5 Simple Steps to Calculate Churn Rate: Understanding and Applying the Formula

Mor Shabtai
February 20, 2024
5 min read

Customer attrition, also known as churn, is the rate at which customers stop doing business with you over a specific period. It's a daunting yet crucial metric. Without knowing your customer churn rate, it's challenging to gauge its impact on your revenue or devise strategies to reduce this rate. Calculating and addressing customer churn can seem overwhelming, but fear not. In this guide, we'll provide a comprehensive overview of everything you need to know about churn rate.

What is Customer Churn Rate

The customer churn rate quantifies the proportion of customers or subscribers who discontinue their subscriptions within a certain timeframe, like a month or year. This metric is particularly vital for businesses with recurring revenue models, such as SaaS or subscription services. No matter your current revenue, if your customers leave before offsetting the average customer acquisition cost (CAC), your business could face significant challenges. Tools like CRM software can assist in determining your churn rate, and your own software might offer subscriber tracking to facilitate this process.

Churn Rate Formula

The churn rate is calculated as follows:

(No. of Lost Customers ÷ Total Customers at Start of Period) × 100.

For instance, if you start with 300 customers and lose 30 by month's end, divide 30 by 300 to get 0.1. Multiply 0.1 by 100 for a 10% monthly churn rate.

Alta's  Metrics Calculator computes revenue churn and customer retention rate, among other critical success metrics. For manual churn rate calculation, the following section provides a detailed explanation.

Calculating Churn Rate

To compute churn rate, you need the initial customer count for a set period (monthly or yearly) and the number of customers lost during that period. Divide the lost customers by the initial total, then multiply by 100 for your churn rate percentage.

Steps for Calculating Churn Rate:

1. Select a time frame: monthly, quarterly, or annually.

2. Count customers at the period's start.

3. Determine the number of customers lost by the period's end.

4. Divide the lost customers by the starting customer count.

5. Multiply the result by 100.

Example: Suppose your software company began last quarter with 500 customers but lost 50 due to expired contracts and poor customer service. Your churn rate is 50/500 = 0.10, multiplied by 100, resulting in 10%.

Actions Post-Churn Rate Calculation:

If you find a high churn rate, implement strategies to reduce it. Failure to address high churn rates can have long-term negative effects on your company. Here are some steps to consider:

1. **Analyze churn for customer service improvement:** Use churn instances to investigate why customers leave and prevent similar future churn. Tracking churn and retention rates is crucial, which can be done using tools like Alta"s Customer Service Metrics Calculator.

2. **Revamp customer onboarding:** A strong onboarding process can prevent early churn. Use welcome emails, dedicated support, and educational content to help new customers derive maximum value from your product.

3. **Enhance training for sales and support staff:** Sales should accurately represent your product's value, and support staff should be equipped to handle any issues effectively. Investing in these areas can significantly reduce churn rates.

4. **Solicit and act on feedback:** Regularly ask for customer feedback, especially at critical moments in their journey. Addressing feedback promptly can strengthen customer relationships and reduce churn.

5. **Proactive communication with customers:** Build trust by consistently engaging with your customers through various channels and content that they find valuable.

6. **Offer perks to existing customers:** Personalized interactions, such as in-person meetings or special check-ins from senior management, can enhance customer loyalty and reduce churn.

7. **Utilize feedback from trial users:** Analyze why trial users didn't convert to paying customers and use this information to refine your product and address potential churn drivers.

Pair these strategies with customer retention tactics for optimal churn reduction. Now, let’s explore what constitutes a good churn rate.

Understanding Good Churn Rates

A study suggests that the global average churn rate is around 32%. However, top-performing SaaS companies maintain a monthly churn rate between 5 to 7%. Aiming for a 2 to 7% churn rate is advisable, with enterprise-level companies targeting less than 1% monthly.

Calculating Annual and Monthly Churn Rates:

- **Annual Churn Rate:** To calculate, subtract the end-of-year customer count from the start-of-year count, divide by the starting number, and multiply by 100.

- **Monthly Churn Rate:** Similar to annual calculations, but with monthly customer numbers.

Tracking Churn

Churn can be tracked through spreadsheets or dedicated software like Alta, which automates calculation and monitoring, providing valuable insights for strategic decision-making.

Mor Shabtai
February 20, 2024
5 min read