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Churn rate

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What is churn rate?

Churn rate, also known as attrition rate, is the number of customers that a business loses over a certain time period.

In a broader sense, churn rate may also refer to the subscribers that stop to extend their subscription with a business.

For a business to experience growth, the number of customers who end their contract should be lower than the number of customers who are onboarded in a given period.

How to calculate churn rate?

Churn rate is a key business metric that enables leaders of a business to make timely decisions about their customer retention strategies.

A high churn rate is a serious alarm for a business, signaling that necessary measures must be taken before the situation gets out of control.

In order to calculate churn rate, you need to take the following steps:

Set a specific time period (month, quarter, year) for measuring your churn rate. Due to inflation and unstable market conditions, you’d better shorten this period as much as possible.
Calculate the number of customers at the beginning of the time period (month, for example).
Determine the number of customers who are still active at the end of the time period
Subtract the number of customers at the end of the period from the number at the beginning of the period.
Divide the result of the above subtraction by the total number of customers at the beginning of the calculation period.
Multiply the number by 100 to find the right percentage.

Note: You need to keep the customers who started to have business with you in the given period out of the calculation.

Let’s see how this works in a simple example. Imagine you have 1,000 customers at the beginning of the month and 970 at the end. This means 30 customers stopped working with you. When you divide this number by 1,000, you will get to 0.03, which multiplied by 100 will be 3. Your churn rate for this period is thus 3%.

What is a good churn rate?

Generally speaking, the lower your churn rate, the healthier your business. Companies that manage to minimize churn have a lower customer acquisition cost and a stronger customer base which they can rely on during turbulent times.

Industries vary in terms of a ‘good’ churn rate. You should also consider the context in which your business operates. In an inflationary environment, churn rate is usually higher than more stable conditions because people and companies try to spend their budget more cautiously.

However, the following numbers help you get a more vivid picture of a good monthly churn rate for different industries:

For B2B enterprises a churn of 1% to 2% is considered a good rate.
B2C companies have a considerably higher churn rate than B2B enterprises. It is often between 6% to 8%.
For startups which are in their growth stage a good churn rate would fall between 3% to 5%.
The average churn rate for SaaS companies usually lands around 5%.

How to improve churn rate?

Minimizing churn rate as much as possible helps a business increase margins and profitability and reduce lead generation and other customer acquisition costs. The following insights help you improve churn rate for your business:

Develop a data-driven mindset. You need to monitor your churn rate on a regular basis to ensure your business is on the profitability track. This needs a data-driven approach that underlines all customer-related interactions.
Monitor the broader context closely. Your business does not operate in a vacuum. Developments in the surrounding environment influence your churn rate. You need to ensure that you detect them and react in a timely manner.
Offer meaningful and timely incentives. Once you realize the main concerns of your customers (for example, rising gas prices), you need to double down your efforts to address them through meaningful promotions (for instance, discounts on gas for loyal customers).
Personalize your customer interactions. According to Gartner, in 2023, brands that put in place user-level control of marketing data will reduce customer churn by 40% and increase lifetime value by 25%. Personalization not only attracts new customers but also helps keep the existing ones loyal.
Focus on subscription renewal campaigns. Just like retaining customers, keeping active subscriptions is essential for the long term health of your business. You need to offer the customer an attractive deal before the end of their current subscription. This way you’re aiming to retain them rather than re-sign them. Ultimately, the main objective is to make sure they don’t churn.

Targeted promotions have a huge effect on minimizing your churn rate, while increasing brand loyalty. Check out how Talon.One powers tailored incentives for B2B enterprises in our report, "The ultimate guide to B2B promotions and loyalty programs."

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