(image sourced Wordstream )
Not all mathematics is hard. Some of it is, like combinatorics or algebraic equations. But mostly we encounter the a + b = c variety. Which we can all understand. So it's handy that calculating your churn rate is of the latter type. Here's how.
Churn is not a machine for making butter, nor is it vague reference to a particularly choppy boat trip. But get it wrong and it will shake up your SaaS profitability.
Churn rate is the amount of subscribers, clients or customers that either leave your service or decide not to continue during a given period of time.
Churn rate is your ability to retain customers.
A high churn rate is attritional and will gradually erode your ability to make profits and impact heavily on your ROI. To expand with a high churn rate you will need to continually bring on more customers than you lose.
Contrast that with a low churn rate or negative churn, the gold standard in SaaS Statistics terms. Instead of losing customer accounts, customers actually start paying more money than they did in the previous month - often without the SaaS company needing to exert any extra muscle.
Now even the best marketers in the world will lose some customers during a given period of time. But if you are losing few customers, making more form your existing customers AND your marketing is still bringing in new customers, then this would be the platinum standard.
WHY CALCULATE CHURN RATE?
Churn rate is why you end the year with a much different customer list than the one you started with in January. It also happens to be the reason why, although you seemed to have gotten a bunch more customers, it hasn't translated to a tangible year on year growth in revenue.
Your churn rate is important.
It makes your new sales and marketing efforts more profitable and helps to improve your product offering. It means making more money from your customers, increasing their lifetime value and leaving less money on the table.
So yes, your churn rate is very important.
A high churn rate is not sustainable, even if you bring on enough customers to mask it and you believe that a churn rate is acceptable - even the norm. You maybe even making an annual profit.
HOW TO CALCULATE CUSTOMER CHURN RATE
So with this is mind, isn't it time you calculated exactly what your churn rate is and whether you should be worried or not?
If you have 100 customers at the start of a month and 92 customers at the end of the month then your churn rate would look like this:
Calculation (Starting Customer Number - Ending Customer Number) /Starting Customer Number = Monthly Customer Churn Rate.
(100-92) ÷ 100 = 8 ÷ 100 = 0.08
Which to you, me and your old maths teacher is a Monthly Customer Churn Rate of 8%
Just be sure to only count those customers in your churn rate figures that both started and/or finished that month as paid customers.
Any customers that weren't there at the start of the month are NEW customers, which means kudos to your sales department.
IS CALCULATING CHURN RATE REALLY THAT SIMPLE?
Well it should be, because churn is simply the number of customers that leave you over a given period of time. But sometimes it isn't as simple as that.
ProfitWell offer a staggering 43 ways to calculate your churn rate
(that's what they say, we didn't count them all), highlighting the difficulty in calculating how the basic propositions (total number of customers & number of churned customers) are defined:
- Difficulties when new signups are included in figures, and cannot churn in the first month anyway
- At what point new customers are included in the churn rates
- When the churn date is confused, is it the cancellation date or the end day of their paid subscription?
So really, calculating your churn rate means only using defined, regularly monthly periods, where new signups within that month aren't included.
But this might again skew when realising that churn rates are much higher for new(er) signups than for established signups over six months old. Which isn't great for speculating long term churn rates. And may account for differences in monthly churn rate as opposed to calculating quarterly churn rate.
And besides, understanding your churn rate for new signups is hugely important in streamlining and tweaking your product to make it better.
FACTORS AFFECTING CHURN RATE CALCULATION
- Number of customers - Small sample sizes don't always correlate with much bigger samples.
- Timescales - Calculating a monthly churn rate might be more, or less accurate than a quarterly one and anomalous months can mislead data.
- Segmentation matters - Depending on what price plan your customers are on can also make a difference to their churnability. As does sector and company size.
HOW YOUR CHURN RATE IS USED
Like the George Orwell novel, not all your customers are created equally. Some will be more valuable. Taking a good look at your data, specifically your segmented lists, will highlight how churn rate differs within each of them.
- Analysing long term health and viability
- Implementing strategies to reduce customer loss
- Calculating lifetime value from customers
- Forecasting SAAS Sales
- Highlighting which customers are profitable.
This makes it even more important to calculate your churn by including certain parameters on your data to highlight how it affects different types of and aged customers - i.e. churn rate encourages detailed segmentation.
However you look at it, the simplest calculation of your churn rate (the first calculation in this article) is often the best - ensuring that new customer sign ups are segmented differently!