Getting to Grips with Churn Rate in Your Business

Does churn rate make you cringe? 

Churn isn’t all bad—it can tell you a lot about your business, your target audience, what’s working, and what needs to be improved.

It’s time to reframe how you think about churn rate and how it can make you a better business owner.

What is Churn Rate?

Churn rate refers to the speed at which customers stop doing business with a company.

Churn is particularly prevalent in subscription-based business models, where customers may grow tired of paying a monthly subscription (Netflix, niche retailers) and cancel their membership.

Here’s a quick video explaining churn rate…

Here’s the good news: Every company that exists and does business with customers has a churn rate.

To understand churn mathematically, here’s the standard churn formula.

Take the number of customers who left over a period of time and divide it by the total number of customers when you started. Boom—you’ve got your churn rate.

Churn rate example: You start with 100 customers and lose 5 in a month, so your churn rate is 5%.

Churn rates are highest in industries like digital media and entertainment, consumer goods and retail, and the lowest in software.

What is a Good Churn Rate?

As a rule of thumb, a yearly churn rate of 5-7% is the sweet spot in most industries. Over longer periods or each month, we’re talking about a 1 to 2% maximum churn rate.

What else should be calculated alongside churn?

Growth rate.

Companies should aim for anywhere between 15 and 45% of year-over-year growth.

Growth rate measures the new customers your business gains during the same time frame.

Say your churn rate is at 5%, but your growth rate is at a solid 10%. This means you’re gaining customers.

One of the biggest ways to stir the pot is through promotional campaigns. Your business offers limited-time specials, discounted trials, or freebies, encouraging new customers to sign up.

This ramps up your growth rate but can also impact churn at the same time.

Once the promo ends and new customers have to pay the standard price for a product or service, you will likely lose some customers, increasing your churn rate.

Even if your churn rate spikes during a seasonal promotion, as long as the growth rate can flex, that promo you ran was profitable.

Median customer churn rates by B2B-focused industries
Source: Customer Gauge: Median Customer Churn Rate for B2B-focused Industries

Factors to Consider When Measuring Churn Rate

The churn rate is just one piece of the puzzle, and you must consider the other important factors when analyzing your business’s success.

Age of the Company

If your company is brand new, your churn rate will likely be higher than 5% in the early days.

You’re running promotions, launching marketing campaigns, and social media blitzes to raise awareness about your brand and get as many people through the door as possible.

Customers are testing the waters, signing up for free trials, and buying your products. This is exactly what you want—to get your product or service into the hands of as many users as possible.

With that comes a higher churn. Not everybody will stick around, but the more initial touchpoints you acquire, the more the business will grow.

On the flip side, veteran companies that have been around for years should look at churn differently.

Low churn rates are desirable; this shows that you’ve established rapport with your customers, built trust, and offered a product or service your audience loves.

What You Can Control

Some customers just find a reason to hit the road, and you can’t take it personally. For the instances that you can control, here’s how to handle the loss.

  • Send customer surveys asking for feedback about their experience, what you can improve, what would bring them back, etc.
  • Offer incentives or freebies as a way to wine and dine them
  • Take steps to improve your service or products
  • Offer a five-star customer experience and service—

Did you know 85 percent of consumers leave a retailer or subscription because of poor customer service or experience?

Churn Rate - offer several options to customers to increase customer retention

Do everything in your power to ensure your business does not lose customers based on something you have total control over—the way staff treat them, how they engage with your website, and how your products make them feel.

What You Can’t Control

Often, the misalignment between the cost and value of your offering causes customers to cancel their subscriptions and move on, even if they love the product.

As a business, you can only focus on customer experience, offer quality products and services, and promote meaningful customer engagement and interactions.

These pillars ensure that customers never leave because they don’t feel appreciated or like they’re just a cog in the proverbial wheel.

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Tim Jones

Tim has worked as a marketing professional for 10+ years. He earned his MBA with a focus in Digital Marketing in 2021. He's an expert in web development, SEO, PPC, and content marketing. He currently runs a successful marketing agency and works as a SVP for a national non-profit foundation.

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