Churn refers to the loss of value-adding assets, but churn rate metrics give you actionable insights to improve retention and profits.
Whether in the form of customers, employees, or revenue, businesses constantly run the risk of losing value-adding assets. Businesses survive by keeping this loss, called churn or attrition, offset by higher growth.
Sometimes churn is unavoidable, but most of the time, there are solutions to mitigate it and improve retention rates.
This article will go over what churn is, how it relates to retention and growth, and the different types that businesses might encounter.
Table of contents
What is Churn?
In its broadest form, churn is the loss of an individual or item from a group. Businesses use it to refer to the loss of a variety of assets, but it’s usually connected with employees or customers.
Most business people use the terms churn and attrition interchangeably because the two are closely related. However, there is a technical difference between the two:
- Attrition: The loss of an asset offset by gains of that same asset. For example, if a business lost three clients but gained two new ones, it attrited one client.
- Churn: The loss of an asset without considering gains. The business in the previous example, for instance, churned three clients.
What is a Churn Rate?
The frequency with which churn occurs over a given time period is called the churn rate. This metric often serves as an indicator of the health or sickness of a business. If you have high rates, that could mean that your business isn’t optimized for customer success or employee satisfaction. However, some industries naturally experience higher rates than others.
Companies calculate churn rates differently depending on their use cases. However, the standard calculation is:
(Churned assets / Total assets at the start of the period) x 100
This calculation gives you your churn rate as a percentage value. So, for example, if a business had 300 customers at the start of a quarter and it lost a total of 75 customers during that period, its quarterly churned customer rate is 25%.
If your business sees large fluctuations in asset numbers, you might instead get better insights by weighing your churned assets against the average numbers of these assets. The formula for this churn rate is:
(Churned assets Average / number of assets within the period) x 100
How Does it Relate to Growth?
Sales revenue, customer acquisitions, and churn rate are some of the best metrics for gauging future business growth overall. The ideal scenario for any business is high revenue and low attrition because this is when profits are highest. However, most businesses will have varying levels of churn and revenue growth at different points in their lifecycle.
A business can even have low sales growth and still increase profits, so long as churn remains sufficiently low. That’s because retaining assets is less expensive than acquiring them.
For example, in the case of customers, it costs very little to sell to existing, loyal users. However, enticing new customers to try your product requires more money and resources spent on marketing, sales, and onboarding. In fact, one study found that customer acquisition can cost up to 500% more than retention.
So if you’re in a high-churn industry, like retail or finance, reducing your rate can be even more beneficial for achieving growth than increasing sales or profit margins.
Types of Churn
There are many different types of churn, like churned employees. In the context of product management, two types of churn are most relevant to the success of a product: customer and revenue churn.
Let’s take a closer look at each type.
When someone in business mentions churn, it’s usually customers that they’re referring to.
Customer churn is so widely discussed that it’s more than just an indicator of profitability. Identifying the reasons why customers leave and analyzing churn rates can produce a variety of insights, including:
- Customer satisfaction or dissatisfaction levels
- Product or functionality flaws
- Onboarding issues
- Perceptions of value for money
- The tenure and life cycles of the average customer
When looking at customer churn, you can get more granularity and derive more meaningful insights by dividing it into two more subtypes: voluntary and involuntary.
Voluntary churn is when customers choose to leave or stop using your service. If you ask for feedback regarding the reason why they churned, you can gain valuable insights to help improve product functionality, onboarding processes, or marketing messages.
This also allows you to win back previous users by providing a solution and showing you’ve addressed their concerns.
Involuntary churn occurs when a customer leaves without making a deliberate choice. The most common reason for this is billing issues, like lack of funds or out-of-date payment information.
Revenue churn is the most relevant type of churn for business models (like SaaS) that rely on recurring revenue as their primary income source. Here, the amount of recurring revenue is what’s important.
Most companies that collect this data also rely on customer churn insights to keep customers paying their subscriptions. This might make inferring revenue churn seem redundant. However, it generates insights that are weighted against how much customers are paying. This is important for businesses that offer regional pricing or segment their offers into tiers of increasing cost.
Analyzing revenue attrition data can help you determine which customer segment contributes most to the problem. It can also help you account for differences in client contract values. This data can help inform your pricing decisions, and it can reveal if you might need to better communicate the value of higher-priced tiers to your customers.
Understand why your customers are churning
Churn is a crucial source of product insight. Understanding why it occurs helps you identify where your business is losing out on valuable resources, so you can develop strategies to improve retention and maximize growth in the future.