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Churn rate refers to the percentage of customers that are not retained by a company. Customer churn rate generally refers to sticky income, such as subscription income, but it can also be general, too. Churn rate vs retention rate are different in terms of focus; churn rate is more concerned with how many customers are being lost, whereas retention rate is more concerned with how many customers are staying. Meanwhile, renewal rate vs retention rate are very similar, with the former being more targeted towards software solutions.
A negative churn rate indicates that a company is growing. It is gaining customers faster than it is losing it. Over time, customer churn statistics can tell a story of a business, and whether it is improving or whether it is struggling.
Churn rate is one of the most important metrics for any business to track. It is an early indicator of company success or failure. If the company’s churn rate is increasing, then they need to change processes or products. If the churn rate is decreasing, the company knows that it is moving in the right direction. Furthermore, customer churn statistics are one of the things that investors look at first. If a company wants to acquire venture capital, it needs a low or negative churn rate.
Some companies and some industries have naturally high churn rates. Other companies have loyalty baked in. Legal firms, for instance, often have very low churn rates. Once they acquire an account, they’ve acquired it for a substantial amount of time. eCommerce companies have higher churn rates. It’s easier for customers of an eCommerce company to cancel their accounts, and customers are more likely to engage in business relationships that are shorter term.
By tracking and improving upon churn rate, companies are able to improve upon their revenue picture. Retained customers are more cost-effective than acquired customers, so companies need to concentrate on retaining customers as much as they need to concentrate on chasing down new leads.
Customer Lifetime Value
Customer Lifetime Value refers to the amount that a single customer makes for the business on average. It’s easy to calculate: It’s the amount of revenue divided by the number of current customers. Different businesses may look at different time ranges, such as months, years, or the entire scope of the business, but regardless, CLV provides a decent metric by which companies are able to quantify the value they have to a customer.
CLV can work with the monthly churn rate metric to determine how much potential profit is being gained and lost, dependent on the customers that are being brought in, and the customers that are leaving. An annualized retention rate will give an organization a solid idea of how much revenue it can expect to retain from year to year, based on the amount of customers that are expected to be retained.
Customer lifetime value is very important not only to determine how much an organization is expecting to make, but also to take a look at how much value a customer brings relative to their cost of acquisition and retention. Consider a business in which the customer lifetime value is $1,000, acquisition costs $20, and retention costs $10. In this scenario, both acquisition and retention are extremely cost-effective compared to the CLV.
But, consider a business in which the customer lifetime value is $100, acquisition costs $20, and retention costs $10. Suddenly, the profit margins are impacted far more substantially by acquisition and retention, and retention becomes more important.
Companies looking to grow fast, get investors, or get acquired need to look at churn rate and retention rate, both of which contribute to the bigger idea of customer lifetime value. These are some of the most important metrics for investors, because they show how successful the business is going to be at truly building revenue from its customer base. Further, companies that know their retention rates and churn rates are more likely to have the information they need to make reliable decisions.
Retention Rate Formula
Every company has a different way of calculating retention rate, but there is a standard retention rate formula. You can calculate retention rate as follows:
RETENTION = ((CURRENT_CUSTOMERS – NEW CUSTOMERS)/PREVIOUS_CUSTOMERS)*100
Retention rate, as opposed to churn rate, is more concerned with how many customers have been retained, than the amount of customers that are being burned through (and how quickly they are being burned through). There are also renewal rates. Renewal rates and retention rates refer to largely the same thing, though renewal rates are focused on subscription models, whereas retention rates can refer to anything from students to employees.
Both churn rates and retention rates are important. Churn retention management is how organizations are able to improve upon their model. Trends in churn and retention indicate problems, and also whether the tactics being used to manage and mitigate these problems are working overall. Without churn and retention rates, an organization cannot tell if it’s performing to the customer’s standards, because the organization cannot track whether the customer keeps coming back.
Retention rates can be calculated on-the-fly through simple equations, or through customer relationship management suites, marketing suites, and other business-oriented dashboards. Today, retention rates can be quite complex, and analysis can drill down to retention rates among specific subsets. As an example, an eCommerce company may notice that it’s losing its female demographic at rates much faster than male. Once the organization has noticed issues such as these, it must take action to resolve them.
Apart from that, retention rates as a whole are quite simple. The biggest issue with retention rates and churn rates is they are highly dependent on the company. Different companies are naturally going to have higher levels of retention or churn. Companies need to compare themselves with businesses of a similar size and of the same industry if they’re going to make any determinations from the data they have.
Churn Rate Calculation
The churn rate calculation is very simple, and taking a look at the churn rate formula is often the easiest way to understand how churn rate and retention rate differs. Here’s what you need to know about the formula.
Churned Customers/Customers at the Beginning of Period = Churn Rate.
Imagine that you lost 800 customers, and you had 18000 customers at the very beginning. 800/18000 = 0.044 (repeating). This is the amount of churn. You are losing 4.4% of your customers under that specific period (and that could be a week, month, or year, depending).
Of course, there are more complicated churn calculations as well, such as calculating the actual dollar amount being churned. But overall, it’s similar: Churn rate indicates how many people are leaving you. When the churn rate goes down, the company is doing well. When the churn rate goes up, the company is doing poorly. Churn rate can even be negative.
Imagine that you’ve gained 2000 customers, and you had 18000 customers at the very beginning. -2000/18000=-0.1111. Your churn rate is -11.11%. You are gaining customers rather than losing them. Of course you can also have separate metrics for retention and churn; for instance, you might see both. How many are being lost and how many are being gained.
Businesses don’t need to look up how to calculate annual churn rate on their own. There are companies that specialize in annual churn rate calculation, including dollar churn calculation, and rolling churn. If you don’t want to manage your own metrics, and would instead like to take a look at the Profitwell churn formula, you can spend money on a specialist who will analyze your information.
Average Customer Retention Rate by Industry
Though it can be interesting, the average customer retention by industry isn’t all your company needs. It’s important to pay attention to the churn or retention rate specified by your industry, but you also need to pay attention to both timing and company size.
First: the industry. Different industries have either lower or higher churn rates, depending on the company and what it does. For instance, B2B businesses tend to have lower churn than B2C businesses, because businesses put more research into their purchasing, and tend to stay with a single solution for longer. Some industries have virtually no retention rate. A funeral home, for instance, usually does not. At the same time, SaaS churn rate may be quite high, and SaaS retention rate might be quite low, which means you should look into how to calculate churn rate SaaS specifically.
Customer churn rate by industry generally indicates how much customer loyalty plays a part within that industry. On a practical level, SaaS churn rate benchmarks, an app churn rate, or a B2B churn rate are all going to tell you very different stories about how a company is perceived and interacted with. Churn rate eCommerce numbers tend to be quite high, because the industry simply doesn’t inspire as much loyalty.
Further, churn rates can be seasonal. In 2020, the Netflix churn rate calculation is likely to be quite good, because Netflix served as vital entertainment. Meanwhile, the subscription box churn rate is likely also going up, while the enterprise SaaS churn rate is probably remaining static. People like receiving things in the mail, such as subscription boxes, when they are not allowed to leave home.
Companies don’t need to calculate their own B2B or B2C churn rate, they can also hire churn rate Profitwell services. They can get special software suites and platforms that are designed to determine Appfolio churn, revenue churn rate calculation, or revenue churn rate SaaS. And companies may find that they already have a built in churn rate. For instance, a real estate agent may already have a tenant churn rate baked into their system.
Companies need to be able to take a look at their industry during different times, and to look at competitors when it comes to retention rate calculations. One of the easiest ways to determine whether you’re moving in the right direction is to look at companies that are similar to yours. The more similar the company is in size and in workflow, the better.
When customer churn and customer retention are followed, companies are empowered to act in ways that improve their operations. The more information an organization has, the more it is aware of causes and effects of the business. While churn and retention are both fairly simple concepts, and the formulas used to calculate them are also fairly simple, they can become more complicated as organizations demand more granular data. When that happens, companies can outsource their data analysis.