In today’s ever-changing business landscape, understanding and managing customers is critical to maintaining growth and profitability. To keep up with the high market competitiveness, the Churn rate becomes a key metric that businesses use to measure customer acquisition and determine the purchasing patterns of the customers.
Churn rate is not one of the entrepreneurship buzzwords but rather a key metric in Attrition & Retention Analytics that is often examined critically for informed decision-making and financial prognosis.
But what makes the Churn Rate so crucial and alarming? What is the Churn rate formula? How to calculate the churn rate? What is a good churn rate?
Well, everything related to the Churn rate is discussed in detail here, in this blog!
Table of Content:
Meaning of Churn Rate
To answer the question, what is the churn rate, we need to delve into its meaning. The Churn Rate or attrition rate is defined as the percentage of customers terminating their transactions with the company in a specified period of time.
In simple terms, it is the number of customers who do not purchase any goods or services from a company any longer. It is a key indicator of client happiness, brand loyalty, and a company’s overall well-being.
A high percentage attrition rate may suggest problems with the product or service, difficulties with customer service, or stress from competitors. On the other hand, a low rate of customer churn generally means good customer satisfaction and retention.
Understanding the churn rate meaning can provide a general idea over the issues of customer acquisition. However, in order to conduct an accurate analysis and make efficient future financial decisions, it is necessary to know the Churn Rate Formula.
The formula for the Churn Rate is as follows:
Therefore, when the result of the number of customers lost during a time divided by the number of customers during the beginning of the time is multiplied by 100, it gives the Churn rate.
How to Calculate the Churn Rate?
Calculating the Churn rate is a step intrinsic process. It is comparatively an easy calculation that is based on two factors:
- The given time period, which can be in terms of weeks, months, quarters, or years,
- The total number of customers at the start of the specified time period and the customers lost during the mentioned time.
The formula has to be applied then to find the accurate Churn Rate for the business. For instance, a notebook company has 2000 customers at the start of May. It lost 86 customers by the end of the month.
Hence, as per the formula, the churn rate for the notebook company becomes:
The rate of attrition is a determinant of the customers lost during that time. A higher churn rate indicates poor customer retention and issues with the product or after-sales services, while a lower rate portrays a higher retention and maximum customer acquisition.
What is a Good Churn Rate?
It is evident that a good churn rate has to be undoubtedly lower. The lower the churn rate, the better it is for businesses. Usually, the churn rates are higher for new companies since the products might need certain improvements which can only be determined once it is present in the market. Though the ideal churn rate ranges from 2% to 8%, a good churn rate varies from company to company.
For a SaaS business (Software as a service), the rate should be less than 10% annually and 4% monthly, while for an E-commerce brand, the rate of attrition should not be more than 7%. But it is different in cases of Subscription-based companies which have an annual churn rate of 20%, which is considered a good performance.
Strategies to scale down the Churn rate
Higher churn rates are certainly a sign of loss and a bad reputation in the industry. But it is not a dead end for the company. The churn rates can be altered and lowered by adopting certain measures that will help businesses regain their losses. These measures need to be strategized well and calculatively.
Some of the strategies to reduce higher churn rates are:
- Surveying Customer Insights: When the final product is to be experienced by the consumers, it is crucial to know what they felt after using the product. Reaching out to customers for feedback and ensuring prompt responses to their queries can be beneficial in understanding consumer patterns as well as maintaining well-being in the market.
In case there has been any communication gap, it should be compensated to help the customer gain trust in the company.
- Enhancing Marketing Strategies: Often issues with the marketing plans are missed which can affect the churn rate. Catering to the right target customers is crucial for an increase in the sales and number of purchasers.
For instance, marketing dog food in communities with limited or no pets would not be as effective as promoting the product to pet owners and lovers. Thus with the help of social media posts, website advertisements, and email marketing, the strategies to reach out to a larger audience can be achieved, thereby lowering the churn rate.
- Modifying the Product: It is possible for the product to have certain issues that can compromise delivering the desired outcome. Besides, it should also be surveyed if the products can solve and help the purchasers.
In case there is consumer dissatisfaction, immediate upgradation of the commodities is suggested. It will not only help in retaining customers but also enhance the quality of the product. Necessary modifications and timely upgrades can help consumers trust the brand and lower the attrition rate.
A crucial indicator of a business’s capacity to retain consumers is its churn rate. Gaining knowledge about how to calculate the churn rate and what a good churn rate in a given industry is will provide key insights into consumer fulfillment and business performance.
Through the implementation of well-planned and optimized methods aimed at reducing attrition, companies can strengthen customer loyalty, improve retention rates, conduct seamless Attrition & Retention Analytics, and propel sustained success.