Calculating Churn

Before you begin strategizing on how to reduce customer churn, it’s important to identify your churn rate. There are three basic ways to calculate your customer churn rate—the simple method, the adjusted method, and the predictive method.

arrow The Simple Method

This method uses a simple calculation to determine churn. Dividing the total number of churned customers in a given time period by the number of customers you had on the first day of the time period.

Churned Customers - Total Number of Customers

Churned Customers

Total Number of Customers

The simple method gives you an estimation of the churn rate but does not factor in that as a brand grows it acquires more customers. This is best used as a quick estimation of churn rate at a given point in time.

The Adjusted Method

This method gives a more realistic estimation of churned customers. Simply divide the total number of churned customers by the average number of customers in that particular time period.

Churned Customers - The Average Number of Customers

The drawback in this calculation is that it fails to scale to various time frames—be it daily, weekly, or monthly.

Churned Customers

The Average Number of Customers

arrow The Predictive Method

A widely used method of calculating churn, the predictive method, uses two month’s of customer data to calculate the customer attrition rate for one month. For example, divide the number of churned customers in two months (January + February), then divide by the number of customers you had in the month of January.

Total Number of Churned Customers in January & February - Total Number of Customers in January

Total Number of Churned Customers in January & February

Total Number of Customers in January

The main drawback of this method is that the attrition rate is one month old.

All of the above calculations focus on number of customers lost and churn rate. Curious what the revenue impact of churn is on your bottom line? Try our quick and easy churn calculator.

Analyzing Churn

How do you know if your churn rate is good, bad, or reasonable (bet you thought we were going to say ugly). Rather than comparing your rate to others in your industry, it’s more valuable to evaluate it in terms of what your churn was last year, how you can improve it, and the impact on your business.

quote mark

“Churn is ultimately an indicator of how well you’re managing your customer relationships, and every brand has room for improvement in this area.”

Erin Raese

SVP of Growth, Annex Cloud

For example, let’s say you have a 5% monthly churn rate. The net result is you’re losing roughly half of your customers each year, about 46% annually. This means if you started January with 100 customers, you’d have only 54 customers left at the end of December. Ultimately what this really means is that over the course of the year you’d need to acquire 46 customers just to break even. And if your goal is growth, you’d actually have to work four times as hard; twice as hard just to replace those customers and then more to add to your overall customer count. In short, you’d be running really hard but not accomplishing your goals.

Harvard Business Review recommends looking at churn as an indicator of behavior rather than a metric. They suggest managers ask these key questions to get to what’s behind the number and help identify what can be done to change it.

  • arrow What are we as a company doing to cause customer turnover?
  • arrow What are our customers doing that’s contributing to their leaving?
  • arrow How can we better manage our customer relationships to make sure it doesn’t happen?

Predicting Churn

Although there’s no sure way to predict customer churn, with the help of analytics and a predictive model you can estimate which customers are more likely to churn. An effective churn predictive model will study customer history and purchase patterns to predict future actions.

Data derived through loyalty programs can be a great indicator of customer churn. For example, if the customer is actively earning and redeeming points, she/he is most likely to stick with your brand to reap the rewards of your loyalty program. Customers that haven’t redeemed their points in a long time are more likely to churn. An investigative look into the customer’s journey with your brand will give great insights on customer behavior. For instance, a noticeable decrease in purchase frequency or the average time spent on the website and app are indicative of churn. Early detection of such traits can help in identifying at-risk customers, giving you time to formulate new strategies to win back their attention, trust, and confidence.

Stages of Churn

Customers may drop off at various times throughout their life cycle. Churn is typically categorized into three stages, each with its own characteristics and strategy.

Early-stage Churn

Early-stage churn is when you lose customers after the first or second purchase. Many companies don’t realize how significant the dip is at this point. The reality is 60 – 70% of their customers simply aren’t coming back. Improving churn in the early stage can have a huge impact on your churn rates throughout the rest of the customer lifecycle. Keeping customers engaged and adding value from day one is one of the best ways to minimize early-stage churn.

Early-stage Churn
Mid-stage Churn

Mid-stage Churn

Mid-stage churn is when you lose customers after they’ve been fairly regular customers for several years. This is where most companies focus their retention efforts. At this stage, it’s already established the customer is satisfied with your products. Clear and consistent communication, responsive service, timely and relevant offers, as well as education and engagement strategies can help to retain customers and considerably reduce mid-stage churn.

Late-stage Churn

Late-stage churn primarily refers to the loss of your best customers. We’re talking about the top 20% of your customers that account for 80% of your revenue. Causes of late-stage churn could vary from brand fatigue, competitor tactics, or customer experience but the underlying factor here is a lack of loyalty. “Late-stage churn often results in the loss of your best customers and, while the percentage may be lower, the cost to your business is significantly greater”, explains Erin Raese, Annex Cloud’s VP of Growth. “By this stage, if loyalty isn’t established, you need to step up your game and adopt a loyalty strategy that rewards customers for profitable behaviors.”

Late-stage Churn

of customers leave because they believe you don’t care about them.

Source: RightNow’s Customer Experience Impact Study

How Companies Use Churn Rate

Keeping a pulse on how many customers leave and understanding why helps inform marketing and other strategies. A low churn rate indicates things are working well, a high churn rate could signal the need for improvement. That may be your marketing strategy, customer service methodology, or something else. In short, churn rate is a valuable metric that speaks to how well you are, or aren’t engaging with and serving your customers.

Marketing managers can also look at churn rate for specific customer segments. Today, with the right data and technology, they can do more than understand what happened in previous periods, they can actually predict what’s going to happen. While marketers typically have the biggest interest in churn rate, investors may also use it to evaluate the health of a company.

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