To understand the health of their business, companies need to track the right metrics. For subscription-based businesses – whose core revenue comes from recurring subscriptions – there are specific metrics that are relevant for their business model, including churn rate. For example, the churn rate for over-the-top (OTT) streaming services in the US was 47% in 2023, highlighting a need to be constantly acquiring new customers in that sector.

Below, we'll explore what churn rate is, how to calculate it, what it indicates about business health and growth, and best practices for minimising it.

What's in this article?

• What is churn rate?
  
• How do you calculate churn rate?
  
• Churn rate best practices
  
• Why is churn rate important for subscription businesses?
  

What is churn rate?

Churn rate is a business metric which measures the percentage of customers or subscribers who end their relationship with a company during a specified period. Often used in subscription-based businesses or those that rely on recurring revenue, churn rate provides insight into customer retention and satisfaction.

How do you calculate churn rate?

Calculating churn rate involves two key numbers: the number of customers at the beginning of a period and the number who left during that same period. The formula to calculate churn rate is relatively straightforward.

Churn rate = (number of customers lost ÷ number of customers at start) x 100

Let's break this calculation down step by step:

1. Determine the time period: decide on the time frame that you want to measure, whether it's a single month, a quarter or a year.

2. Identify initial customers: count the total number of customers that you had at the beginning of this period. This number serves as your baseline.

3. Count lost customers: tally the total number of customers who ceased their relationship with your company during the chosen period.

4. Apply the formula: divide the number of lost customers by the initial number of customers. Multiply the result by 100 to convert your result to a percentage.

For instance, if a company started a quarter with 200 customers and lost 10 of them by the end of that quarter, the calculation would look like this:

Churn rate = (10 ÷ 200) x 100 = 5%

This means that the company had a 5% churn rate for that quarter.

Churn rate best practices

While calculating churn rate might be a simple exercise, creating a strategy for reducing customer churn is a little more complex. As with any performance metric, the value of measuring churn rate depends on how meticulously you calculate it and what actions you take based on those insights. Here are the best practices that businesses should employ for minimising churn rate:

• Monitor churn rate regularly: calculate and review your churn rate consistently – on a monthly, quarterly or annual basis. This habit allows you to identify trends and address issues proactively.

• Act on feedback: actively seek feedback from present and former customers. Their insights can reveal issues in your products, services or overall customer experience.

• Implement proactive customer service: anticipate potential problems and address them ahead of time. This proactive stance can reduce the number of customers that leave due to unaddressed concerns. A 2018 PwC report demonstrated that 32% of consumers say that they will stop supporting a brand after just one bad experience.

• Create a loyalty programme: rewarding loyal customers can motivate them to stick around. Such programmes can provide special discounts, exclusive access or other perks that add value to the customer experience.

• Offer onboarding and training: some customers leave because they don't fully grasp the value of a product or service. Providing thorough onboarding and training can help them to maximise their benefits.

• Segment your customer base: not all customers are the same. Segmenting allows you to customise strategies and communication for different groups, which can increase retention.

• Analyse exit surveys: when a customer decides to leave, request an exit survey. Their responses can highlight areas for improvement.

• Develop a win-back strategy: even after a customer leaves, there's still a chance to win them back. Create win-back strategies, such as special offers or addressing previously mentioned concerns, to encourage their return.

• Maintain open communication: ensure that customers are aware of updates, changes or improvements to your products or services. Transparency can foster trust and reduce misunderstandings.

• Focus on quality control: always strive to deliver the best possible product or service and add value continuously. This can reduce the number of customers who leave due to dissatisfaction. A 2020 McKinsey & Company survey found that 30% of consumers say that a lack of fun or new experiences would factor into their decision to cancel a subscription.

Keeping the churn rate low requires ongoing effort, attention to detail and a genuine commitment to customer satisfaction. While it's natural for some churn to occur, these best practices can help businesses to minimise it and foster long-term customer relationships.

Why is churn rate important for subscription businesses?

Churn rate is one of the most important metrics that subscription-based businesses can use to assess their overall performance. While other metrics relate to how customers engage with the product or service, or how new subscribers are acquired, the churn rate tells you how many customers you're losing relative to how many new customers you're gaining.

Here's why churn rate is so useful for businesses and what they can learn about their operations:

• Revenue predictability
  In the subscription model, businesses rely heavily on consistent, recurring-revenue streams. This predictability is important for budgeting, forecasting and making long-term investments. The churn rate can tell businesses how predictable their revenue will be in the coming months. For example, if the churn rate increases, then predictability decreases, indicating that the business may be less stable.

• Average customer lifetime value
  The longer a customer remains subscribed, the more valuable they become in terms of revenue. An elevated churn rate implies that, on average, customers aren't staying as long, which reduces the average customer lifetime value. Customer lifetime value has a direct effect on profitability and how much a subscription business can afford to spend on acquiring new customers.

• How much to spend on customer acquisition
  Attracting new subscribers often requires significant investment via advertising, promotions or other marketing efforts. Businesses can justify high customer acquisition costs if their churn rate is low, meaning that they're retaining these new customers. If their churn rate is high, those acquisition costs are harder to justify.

• Whether the business is shrinking or growing
  Each new customer can represent business growth. But if existing customers are leaving at a faster rate than new customers are joining, the business isn't truly growing. And if more customers are exiting than joining, the business may be shrinking. The churn rate can therefore give you a holistic picture of what direction your business is moving in.

• Product and service quality
  An increase in churn rate can be a valuable warning sign that something about the product, service or overall customer experience isn't meeting expectations. Such insights give businesses the chance to rectify issues before they escalate.

• Cost benefits of customer retention
  Maintaining a relationship with an existing customer is generally more cost-effective than establishing a new one. A lower churn rate indicates that the business is enjoying associated cost savings and can allocate resources elsewhere.

• Community and network health
  Many subscription businesses benefit from maintaining a vibrant, engaged community. Consistent churn disrupts these communities and departing customers can weaken the benefits that come from a network of engaged customers.

• What strategic decisions may be needed
  With churn rate as a guiding metric, businesses can make informed decisions about product development, marketing strategies and customer-service improvements. It offers a clear picture of where attention is needed and where resources should be directed.