HomeIndustriesFinanceChurn Rate: Definition and Why It Matters

Churn Rate: Definition and Why It Matters

Churn rate definition refers to someone’s action that leaves a specific group in a particular period of time. So, the churn rate is applicable when we talk about human resources or customer who stops subscribing for a service, for example. 

In this article, we will specifically talk about churn rates in the context of sales and customers. We will begin with the churn rate definition, the importance of calculating it, factors that cause it to happen, and preventive actions. 

Churn rate definition

Churn rate measures the proportion of accounts or people who do not renew their subscription. The number is taken every certain range of periods such as monthly, quarterly, or annually. So, churn is an important matrix for a service company such as Saas or subscription-based. 

There are two variations of churn rate: voluntary churn and involuntary churn. Voluntary churn indicates a proportion of customers who cease their subscription because of their own willingness. For example, they don’t find the service or product is good enough. 

Meanwhile, involuntary churn represents people who unsubscribe due to uncontrolled circumstances such as relocation. Most companies focus their concern on voluntary churn because it directly impacts their business. 

Why should we calculate churn rates?

The success of subscription-based companies relies on churn rate levels. For example, a high churn rate and significantly increase over time might deeply hurt the company’s revenue. That is why churn estimation that is nearly accurate can help the company to take the required actions. 

Usually, to reduce the churn rate, companies should revisit how they manage customer retention and improve the satisfaction rate. It can be establishing a good communication routine, easy access for giving feedback, and improved business operations. 

Churn rate formula

Churn rate is by dividing the number of customers who unsubscribe by the total number of customers at the beginning of a given period. 

It looks simple, isn’t it? However, there are some considerations to take such as how we define active users in the period that we measure. For example, what if there is a customer who unsubscribes because their subscription period ends. And, they’re about to renew the subscription a few moments after you extract the data. 

However, that formula is a good start. 

Why do customers churn?

Although there is no exact answer to that question, we can summarize the cause of churn as such:

  • The customers are no longer interested in the product or service
  • Factors that motivate the purchase is no longer there, the customers’ problem is solved
  • Customers are dissatisfied with the product or services due to a lack of key features or difficult to use
  • The product does not have the required function
  • ROI is very low compared to the investment cost
  • Customers have found an alternative from competitors
  • Product reputation is damaged

How to improve churn rate

We can decrease the churn rate by leveraging the value proposition to the customers. These are the actions that we can do: 

  • Making sure the customers are aware of the features and improve their journey
  • Targeting the right customers so they would buy the product with the price offered
  • Ensuring that the price is realistic
  • Renewing the products to make it stay relevant
  • Trying to improve customer retention with excellent customer service and good communication

Conclusion

It’s impossible to have no churn at all. However, one thing for sure, companies can always enhance customer engagement. Use Customer Relationship Management (CRM) software for better and easier customer management. 

Understanding what your customer wants is the key to growth and minimized expenses.

Related article: 6 Tips for Optimizing Customer Experience in Your Service Business

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