Know Your Metrics: Customer Churn Rate

Signing up a new customer can be a moment of almost fairy-tale happiness, but unfortunately not every relationship leads to a “happily ever after.”

Customers come, but customers also go. They cancel their subscription. They decide not to bother upgrading. They opt out of receiving communication from you ever again.

This is customer churn: the reality that building a business of any kind will involve losing at least some of the customers you’ve worked so hard to win.

When you’re first launching a startup or SMB, churn might not be something you want to give a lot of thought to. You might feel more compelled to maintain that initial sense of excitement as you bring products to market, and attract those early customers whose investment reflects a belief in your core value proposition.

The problem is that ignoring churn can come at a substantial cost.

If you assume that customers are going to stick with you forever, you’re probably not going to make the right call in terms of what you’ll budget for marketing, the number of sales reps you hire or other resources you outline in your business plan.

Instead, assume at least some degree of churn, so that you can develop the right strategy to continue winning more new customers than those who fade away.

As your company grows, customer churn becomes a key metric because it helps with everything from sales forecasts to product development and even pricing.

Churn can also add an extra layer of insight on other metrics, such as customer acquisition costs (CAC). If you spend a lot to win a customer and they churn after only a few months, for example, were the costs truly worth it?

That said, customer churn isn’t always as simple to calculate and apply to your business strategy as it seems at first glance. Let’s look a bit more carefully at some of the considerations and best practices.

Calculating customer churn

You will need to decide if the total number of customers you’re looking at reflect those you had at the beginning of a certain period (such as the beginning of the month) or the end. If you win more customers during the period in which you’re calculating churn, that obviously affects your number.

Other ways to calculate churn include using an average of the first day and last day of the month, or using the average from every day of the month. The latter might make sense if you’re in an extremely fast-growth business that tends to get a lot of new customers via e-commerce.

You might also need to define what counts as “churn.” If you’re running a software-as-a-service (SaaS) business, for instance, customers might cancel their service but continue to use your product until their contract completely expires.

Calculating churn might become easier or harder depending on the stability of your customer base and your rate of growth, so continue to revisit your approach to make sure you’re getting data you can really use.

Factors that affect churn

Churn may be a constant, but the factors that influence it are constantly in flux.

Offering a new product or service? You may see a spike in churn among customers who aren’t yet sure of the value. Expanding into a new category of customers — say, moving from selling to large companies to other SMBs or startups? The volumes of sales might be higher, but so might the churn. Increasing the price, even if you’re offering more value, there will be churning.

If you’re selling to consumers, meanwhile, everything from holiday seasonality to the weather could affect churn.

Another possible factor is time. Customer churn might be a bit more up and down in the beginning, but as you become more established and trusted in your market, customers may not be as quick to cancel or move to a competitive vendor.

Alternatively, if you’re the market incumbent and new, disruptive rivals emerge, churn could get worse.

How to use customer churn

Understanding your customer churn rate will help everyone in a company, from the CEO or owner to those working in specific functional areas.

For the sales team, customer churn rate should provide insight into what kinds of customers find the greatest value from your products and services. This can become a way to determine territory assignments, target accounts and what kind of quota is reasonable for reps.

Marketers, meanwhile, should use churn rates to not only develop campaigns but what kind of story they’re trying to tell customers. If people are leaving or choosing not to renew, they may have been disappointed or felt a brand promise of some kind wasn’t being kept. Reducing churn, for a marketing team, is ultimately about creating more die-hard fans and advocates.

Customer service teams often look at churn as their mortal enemy, because it can have an impact on how their performance is evaluated. A more positive way to approach this might be retention: could there be a way to bolster the success of new customers early on, or treat their questions and troubleshooting issues in such a way that they have more reasons to stick around?

This points to one of the best, most holistic ways to think about customer churn. Like it or not, churning is part of any organization’s customer experience. It should be easy and quick to part ways with a company, and it should be handled respectfully. Where possible, it should be a moment to ask questions about how things might have turned out differently.

Just as seasoned entrepreneurs know that big failures sometimes lead to even bigger successes, customer churn shouldn’t be something you fear. It’s an opportunity to take in data about your company and make it better.

It’s okay if you’re churning — as long as you’re also learning.