Churn Rate

Definition

Churn rate (customer attrition rate) is the percentage of customers or subscribers who stop doing business with a company during a specific period. It’s a primary measure of customer retention and is also applied to employee turnover.

Why it matters

• High churn reduces revenue and profit and slows or reverses growth.
• For subscription-driven businesses, churn directly affects recurring revenue.
• A company must grow new customers faster than it loses existing ones to expand its customer base sustainably.
• Churn signals underlying issues such as product problems, poor service, or pricing misalignment.

How to calculate churn

Common formula:
– Churn rate (%) = (Number of customers lost during period ÷ Number of customers at start of period) × 100

Notes:
– Some firms use the average number of customers during the period as the denominator.
– Distinguish between customer-count churn (logo churn) and revenue churn (dollar churn) when customers vary in value.

Simple examples

• If you start a quarter with 1,000 subscribers and lose 120: 120 ÷ 1,000 = 0.12 → 12% churn.
• If you add 100 new subscribers but lose 110 in the same quarter, net change = –10 customers (negative growth), even though churn is positive.

Interpreting churn

• “Good” churn depends on industry, business model, and company maturity. Compare to industry peers and consider whether the firm is a growth-stage startup (often higher churn) or a mature business (typically lower churn).
• Consider customer segments: losing recent trial customers is different from losing long-term customers. The latter often signals deeper problems.

Pros and cons of using churn as a metric

Pros:
– Simple and quick indicator of retention health.
– Helps identify when product, pricing, or service issues need attention.
– Cost-effective: retaining customers is usually cheaper than acquiring new ones.

Cons:
– Doesn’t show which customer types are churning (new vs. long-term).
– Can be misleading during rapid growth periods.
– Comparing churn across companies requires context (stage, customer mix, pricing).

Applying churn analysis to employee turnover

• The same calculation can measure staff churn to highlight departments with high turnover.
• Department-level churn can point to pay, management, workload, or culture issues.

Practical considerations

• Track churn alongside growth rate, customer acquisition cost (CAC), and lifetime value (LTV). If customers churn before you recover CAC, the acquisition model is unsustainable.
• Use cohort analysis to understand when and why customers leave (e.g., early churn vs. late churn).
• Monitor revenue churn separately to capture the impact of downgrades and high-value customer losses.

Reducing churn (high-impact steps)

• Improve onboarding to help customers realize value quickly.
• Strengthen customer support and proactive outreach.
• Fix product issues and iterate based on exit feedback.
• Segment customers and tailor retention actions to high-risk cohorts.
• Revisit pricing and packaging to align value with cost.

Conclusion

Churn rate is a fundamental metric for assessing retention and long-term viability. Measured and analyzed properly—alongside growth, CAC, and LTV—it guides where to invest in product, service, and customer success to sustain and grow the business.