“Churn” refers to the number of customers or subscribers who stop using your service during a given time period. Your annual churn is the percentage rate at which you are losing your users. Those customers who have stop using your service have “churned.”
Measuring your churn rate is crucial to understanding your company’s growth (or decline). Even a small churn rate can have a major impact on your revenue over time. While churn is inevitable — you will lose users, just as you will gain them — it is a key figure to have in mind as you plan for your company’s expansion.
How to Calculate Churn Rate
There is more than one way to measure your churn. Churn is typically presented as a percentage of either revenue or customers lost in a given time frame.
The most straightforward way is to calculate the percentage of users lost based on the number of users you started within a given time period. Do this by dividing the number of users you churned by the number you started with. That percentage will allow you to estimate how many users you may lose on a monthly or quarterly basis.
However, you may also calculate your churn in terms of potential revenue lost. Each time you lose a user and their subscription, you are losing a certain amount of revenue. This is called revenue churn, and it is arguably more important than user churn. This metric is important to track because it weights your user churn in a way that more accurately represents how your business is doing.
User Churn = (Cancelled Customers in the last 30 days ÷ Active Customers 30 days ago) x 100
Revenue Churn = (MRR Lost to Downgrades & Cancellations in the last 30 days ÷ MRR 30 days ago) x 100
A 5% User Churn Rate means that 5% of the total customers you had 30 days ago have canceled within the last 30 days.
A 5% Revenue Churn Rate means that you lost 5% of your MRR as it stood 30 days ago to churn in the past 30 days.
What about annual plans?
Great question! Annual plans work a bit differently. In the case of an annual plan (or any plan that is not monthly, actually) you use the same formula but with a different date interval.
User Churn = (Cancelled customers in the last 365 days ÷ Active Customers 365 days ago) x 100
Revenue Churn = (MRR Lost to Downgrades & Cancellations in the last 365 days ÷ MRR 365 days ago) x 100
What is an acceptable churn rate?
It is natural to look for an acceptable churn rate number as a benchmark for success. But first it’s important to consider how to measure it. Keep in mind that a monthly churn rate will compound over time. A percentage that starts out small and seemingly acceptable balloons over the course of a year. As I’ve said, even a small churn rate can have huge impacts on your revenue over time. So when measuring your churn, project it over the span of a year, not just on a monthly basis.
Now that we’ve made that clear, a churn rate of about 5-7% annually is generally agreed to be acceptable and recoverable. This is a monthly churn of about .4%. However, these numbers tend to be much lower than most startups.
How to improve your churn
Churn is always inevitable, but there are ways to keep your customers engaged, which is the key to reducing your churn. We’ve put together a list of practical ways to start reducing your churn today. This is absolutely key to the long term success of your company, increasing your growth and reducing your spending.