Churn Rate Definition - Investopedia

The churn rate, also known as the rate of attrition or customer churn, is the rate at which customers stop doing business with an entity. TableofContents Expand TableofContents WhatIsChurnRate? UnderstandingChurnRate ChurnRatevs.GrowthRate AdvantagesandDisadvantagesofChurnRate ExamplesofChurnRate ChurnRateFAQs TheBottomLine FinancialAdvisor PortfolioConstruction WhatIsChurnRate? Thechurnrate,alsoknownastherateofattritionorcustomerchurn,istherateatwhichcustomersstopdoingbusinesswithanentity.Itismostcommonlyexpressedasthepercentageofservicesubscriberswhodiscontinuetheirsubscriptionswithinagiventimeperiod.Itisalsotherateatwhichemployeesleavetheirjobswithinacertainperiod.Foracompanytoexpanditsclientele,itsgrowthrate(measuredbythenumberofnewcustomers)mustexceeditschurnrate. KeyTakeaways Thechurnratemeasuresacompany'slossinsubscribersforagivenperiodoftime.Churnratescanbeappliedtosubscription-basedbusinessesaswelltothenumberofemployeesthatleaveafirm.Thechurnrateandgrowthratearediametricallyoppositefactors,astheformermeasuresthelossofcustomersandtheothermeasurestheacquisitionofcustomers.Foracompanytoexperiencegrowthitmustensurethatitsnewsubscriptionsarehigherthanitslostsubscriptionsinagivenperiod.Eachindustrywillhaveadifferentaveragechurnratethatcompaniescancomparethemselveswithtounderstandtheircompetitiveness. UnderstandingChurnRate Ahighchurnratecouldadverselyaffectprofitsandimpedegrowth.Churnrateisanimportantfactorinthetelecommunicationsindustry.Inmostareas,manyofthesecompaniescompete,makingiteasyforpeopletotransferfromoneprovidertoanother. Thechurnratenotonlyincludeswhencustomersswitchcarriersbutalsoincludeswhencustomersterminateservicewithoutswitching.Thismeasurementismostvaluableinsubscriber-basedbusinessesinwhichsubscriptionfeescomprisemostoftherevenues. Whatisconsideredagoodorbadchurnratecanvaryfromindustrytoindustry. ChurnRatevs.GrowthRate Acompanycancompareitsnewsubscribersversusitslossofsubscriberstodeterminebothitschurnrateandgrowthratetoseeiftherewasoverallgrowthorlossinaspecifictimeperiod.Whilethechurnratetrackslostcustomers,thegrowthratetracksnewcustomers. Ifthegrowthrateishigherthanthechurnrate,thecompanyexperiencedgrowth.Whenthechurnrateishigherthanthegrowthrate,thecompanyexperiencedalossinitscustomerbase. Forexample,ifinonequarteracompanyadded100newsubscribersbutlost110subscribers,thenetlosswouldbe10.Therewasnogrowthforthecompanythisquarterbutratheraloss.Thiswouldbeanegativegrowthrateandapositivechurnrate. It'simportanttopayattentiontocustomeracquisitioncostsandtonotewhetheracustomerchurnsbeforeyouhavemadebackthemoneyspentonacquiringthatcustomer. Itiscriticalforacompanytoensurethatitsgrowthrateishigherthanitschurnrateotherwiseitwillexperiencedecliningrevenuesandprofitswiththeeventualscenarioofhavingtoclosethebusiness. AdvantagesandDisadvantagesofChurnRate Advantages Theadvantageofcalculatingacompany'schurnrateisthatitprovidesclarityonhowwellthebusinessisretainingcustomers,whichisareflectiononthequalityoftheservicethebusinessisproviding,aswellasitsusefulness. Ifacompanyseesthatitschurnrateisincreasingfromperiodtoperiodthenitunderstandsthatafundamentalcomponentofhowitisrunningitsbusinessisflawed.Thecompanymaybeprovidingafaultyproduct,itmayhavepoorcustomerservice,oritsproductmaynotbeattractivetoindividualswhodecidedthecostisnotworththeutility. Thechurnratewillindicatetoacompanythatitneedstounderstandwhyitsclientsareleavingandwheretofixitsbusiness.Thecostofacquiringnewcustomersismuchhigherthanitistoretaincurrentcustomers,soasyouensurethatthecustomersyouworkedhardtoattractremainaspayingcustomers,itmakessensetounderstandthequalityofyourbusiness. Disadvantages Oneofthelimitationsofthechurnrateisthatitdoesnottakeintoconsiderationthetypesofcustomersthatareleaving.Customerdecayisprimarilyseeninthemostrecentlyacquiredcustomers. Perhapsyourcompanyhadarecentpromotionthatattractednewcustomers.Oncethispromotionwasoverorevenifthebenefitofthepromotionneverended,customersthatweretryingouttheproductmaydetermineit'snotforthem,cancelingtheirsubscription. Theimpactoflosingnewcustomersversuslong-termcustomersiscritical.Newcustomersaretransientwhereasoldcustomersareentrenchedandhaveenjoyedyourproductandtheremustbeamoresignificantreasonastowhytheyareleaving.Ahighchurnrateinoneperiodmaybeindicativeofahighgrowthratefromthepreviousperiodratherthanajudgmentonthequalityofthebusiness. Thechurnratealsodoesnotprovideatrueindustrycomparisonofthetypesofcompanieswithinanindustry.Mostnewcompanieswillhaveahighacquisitionrateasnewpeopletrythebusiness,buttheywillalsohaveahigherchurnrateasthesenewclientsleave. Acompanythatismatureandhasbeenaroundfordecadeswillhavealowchurnrateasitsclientsareestablishedbutitsacquisitionratewillalsobelower.Comparingthechurnratesofboththesecompanieswillbelikecomparingapplesandoranges. Pros Providesclarityonthequalityofthebusiness Indicateswhethercustomersaresatisfiedordissatisfiedwiththeproductorservice Allowsforcomparisonwithcompetitorstogaugeanacceptablelevelofchurn Easytocalculate Cons Doesnotprovideclarityonthetypesofcustomersleaving:newversusold Doesnotdifferentiatebetweentypesofcompaniesinindustrycomparison:startups,growing,andmature ExamplesofChurnRate TelecommunicationsIndustryChurnRates Thechurnrateisaparticularlyusefulmeasurementinthetelecommunicationsindustry.Thisincludescableorsatellitetelevisionproviders,internetproviders,andtelephoneserviceproviders(landlineandwirelessserviceproviders). Asmostcustomershavemultipleoptionsfromwhichtochoose,thechurnratehelpsacompanydeterminehowitismeasuringuptoitscompetitors.Ifoneoutofevery20subscriberstoahigh-speedinternetserviceterminatedtheirsubscriptionswithinayear,theannualchurnrateforthatinternetproviderwouldbe5%. EmploymentChurnRate Employeeturnoverwithinabusinesscanalsobemeasuredwiththechurnrate,asitprovidesamethodforanalyzingthecompany'shiringandretentionpatterns.Thiscanbeespeciallyhelpfulifoverallemployeelongevitywithinacompanyislow. Whenstatisticsareexaminedonadepartmentbydepartmentbasis,itcanhighlightwhichparticulardepartmentsareexperiencingmorefrequentturnoverwithinthecompany,oratahigherratethanthebusinessaverage.Thiscanhelpdetermineifthepayissatisfactory,thequalityofthemanagersinthatdivision,aswellastheworkloadthateachemployeebears. ChurnRateFAQs WhatDoesChurningMeaninBusiness? "Churning"inabusinessreferstothenumberofsubscribersthatleaveaproviderorthenumberofemployeesthatleaveafirminagivenperiod. HowDoYouCalculateChurnRate? Tocalculatethechurnrate,chooseaspecifictimeperiodanddividethetotalnumberofsubscriberslostbythetotalnumberofsubscribersacquired,andthenmultiplyforthepercentage. Forexample,sayinaquarteryouacquired100newsubscribersbutyoulost12subscribers,yourchurnratewouldbe(12/100)x100=12%. Youcanalsocalculatethechurnratebydividingthenumberofsubscriberslostinaperiodbythetotalnumberofsubscribersatthebeginningofthatperiod. WhatIsaGoodChurnRate? Ideally,achurnrateofzerowouldbethebestchurnrate,asthatwouldindicateabusinessisnotlosinganysubscribers;however,thatisneverthereality.Abusinesswillalwayslosesubscribersforonereasonoranother. Inthiscase,itisimportanttocomparethechurnrateofthebusinesstoitsindustry'saveragechurnrate,takingintoconsiderationifthebusinessisnewormature.Knowinganindustry'schurnrateversusthatofthebusinessistheonlywaytounderstandifachurnrateisacceptableorpoor.Everyindustryhasadifferentbusinessmodeland,therefore,willhavedifferentacceptablechurnrates. WhatDoesaHighChurnRateMean? Ahighchurnrateindicatesthatabusinessislosingsignificantcustomers,certainlymorethanitisbringingin.Thiswouldmeanthatthebusinessisdoingsomethingwrong,whetherthatbedeliveringapoorproduct,havingpoorcustomerservice,orahostofothernegativereasonsthatwouldexplainwhyitislosingcustomersfast.Ahighchurnratewouldmostlikelymeanacompanyissufferingsignificantlosses. WhatIsNetflix'sChurnRate? BetweenQ12009andQ22021,Netflixhadachurnratebetween2.3%and2.4%. TheBottomLine Churnrateisacalculationthatshowsthepercentageofsubscribersofabusinessthatareleaving.Itcanalsobeusedtoshowthepercentageofemployeesthatareleavingafirm.Understandingacompany'schurnrateisonemetricinunderstandingitsfinancialhealthanditslong-termprospects. Companieswithhighchurnratesarelosingalargenumberofsubscribers,resultinginlittlegrowth,whichsignificantlyimpactsrevenuesandprofits.Companieswithlowchurnratesaremanagingtoretaincustomers. Understandingthechurnrateofyourcompanywillalsoshedlightonhowyourbusinessisoperating,whetheryouareprovidingaqualityproductmatchedwithgoodcustomerserviceorwhetheryourbusinessneedsimprovementstoloweritschurnrate. ArticleSources Investopediarequireswriterstouseprimarysourcestosupporttheirwork.Theseincludewhitepapers,governmentdata,originalreporting,andinterviewswithindustryexperts.Wealsoreferenceoriginalresearchfromotherreputablepublisherswhereappropriate.Youcanlearnmoreaboutthestandardswefollowinproducingaccurate,unbiasedcontentinour editorialpolicy. Antenna."AntennaQ12021GrowthReport." CompareAccounts AdvertiserDisclosure × TheoffersthatappearinthistablearefrompartnershipsfromwhichInvestopediareceivescompensation.Thiscompensationmayimpacthowandwherelistingsappear.Investopediadoesnotincludealloffersavailableinthemarketplace. Provider Name Description RelatedTerms WhatIsAttritioninBusiness?Meaning,Types,andBenefits Attritionisthegradualbutdeliberatereductioninstaffasemployeesretireorresignandarenotreplaced. more AverageRevenuePerUnit(ARPU)Definition Averagerevenueperunit(ARPU)measurestheamountofmoneythatacompanyearnsforeachcustomer.LearnhowtelecomsandmediacompaniesuseARPU. more KeyPerformanceIndicator(KPI):Meaning,Types,Examples Keyperformanceindicators(KPIs)arequantifiablemeasuresthatgaugeacompany'sperformanceagainstasetoftargets,objectives,orindustrypeers. more GrowthRates:Formula,HowtoCalculate,andDefinition Growthratesarethepercentchangeofavariableovertime.ItcanbeappliedtoGDP,corporaterevenue,oraninvestmentportfolio.Here'showtocalculategrowthrates. more GrossDomesticProduct(GDP):FormulaandHowtoUseIt Grossdomesticproductisthemonetaryvalueofallfinishedgoodsandservicesmadewithinacountryduringaspecificperiod. more WhatisaBusinessModelwithTypesandExamples Abusinessmodelisacompany'sprofit-makingplanwhichdefinestheproductsorservicesitwillsell,itstargetmarket,andanyexpectedcosts. more PartnerLinks RelatedArticles Sectors&Industries Whatarethebestmetricstoevaluateatelecommunicationcompany? 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