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.

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