What is Churn Rate and How to Calculate It?

• Often called the attrition rate, the churn rate indicates the number of customers that have, over time, left a business. 

• A high churn rate means the company is losing more customers than it is gaining, while a lower rate signals customer retention.

• Growth rate is the rate at which, during a certain period, a company attracts first-time customers.

Churn rate is a tool investors can use to understand a company’s long-term prospects and its financial health overall. Thus it can be an important metric. But what is churn rate and how is it calculated? Here is that and more. 

What is Churn Rate? 

The metric indicates the number of customers that have, over time, left a business. It is often known as attrition rate.

In other words, it is the rate at which customers cease doing business with a company. This means customers who did not return to a market, for example, or subscribers who dropped their subscriptions.

For companies, churn rate is key to financial forecasting, maintaining balanced books, and making labor decisions. 

If the churn rate is high, that means the company is losing more customers. On the other hand, a lower rate signals customer retention.

The metric can also help investors with decisions, since it provides a telling snapshot of how the company is faring — and will likely fare.

Revenue Churn Rate vs Growth Rate

Some people confuse churn and growth rates, as they both measure customer bases. Churn rate is the rate at which a company sheds customers. Meanwhile, growth rate is the rate at which, during a certain period, a company attracts first-time customers.

One can compare one metric against the other to learn whether customer levels are growing or contracting. If the churn rate surpasses the growth rate, it means a drop in customers. If the growth rate is higher than the churn rate, the opposite is true.

For example, say a company in a quarter gained 50 subscribers but lost 100. Since the customer base fell, the predicament is a loss. However, say that business gained 100 subscribers but lost 50. In that situation, it is a win despite the customer losses. 

Churn Rate Calculation

A churn rate can significantly impact a company. The good news is that the calculation is simple:

(Number of Lost Customers / Total Customers at the Start of Time Period) x 100 = Churn Rate

Note that the company should select a time period for measuring churn and determine the original number of customers as well as customers lost.

Churn Rate Examples 

Various industries and segments use the churn rate, and in differing contexts. For example:

— Employee churn rate. The rate here discloses how many individuals left the company during a certain period. In addition, it is used to determine employee retention or seniority. Companies can use this data to compare churn rates to other departments or teams. They also can use it to identify company-wide pay, workload, or management issues.

— E-commerce churn rate. E-commerce companies can use the churn rate to see whether their customer base has increased or decreased. Competition and options abound, so the industry’s churn rate runs higher — about 70% to 80%. So, a business can expect to keep about 20% to 25% of customers. A high rate could signal a need to revisit the product or marketing strategy.

— SaaS/telecommunications churn rate. The churn rate with SaaS companies, most of which use subscription models, can show whether a company will break even. A low annual churn may indicate a need to lure more first-time customers.

What is a Good Churn Rate?

Any churn rate meaning must include what a “good” one is. For older and more established companies, the optimal turn rate is 5% to 7% annually and under 1% monthly. 

For early-stage startups or small and medium-size businesses, the typical churn rate is 10% to 15%, according to Forbes. This is because the goods or services offered at this stage often require improvement.

How to Improve Churn Rate?

While an elevated churn rate is not viewed as ideal for operating a thriving company, all is not necessarily lost. In fact, there are ways to bring down one’s rate and return to the proper path. 

Offer Better Customer Service 

A single unpleasant customer experience can prompt a customer to drop a business. Thus, it is wise to learn from support personnel what customers are complaining about. The company may discover issues with its product and sales approach.

Perhaps it would be helpful to add more support communication options, such as live chat, SMS, or email. Such channels can also be more expedient, which is what many customers now expect.

Assess the Customer Experience 

First, the company should find its return rate, then compare it to the industry average. If its rate is higher than the average, the product or service may fall short of consumer expectations. Customer satisfaction interviews or surveys can help uncover the issues.

Improve Marketing Approach 

This is an increasingly content-oriented world, so it may be wise to employ content to recruit customers. Be it blog posts, email newsletters, or social media posts, brand-related content promotes engagement and relationships.

What Does Churn Rate Say About a Company?

Overall, a churn rate can tell a company whether it is where it must be to increase their bottom line. It can help a company retain balanced books and remain healthy.

More specifically, here is why it is essential to know one’s churn rate:

Market Strategy Effectiveness

A company will discover through its churn rate whether its marketing efforts are retaining customers. If customers are discontinuing subscriptions, the company could analyze whether it is reaching its target audience.

Customer Growth 

A churn rate can tell whether a company that seeks to increase its customer base — and thus its profits — is on track. Retention of existing customers is key. After all, as of this writing, between five and 25 times pricier to convert a first-time customer than retaining a current one, according to the Harvard Business Review in 2014.

Revenue Planning

Churn rate helps subscription-based companies gauge whether profits increased or dropped. In addition, it establishes for the foreseeable future the company’s financial health.

Finding Marketplace Fit

Should a company learn that its churn rate is going up for consecutive months or quarters, it may want to revisit the fit of its product to market. That could mean improving or overhauling the product or heightening its relevance.

What is the Importance of Churn Rate for Investors?

Before a venture capitalist invests in a new company, they will commonly want to know a company’s churn rate. Why? Because there is no way to scale a company if it is churning excessive users. It matters not how many subscribers are added, for instance, if they’re being lost faster.

Ways to Invest in Venture Capital

Knowing a company’s churn rate can help an investor make investment decisions. Take venture capital (VC), for example. With VC, investors put capital into private companies in their early stages. Such companies potentially produce returns that are ordinarily unattainable in public markets.

Through an alternative platform such as Yieldstreet, venture capital and other offering types are already thoroughly vetted. While no investment is risk free, Yieldstreet’s investment opportunities are subject to a rigorous screening process before they make the platform.

That includes Yieldstreet’s venture capital program.  Through funds, the offerings expose retail investors to private companies that are disrupting sectors – if not creating new ones altogether.  We believe these new, promising companies are poised for fast growth as commercialization gets going in earnest and allows for scale. Note that these types of opportunities were once only available to top-tier earners. 

Investing in VC also serves another vital purpose: portfolio diversification. Constructing holdings with varying asset types and generally expected returns can shield against inflation, potentially improve returns, and help mitigate risks. In fact, we believe diversification is a primary pillar of long-term investing success.

Alternative Investments and Portfolio Diversification

Alternative investments can be a good way to help accomplish this. Traditional portfolio asset allocation envisages a 60% public stock and 40% fixed income allocation. However, a more balanced 60/20/20 or 50/30/20 split, incorporating alternative assets, may make a portfolio less sensitive to public market short-term swings. 

Real estate, private equity, venture capital, digital assets, precious metals and collectibles are among the asset classes deemed “alternative investments.” Broadly speaking, such investments tend to be less connected to public equity, and thus offer potential for diversification. Of course, like traditional investments, it is important to remember that alternatives also entail a degree of risk. 

In some cases, this risk can be greater than that of traditional investments.

This is why these asset classes were traditionally accessible only to an exclusive base of wealthy individuals and institutional investors buying in at very high minimums — often between $500,000 and $1 million.  These people were considered to be more capable of weathering losses of that magnitude, should the investments underperform.

However, Yieldstreet has opened a number of carefully curated alternative investment strategies to all investors. While the risk is still there, the company offers help in capitalizing on areas such as real estate, legal finance, art finance and structured notes — as well as a wide range of other alternative investments. 

Moreover, investors can get started with a relatively small amount of capital. Yieldstreet has opportunities across a broad range of asset classes, offering a variety of yields and durations, with minimum investments as low as $10,000.

Learn more about the ways Yieldstreet can help diversify and grow portfolios.

Summary

While churn rate covers business practices overall, understanding it can help companies prioritize its focus. It can also help investors with investment decisions. Generally, companies with high churn rates experience minimal growth, which markedly affects revenues and profits. Remember that investing in high-growth companies is possible through venture capital, which also can diversify portfolios.