subscribers who discontinue their subscriptions within a given period. For example, when we unsubscribe from Netflix, we will increase their customer churn rate. For revenue churn, we calculate it as the revenue lost due to customers who unsubscribed during the period over total revenue in the period. It is also commonly expressed as the percentage of revenue lost because of reduced subscription.

Importance of Customer Churn Rate

Churn rate is primarily associated with companies operating on a subscription-based business model as it is one of the most important business metrics. A high or increasing customer churn rate suggests that more subscribers (customers) are discontinuing their subscription. Since subscription rates directly affect the revenue of a subscription-based business, less subscription may hamper a company’s growth and profitability. As such, customer churn rate may be a good indicator of success for companies, especially those on a subscription basis, which may thus explain companies’ rising use of predictive analytics to forecast customer churn rates.

There are two variations of customer churn rate: voluntary churn and involuntary churn. The voluntary churn rate indicates the proportion of customers who decide to stop their subscription themselves, perhaps due to product dissatisfaction, whereas the involuntary churn rate indicates the proportion of customers who cease their subscription because of unavoidable situations like illnesses. Generally, companies are more concerned with voluntary churn as it is directly linked to their business operations.

Importance of Revenue Churn Rate

Since customer subscription is linked to the revenue of a subscription-based company, a higher customer churn equates to a high revenue churn. Hence, companies also use revenue churn rate as an indicator of their growth. Revenue churn rate allows companies to accurately segment their customers into high and low spenders, thereby helping companies to identify the customer segment which contributes the most to the churn and analyse the reasons for a high revenue churn.

As voluntary churn rate is directly linked to customers, companies usually utilize different methods and strategies to target their customers. Customer retention and satisfaction are just two key aspects of strategies which can help improve business operations and ultimately decrease the churn rate.

In conclusion, customer churn and revenue churn serve as two useful indicators of business success, especially for companies on a subscription-based business model. With a heavy reliance on recurring revenue, a subscription-based company should focus more on serving its existing customer base well, simply because it is always cheaper to retain a customer than to acquire one.

Subscribe Paloe

Thank you for reading! Like our content?

Sharpen your finance acumen through our FREE WEBINARS. Sign up for our mailing list and we’ll inform you about any future events or webinars.

Free Webinars

Optimise your company’s finance functions with a FREE 1-hr consultation

Blog Book Now Free 1-hour Consultation

Related content

Here are similar contents you might like:

Raising your Series A round

Raised a seed round? Besides the obvious benefit – funding, what you get is the implicit confirmation on the potential of your business idea and the momentum to keep venturing forward. A seed round is meant to supply a start-up with sufficient capital to support product development and initial market

Read More >

Should you revisit your budgeting process in 2021?

With the Covid-19 Pandemic persisting towards the last quarter of 2020, uncertainties cloud the pace of recovery. Businesses can use this as an opportunity to re-evaluate their budgeting processes. What is the zero-based budgeting approach?  This approach is beneficial in times where the past year actuals do not make sense

Read More >

Is your business eligible for the Enterprise Development Grant?

What is Enterprise Development Grant (EDG)? With the onset of Covid-19 and its impact on catalysing businesses towards digitalisation, many companies must adopt technology and innovate their processes to survive. Thankfully, companies can receive aid in doing so. The Enterprise Development Grant (EDG) is one such scheme that seeks to

Read More >