How to calculate churn rate: A better formula
Customer churn rate, also known as customer attrition rate or customer turnover rate, is a critical metric in subscriptions. Knowing how many customers are leaving your company lets you gauge your financial health and get actionable insights into subscriber behavior and preferences.
In this article, we’ll cover everything you need to know about churn rate–from its definition and calculation to its recognition and prevention–so you can start measuring it for your company.
What is churn rate?
It’s the percentage of subscribers who canceled or didn’t renew their subscriptions in a given time period. Churn rate tells you how engaging your product is. The higher the churn rate, the more customers and revenue you lose–hurting your bottom line.
Churn is a critical indicator of the health of your subscription businesses. Learn how your churn rate compares vs. other companies in your industry.
There are two ways of measuring churn rate:
Churn based on customer counts
Churn based on customer revenue (revenue retention/revenue churn)
Every subscription business would benefit by looking at method #1. However, companies that have wide variations in revenue among their customers, like SaaS businesses, for example, would also benefit from method #2 as it helps maintain focus on the largest customers.
How to calculate churn rate
Churn is usually calculated monthly, but you can also calculate it on a daily, quarterly, or annually basis. The most basic calculation of churn rate is dividing your churned subscribers by the total number of subscribers.
Churn rate formula: Churn rate = Churned customers / Total customers
It seems simple, but the devil is in the details. Calculating churn is related to how you count subscribers and activations. It’s also easy math.
Subscriber formula: End of period subscribers = Beginning of period Subscriber - Churned customers + Customer acquisition
Let’s picture it with an example. We’ve partnered to help you launch a new subscription business: Butter of the Month. Every month, your subscribers get a delicious, new variety of butter to their homes.
Butter of the Month starts in July with 10,000 customers. Of these original customers, 500 leave by the end of the month. But 600 new customers join the community and are active at the end of the month.
As you can see, Butter of the Month has a 5% churn rate and 10,100 subscribers by the end of July.
Now, let’s imagine you have the same subscriber behavior in August. You start the month with 10,100 subscribers from the end of July, 500 consumers churn, but you earn 600 new customers.
This simplified example shows that churn decreased in August. In reality, churn would slightly increase because the company grew, and new subscribers tend to churn at a higher rate.
Regardless of your methodology for calculating churn, the real value lies in cohort analysis and analyzing changes in churn over time. For example, you could segment Butter of the Month into subscribers who are less than 6 months old vs. greater than 6 months old and track the behavior for both cohorts.
Recurly’s analytics engine does all this heavy lifting for you–allowing you to spend more time focusing on growing your business instead of churn calculations. Let’s dive deeper.
How to track churn rate
Now that you’ve learned how to calculate churn rate, it’s time you learn how to track it for your subscription business. Measuring churn is an extensive task, especially when done manually.
Leading subscription brands, like AllTrails and Output, rely on a subscription and billing platform to automatically identify, analyze, and fight churn. It’s the most convenient way to track your churn, as you get nearly real-time subscriber information and actionable insights from a single source of truth.
For example, Recurly Analytics helps you measure subscriber retention–based on plan and churn volume:
Our Plan Performance Dashboard lets you run cohort analysis to know the number of subscriptions that churned out of each plan–further broken down by involuntary vs. voluntary churn rates.
Additionally, our Subscriber Retention view of the Plan Performance Dashboard helps you track activity and churn volume from paying and active subscribers for the top five plans.
Answering your churn rate FAQs
What is a good churn rate?
Recurly’s benchmark report shows that 5.57% is the average churn rate in subscriptions. However, churn varies widely across industries and business models–make sure you know the standard in your industry and how yours compares.
Netflix has one of the lowest churn rates in the video streaming industry. Its monthly churn rate is strikingly low at 2.5%, meaning that more than 97% of customers choose to stay. Spotify has a reported churn rate of 4.8%, while Peloton–the exercise equipment and fitness subscription company–has an 8% annual churn rate, enjoying a 92% retention rate.
What does a high churn rate mean?
A high churn rate indicates you’re struggling to retain subscribers. The higher your churn rate, the more customers you’re losing.
Can you predict churn?
Yes–leverage data to understand customer behavior and identify zombie segments. Common patterns of changes in subscriber activity to track are:
Drops in engagement or interaction with your product or service
Lower dwell time or lower average spend
Sudden increase in visits to the pricing or cancellation page
Can you prevent churn?
Yes, you can prevent both types of churn–involuntary and voluntary. Tracking subscriber behavior can give you actionable insights to better tailor your customer experience and reduce voluntary churn. Whereas for involuntary churn, a comprehensive payment decline strategy and intelligent retry model can help you recover as many failed payments as possible.
Recommended reading: 16 Serious strategies to reduce subscriber churn
Defeating churn is part of every C-suite agenda–calculating it is the first step. Once you understand how your churn rate behaves, you will start identifying opportunities to grow your recurring revenue faster, smarter, and stronger.