Businesses invest considerable time and resources in acquiring new customers, but ensuring those customers stick around is just as important. There are several key metrics that businesses track and monitor to help assess how happy their customers are—and why they tend to leave. One of the most important is churn rate.

Below, we’ll look at what churn rate is, how businesses use different versions of it, and how to improve it. Whether you’re interested in identifying weak points in your customer journey or learning why certain audience segments are leaving, examining churn rate is an important step in elevating your retention efforts.

What’s in this article?

• What is churn rate?
  
• Types of churn
  
• What does churn rate tell you?
  
• How to reduce churn rates
  

What is churn rate?

Churn rate measures the number of customers, users, or subscribers who discontinue a service within a given time period. This metric, usually expressed as a percentage, is an indicator of customer attrition and is used across industries—from telecommunications to software-as-a-service (SaaS).

Churn rate is calculated by dividing the number of customers who left a service during a specific time period by the total number of customers at the start of that period. Then multiply the result by 100 to get a percentage.

Here’s the formula:

Churn Rate = (Number of Customers Who Left ÷ Total Number of Customers at the Start) × 100

For example, if a subscription service had 1,000 subscribers at the beginning of the month and lost 50 subscribers by the end of the month, the churn rate would be:

(50 ÷ 1,000) × 100 = 5% churn rate

This means that the business lost 5% of the customer base during that month.

For software companies, the median monthly churn rate is 4.75%, according to a study from Recurly Research, conducted from January 2021 to July 2022. By comparison, the median monthly churn rate for consumer goods and retail businesses is higher, at 7.55%.

Types of churn

There are different types of churn that businesses can examine. Each represents different use cases and provides its own insights. Here are some common types of churn:

• Customer churn: This is the most straightforward type of churn, and it represents the percentage of customers who stop doing business with a company during a specific time period. Subscription-based services, such as streaming platforms and SaaS companies, often focus on customer churn.

• Revenue churn: This measures the loss of revenue from existing customers, either because they downgraded their plans or terminated their contracts. Companies with tiered pricing models often pay attention to revenue churn.

• Gross churn vs. net churn

  • Gross churn: This metric represents lost customers or revenue only, and it ignores any gains from existing customers.
    
  • Net churn: This accounts for upsells or additional purchases by existing customers, subtracting these gains from overall losses. Businesses seeking a more comprehensive understanding of customer behavior often use net churn.
    

• Voluntary vs. involuntary churn

  • Voluntary churn: Voluntary churn is when customers choose to end their relationship with a service and cancel a subscription intentionally.
    
  • Involuntary churn: With involuntary churn, the customer doesn’t initiate the termination; instead, the cause is payment failure or a similar factor. Ecommerce platforms and subscription services often differentiate between voluntary and involuntary churn.
    

• Active vs. passive churn

  • Active churn: Also known as voluntary churn, this is when a customer takes an action to leave a service, usually by canceling a subscription.
    
  • Passive churn: Also known as involuntary churn, this happens when a customer’s account is deactivated due to inactivity or failure to update payment information.
    

• User churn: App-based businesses and freemium models often measure user churn because it focuses on the number of users who stop using an app or service—regardless of whether or not they were paying customers.

• Product churn: In industries such as retail or consumer goods, product churn refers to the discontinuation of a specific product, rather than the loss of a customer.

• Contractual vs. noncontractual churn

  • Contractual churn: For industries in which customers and businesses sign contracts for a specific term, contractual churn refers to customers who choose not to renew their contracts.
    
  • Noncontractual churn: In industries without contracts, such as retail, this refers to customers who have not made a purchase in a given time frame.
    

• Early churn: Some businesses with long customer onboarding processes pay attention to early churn, which represents customers who leave shortly after joining, as this could indicate issues with the onboarding process.

What does churn rate tell you?

Churn rate is an invaluable metric for assessing customer retention and determining the health of a business. It hinges on the principle that retaining existing customers is often less costly than acquiring new ones. Here’s a rundown of the key insights a business can gain from churn rate:

• Financial health and sustainability
  A high churn rate can indicate issues with a company’s financial sustainability. The cost associated with attracting new customers, known as customer acquisition cost (CAC), can quickly outpace revenue if existing customers leave at a fast rate. This imbalance has the potential to jeopardize the business’s financial stability over time.

• Customer satisfaction and loyalty
  Churn rate provides insights into customer satisfaction. A low rate often indicates that customers find value in your service or product, which can lead to higher customer loyalty. Conversely, a high churn rate may mean that customers are dissatisfied and seeking alternatives.

• Product or service quality
  Churn rate can also reflect the quality of your product or service. If customers are leaving in large numbers, it could mean that your offering fails to meet expectations or that the customer experience is subpar. Monitoring churn can provide an early warning system for potential issues.

• Market fit
  A churn rate that declines continually over a considerable period might suggest that your product or service aligns well with market demands. This data can be a strong indication that your business has found a market fit, and that it resonates with your target audience.

• Operational weaknesses
  Different types of churn, such as involuntary churn caused by payment failures, can highlight operational inefficiencies. Such metrics are often easier to fix than issues related to product quality or market fit, and they demand immediate attention.

• Competitive positioning
  An elevated churn rate can also signal a competitive disadvantage. Comparing your churn rate to industry benchmarks can help you see how you compare to your competitors.

• Data-driven decision-making
  Examining churn metrics allows you to make data-driven decisions for your business, such as refining marketing strategies, optimizing customer experience, and directing resources more effectively. For example, focusing on customer segments with lower churn could be more beneficial than investing heavily in high-churn, high-risk segments.

How to reduce churn rates

The desire to retain customers as long as possible is central to all businesses. But depending on your business type, the details will vary. What does retention look like for your business? Do you want to keep your customers using a certain product, or simply keep them using your brand overall? Why are customers leaving—and when? What indicators precipitate drop-off? And what mechanisms are most effective at preventing churn? These are some of the key questions that often accompany a churn rate analysis.

There are a variety of strategies businesses can use to reduce churn rate and keep customers engaged and loyal. Here are some popular go-to tactics:

• Address customer satisfaction

  • Regular surveys: Conduct frequent customer surveys to gauge their satisfaction level. This is particularly effective for SaaS and subscription-based businesses. Feedback can lead to actionable insights that improve the customer experience.
    
  • Retargeting campaigns: For ecommerce businesses experiencing noncontractual churn, retargeting campaigns based on customer purchase history can reengage users.
    

• Leverage data to identify high-risk customers

  • Predictive analytics: Subscription businesses can use machine learning algorithms to identify customers who are likely to churn, based on behavior patterns, thus prompting preemptive outreach.
    
  • RFM segmentation: Retail and ecommerce companies can use recency, frequency, and monetary (RFM) metrics to identify which customers are less engaged, targeting them with special promotions or engagement strategies.
    

• Improve onboarding processes
  For companies observing early churn, such as those in the SaaS sector or businesses with a freemium model, there are a couple of tactics:

  • Interactive tutorials: Interactive onboarding tutorials can help acquaint new customers with the product, reducing the likelihood they will become frustrated and leave.
    
  • Onboarding emails: Informative emails can guide new customers through various features, increasing product stickiness.
    

• Address different types of churn

  • Voluntary and involuntary: Sending customers automated email reminders to update their payment information can help reduce involuntary churn, such as payment failures. Voluntary churn may require more complex interventions, such as personalized outreach.
    
  • Revenue churn: Businesses should closely monitor downgrade rates. If a high number of customers are moving to less expensive plans, it may be beneficial to revise the value proposition of higher-tier plans or introduce a new pricing structure.
    

• Implement customer retention programs

  • Loyalty programs: Ecommerce and retail businesses can benefit from loyalty programs that reward repeat purchases.
    
  • Customer milestones: For long-term service providers, celebrating customer milestones can enhance the sense of community and belonging, reducing churn.
    

• Optimize customer service

  • Immediate support: Providing immediate and 24/7 customer support can help reduce churn rates, especially for businesses that operate internationally.
    
  • Proactive outreach: Customer service teams can reach out to customers who have not interacted with the service for a while, which is particularly useful for app-based businesses experiencing user churn.
    

• Conduct exit interviews

  • Feedback loop: Both subscription and contract-based businesses can use exit interviews to understand why customers are leaving. This information can guide internal teams to make related improvements.
    

Reducing churn is never a one-size-fits-all endeavor. Different industries—from SaaS and ecommerce to retail and health care—have different customer interaction paradigms, revenue models, and product lifecycles that demand specialized approaches. For instance, a SaaS enterprise might focus on enhancing onboarding experiences and offering tiered subscription models to minimize customer attrition, while a telecom operator may prioritize network reliability and customer service responsiveness.

In industries where customer relationships span years and are based on high levels of trust—such as health care and financial services—churn reduction tactics may focus on long-term value delivery, consultation, and building strong relationships. Even within the same industry, market leaders and new entrants could employ diverging strategies based on their resources and customer base characteristics. Businesses must base their churn mitigation strategies on a deep understanding of their specific business model and customer expectations.