How to Calculate Customer Churn Rate and Revenue Churn ...

Churn rate, sometimes known as attrition rate, is the rate at which customers stop doing business with a company over a given period of time. Skiptocontent     RESOURCECENTER BROWSEBYCATEGORY       HowtoCalculateCustomerChurnRateandRevenueChurnRate Theeasywaytofindouttherateatwhichcustomerschurn—andwaystoreduceattrition Timetoread:5minutes Howdoyoucalculatecustomerchurnrate,andwhatarethedifferencesbetweencustomerchurnandrevenuechurn? Tofindouthowtocalculatecustomerandrevenuechurn,it’simportanttostartbydiscussingthetwodifferentmethodsofcalculatingchurn:customerchurnandrevenuechurn. Whatiscustomerchurn? Customerchurnreferstothenaturalbusinesscycleoflosingandacquiringcustomers.Everycompany—nomatterthequalityofitsproductsorcustomerservice—experienceschurn.Generallyspeaking,thelesschurnyouhave,themorecustomersyoukeep. Whatisachurnrate? Churnrate,sometimesknownasattritionrate,istherateatwhichcustomersstopdoingbusinesswithacompanyoveragivenperiodoftime.Churnmayalsoapplytothenumberofsubscriberswhocancelordon’trenewasubscription.Thehigheryourchurnrate,themorecustomersstopbuyingfromyourbusiness.Theloweryourchurnrate,themorecustomersyouretain.Typically,theloweryourchurnrate,thebetter. Whyiscustomerchurnimportant? Understandingyourcustomerchurnisessentialtoevaluatingtheeffectivenessofyourmarketingeffortsandtheoverallsatisfactionofyourcustomers.It’salsoeasierandcheapertokeepcustomersyoualreadyhaveversusacquiringnewones.Duetothepopularityofsubscriptionbusinessmodels,it’scriticalformanybusinessestounderstandwhere,how,andwhytheircustomersmaybechurning. Howdoyoucalculatecustomerchurnrate? Todeterminethepercentageofrevenuethathaschurned,takeallyourmonthlyrecurringrevenue(MRR)atthebeginningofthemonthanddivideitbythemonthlyrecurringrevenueyoulostthatmonth—minusanyupgradesoradditionalrevenuefromexistingcustomers.Donotincludenewsalesinthemonth,asyouarelookingforhowmuchtotalrevenueyoulost.Newrevenuefromexistingcustomersisrevenueyouhavegained. Forexample,ifCompanyADGhad500customersatthebeginningofthemonthandonly450customersattheendofthemonth,itscustomerchurnratewouldbe10%. FourWaystoReduceCustomerChurn Everycompanyexperiencescustomerchurn.However,therearesomethingsyoucandotopreventchurnbeforeithappens. #1:Understandwhycustomerschurn. Knowingthefactorsthatcauseacustomertojumpshipisthefirststeptofixingthem.Considerinterviewingorsurveyingcustomerswhohavechurnedtogaininsightintotheirreasonsforleaving. #2:Providesupportingresourcesandeducation. Ifcustomersfeelthattheydon’tunderstandyourproductoraren’tgettingthemostoutofit,theymayabandonyoualtogether.Dependingonyourindustryandproducts,youmayconsiderprovidingdigitalresourcecenters,blogupdates,andeducationalemailonboardingjourneys. #3:Makesureyou’retargetingtherightaudienceforyourproducts. Areyourmarketingeffortsandsalesteamtargetingaudienceswhoarelikelytogetthemostfromyourproduct?Considerpivotingyourmarketingeffortstotargetcustomersegmentsmorealignedwithyouroffer.  #4:Knowthesignsthatacustomerislikelytoleave. Havetheynotloggedinforamonth?Aretheirsessiondurationsshortandinfrequent?Thesesignalscansometimestipyouoffthatacustomermaybeontheirwayoutthedoor,soyoucanstepinwithresourcesandsupporttobringthemback. Whatisrevenuechurn? Anotherwaytothinkaboutchurnisintheformofrevenue.Trackingandunderstandingrevenuechurnisimportantformeasuringacompany’sfinancialperformanceandoutlook. Howdoyoucalculaterevenuechurnrate? Todeterminethepercentageofrevenuethathaschurned,takethemonthlyrecurringrevenue (MRR)youlostthatmonth—minusanyupgradesoradditionalrevenuefromexistingcustomers,anddivideitbyyourtotalMMRatthebeginningofthemonth.Donotincludenewsalesinthemonth,asyouarelookingforhowmuchtotalrevenueyoulost.Newrevenuefromexistingcustomersisrevenueyouhavegained. Forexample,ifCompanyADGhad$500,000MRRatthebeginningofthemonth,$450,000MRRattheendofthemonth,and$65,000MRRinupgradesthatmonthfromexistingcustomers,itsrevenuechurnratewouldbe-3%. Thenegativerevenuechurnratemeansyouactuallygainedrevenue.Asbefore,youcanchooseadifferenttimeframe,suchasquarterlyorannual.Also,astheexamplepointedout,amajorbenefittocalculatingrevenuechurnisthatit’spossibletoincludeupgraderevenue. Thedifferencebetweencustomerchurnrateandrevenuechurnrate Customerchurnandrevenuechurnarenotalwaysthesame.Asanexample,let’ssaythatCompanyADGhas2productlines: #1:Basic: 5,000customersthatpay$500/monthpercustomer=$2,500,000MRR #2:Premium: 1,000customersthatpay$1,250/monthpercustomer=$1,250,000MRR ThisgivesCompanyADGatotalof6,000customersand$3,750,000MRR.Let’salsosaythatinonemonth,180basiccustomersand20premiumcustomerschurn.Seetheexamplebelowtoreviewthecustomerchurnandrevenuechurnrates. Whilesimilar,customerandrevenuechurnratearenotidenticalbecausethebasicandpremiumpackagesarenotworththesamerevenue.Thisdiscrepancywillonlygrowasyougainmoreproductlinesorthepricedifferencebetweenproductlinesgrows.Clearlycommunicatewhichmethodyouuseandbeconsistentinyourregularreporting. Youmayneedtousebothcalculationsasyoumanageyourbusiness.Revenuechurnisagreatwaytoreportonperformanceandunderstandthefinancialhealthofyourcustomerbase.Customerchurnisimportantforstaffingreasonsasanemployeecanonlymanagesomanyaccountsatonetime. Calculatingcustomerchurnrate:cohortanalysis Asmentioned,youcancalculatechurnoveramonthly,quarterly,orannualtimeframe.Whilethisistrue,thereisanimportantcaveattoconsider. Inthemonthlycalculation,thereisanunderlyingassumptionthatnocustomercanchurninthefirstmonth.Thisisbasedontheassumptionthatyourcustomerspayforthemonthupfront.Sowhenyoutakeasnapshotatthebeginningofthemonthandthendividethatbythetotalnumberofchurnedcustomers,youdon’thavetoworryaboutanynewsaleschurninginthattimeperiod. Ifinthesamemodelwecalculatedchurnoveraquarter,wecouldrunintoaproblem.Therewillbesomenewsalesfromthefirstmonthinthequarterthatcouldchurninthesecondorthirdmonthofthequarter.Ifthosechurnsareaccidentallyincludedinthecalculation,thenwe’lloverstatechurn. Forexample,CompanyADGwantstocalculatequarterlychurn. Ifwelookoverthequarter,ourinitialcohortof1,000customersonlyhas850customersremaining,givingacustomerchurnrateof150/1000=15%. Duringthatsametimeframe,therewere300newsales,ofwhich15churn.Ifyouincludedthose15churnsinyourcalculation,you’dhave165/1000=16.5%. Thesimplestwaytogetaroundthisproblemistoexcludeallnewsalesfromchurncalculations.Ifyoudothat,yougetthechurnrateofCohortA,whichwasourinstallbaseatthebeginningofthequarter.Thismethodgivesyouthetruechurnrate,withoutreplacement,ofyourcustomerbaseoveraquarter. Youmay,however,wanttoincludethechurnrateofCohortsBandC.Ifthat’sthecase,youcanuseaweightedaverage. Asyoucansee,it’sstillrelativelysimpletoincludenewsalesandtheirchurnsduringthequarter,too.Justmakesureyouexplainthistoyouroperationsteam,orwhoevermanagesreporting,sotheyknowexactlywhatyouwantandhowtoreportit. AdditionalResources:   PredictingChurnandKeepingCustomers:AIandCustomerSuccess   TheCompleteGuidetoBuildingaSalesForecast   HowtoCalculateRecurringRevenue   PredictingChurnandKeepingCustomers:AIandCustomerSuccess SalesforceResources MarketingCloudPersonalization:Real-TimePersonalizedMarketing Product MarketingCloudPersonalization MarketingCloudPersonalization:Real-TimePersonalizedMarketing TheGartnerMagicQuadrantforPersonalizationEngines,2019. Report TheGartnerMagicQuadrantforPersonalizationEngines,2020 TheGartnerMagicQuadrantforPersonalizationEngines,2019.   RelatedContent   MarketingCloudPersonalization:Real-TimePersonalizedMarketing Product InteractionStudio MarketingCloudPersonalization:Real-TimePersonalizedMarketing TheGartnerMagicQuadrantforPersonalizationEngines,2019. Report TheGartnerMagicQuadrantforPersonalizationEngines,2020 TheGartnerMagicQuadrantforPersonalizationEngines,2019. 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