How to Calculate Churn Rate

What is Customer Churn?

Customer churn (or customer attrition) refers to the percentage of customers who stop using your product or service during a specific time period. It’s a critical metric for SaaS businesses, subscription models, and any company relying on recurring revenue.

The average churn rate varies greatly depending on the industry and business model:

• Subscription services: ~5-7% monthly churn
• E-commerce businesses: ~20-25% monthly churn

Types of Churn

• Voluntary Churn: Customers deliberately cancel their subscriptions.
• Involuntary Churn: Customers leave due to failed payments (expired credit cards, insufficient funds).
• Revenue Churn: Lost revenue from downgrades or cancellations.

Why Churn Matters

• High churn erodes monthly recurring revenue (MRR).
• Acquiring new customers costs 5x more than retaining existing ones.
• A 5% monthly churn rate means losing ~46% of customers annually.

Types of Churn

1. Revenue Churn vs Customer Churn

• Revenue Churn: The revenue lost from cancellations and downgrades.

  • Formula:
    [ \text{Revenue Churn Rate} = \frac{\text{MRR Lost}}{\text{MRR at Start of Period}} \times 100 ]
  • Example:
    • Starting MRR: $100,000
    • Lost MRR: $5,000
    • Revenue churn rate: 5%

• Customer Churn: The percentage of customers who leave.

  • Formula:
    [ \text{Customer Churn Rate} = \frac{\text{Customers Lost}}{\text{Total Customers at Start}} \times 100 ]
  • Example:
    • Start of month: 1,000 customers
    • End of month: 950 customers
    • Churn rate: 5%

2. Voluntary vs Involuntary Churn

• Voluntary Churn: Customers actively cancel due to dissatisfaction (e.g., poor support, pricing, better alternatives).
• Involuntary Churn: Customers leave due to payment failures (expired cards, insufficient funds).

Solution:

• Reduce voluntary churn with better service and product improvements.
• Fix involuntary churn with automated payment recovery tools.

Why Customer Churn Matters

1. Impact on Business Growth

• Lost revenue from churn means increased pressure to acquire new customers.
• High churn signals deeper issues (poor customer satisfaction, lack of value).
• Customer acquisition costs (CAC) increase as churn rises.

2. Churn Affects Reputation

Dissatisfied customers often leave negative reviews, making it harder to attract new business.

How to Calculate Churn Rate: Formulas & Examples

1. Customer Churn Rate Formula

[ \text{Customer Churn Rate} = \frac{\text{Customers Lost}}{\text{Total Customers at Start}} \times 100 ]

Example:

• Start of month: 1,000 customers
• End of month: 950 customers
• Churn rate: ( \frac{50}{1000} \times 100 = 5% )

2. Revenue Churn Rate Formula

[ \text{Revenue Churn Rate} = \frac{\text{MRR Lost}}{\text{MRR at Start of Period}} \times 100 ]

Example:

• Starting MRR: $50,000
• Lost MRR: $3,000
• Revenue churn rate: ( \frac{3,000}{50,000} \times 100 = 6% )

3. Net Revenue Churn Formula

[ \text{Net Revenue Churn} = \frac{\text{MRR Lost} - \text{MRR Gained from Expansions}}{\text{MRR at Start of Period}} \times 100 ]

Net revenue churn accounts for upsells and expansions, giving a clearer picture of growth.

What’s a “Good” Churn Rate? Industry Benchmarks

• B2B SaaS: 1-3% monthly churn
• B2C SaaS: 3-5% monthly churn
• Enterprise SaaS: <1% monthly churn
• E-commerce/Subscription Boxes: 5-7% monthly churn

Pro Tip: Compare churn rate with Customer Lifetime Value (CLTV). If CLTV is 3x CAC, even a 5% churn rate may be sustainable.

7 Root Causes of High Customer Churn

1. Poor Onboarding – 23% of customers churn because they don’t understand your product.
2. Lack of Customer Success – No dedicated support to guide users.
3. Pricing Misalignment – Customers don’t see enough ROI.
4. Weak Engagement – Low feature usage leads to cancellations.
5. Competitor Offerings – Better pricing, features, or experience elsewhere.
6. Involuntary Churn – 20-40% of churn is due to payment failures.
7. Negative Feedback Loop – Bad reviews deter new signups.

10 Actionable Strategies to Reduce Churn

1. Identify At-Risk Customers Early

• Track customer health scores (login frequency, feature adoption).
• Use predictive churn modeling tools like ProfitWell.

Example:
If a customer hasn’t logged in for 14 days, trigger an automated email:
"We noticed you haven’t used [Feature] lately. Need help? Here’s a quick guide!"

2. Fix Involuntary Churn

• Automate payment recovery with Chargebee or Recurly.
• Send dunning emails for failed payments.

Dunning Email Template: "Hi [Name], Your payment for [Product] failed. Update your billing info here to avoid service interruptions. – [Your Team]"

3. Build a Customer Success Program

• Assign Customer Success Managers (CSMs) to high-value accounts.
• Conduct quarterly check-ins to review ROI.

4. Leverage Customer Feedback

• Use tools like Delighted or SurveyMonkey to track churn reasons.
• Ask: "What’s the primary reason you’re canceling?" (Pricing? Missing features? Poor support?)

5. Improve Onboarding

• Use interactive tutorials and in-app tooltips.
• Example: Slack’s onboarding guides users to send their first message within 2 minutes.

6. Reward Loyalty

• Offer discounts for annual commitments.
• Example: Dropbox offers 10% off annual billing, reducing churn by 2%.

7. Monitor Competitor Benchmarks

• Use ProfitWell to compare churn rates.
• Adjust pricing or features to stay competitive.

8. Optimize Pricing Tiers

• Test freemium models, free trials, and tiered plans.
• Use "Most Popular" labels to nudge customers toward mid-tier plans.

9. Build a Customer Community

• Create a forum or Slack group for users to connect.
• Host webinars to showcase advanced features.

10. Analyze Churn by Customer Segments

• Segment churn by demographics, plan type, or region.
• Tailor retention strategies to high-risk groups.

Key Takeaway

Reducing churn starts with understanding why customers leave. By tracking churn rate, analyzing customer feedback, and implementing proactive retention strategies, you can protect your revenue and build a loyal customer base.