Retention rate and churn rate are two of the most important metrics for subscription-based businesses. Retention rate tells you how many of your customers are continuing to use your business, and it indicates how well your customer retention strategies work. Churn rate tells you how many customers are leaving your business, and it can reveal warning signs in your service or product experience. Together, these figures can give you a clearer sense of where your business is succeeding and where there might be problems.

Here’s what you should know about retention and churn rates: how they work, how they’re different from each other, and how to use them to better understand your business.

What’s in this article?

• What is churn rate?
  
• How to calculate churn rate
  
• What is a good churn rate? Benchmarks to know
  
• What is revenue churn?
  
• What is retention rate?
  
• How to calculate retention rate
  
• What is a good retention rate? Benchmarks to know
  
• Metrics to determine churn and retention rate
  
• Key differences between retention rate and churn rate
  

What is churn rate?

Churn rate measures how many customers or subscribers a business loses over a specific period of time. It’s particularly relevant for businesses that operate on a subscription or ongoing service model such as software companies, streaming services, or any service with recurring billing. To calculate churn rate, which is expressed as a percentage, divide the number of customers who left during the given time period by the total number at the start.

Churn helps businesses assess how effective their customer retention efforts are and how well they maintain customer relationships. Generally, a lower churn rate is a sign that the business is healthy.

How to calculate churn rate

There are a few ways to calculate churn rate. Here is the most common and straightforward formula:

Churn Rate = (Number of Customers Lost During a Period ÷ Total Number of Customers at the Beginning of the Period) x 100

Here is how to set up this calculation.

• Determine the time period: Choose the time frame for which you want to measure churn (e.g., monthly, quarterly, annually).

• Define customers: Define what constitutes a “customer” for your calculation. This might vary depending on your business model (e.g., subscribers, active users, paying customers).

• Count lost customers: Identify the number of customers who stopped doing business with your company during that period. This could include cancellations, nonrenewals, or any other form of discontinuation.

• Count beginning customers: Determine the total number of customers you had at the start of the period.

• Apply the formula: Plug the numbers into the formula and calculate the percentage.

Sample calculation

Let’s say a company had 1,000 customers at the beginning of a month and lost 50 customers by the end of the month.

(50 ÷ 1,000) x 100 = 5% Churn Rate

What is a good churn rate? Benchmarks to know

In general, a lower churn rate is better, because it indicates that more customers are staying with the service. What constitutes a “good” churn rate varies depending on several factors. Seasonal businesses or those with specific customer engagement cycles (such as annual renewals) might experience different churn dynamics. Ultimately, the best way to assess whether a churn rate is good is by comparing it to past performance, direct competitors, and industry averages. Pairing churn rate analysis with revenue churn and customer lifetime value provides a more comprehensive view of its impact on the business.

Here are some factors that affect what’s considered a good churn rate.

• Industry: Different industries have different customer behavior patterns and expectations. For example, a good churn rate for a subscription box service might be higher than for an enterprise software company.

• Business model: Subscription-based businesses typically have higher churn rates than companies selling one-off products.

• Customer segment: Churn rates can differ based on the type of customers you serve (e.g., small businesses versus large enterprises).

• Growth stage: Early-stage companies often have higher churn rates as they refine their product-market fit and customer acquisition strategies.

Here are some general churn benchmarks for different sectors.

• Software-as-a-service (SaaS): For SaaS companies, especially those dealing with small to medium-sized businesses, a monthly churn rate of around 3%–7% is considered acceptable. For those servicing larger enterprises, a lower rate closer to 1% monthly is considered good, reflecting the longer contract terms and higher switching costs associated with such customers.

• Telecommunications: This sector often sees higher churn rates, with a median churn rate of 31% as of April 2024. Competition and customer service quality greatly impact churn in this industry.

• Digital media and entertainment: These services can expect average churn rates from 6%–7% monthly.

• Ecommerce: Ecommerce churn rates can be difficult to define because the industry does not rely on subscriptions, but repeat customer rates are often used as a proxy. A repeat customer rate of 20%–30% is a good benchmark to aim for, although this can vary widely.

What is revenue churn?

Revenue churn—often called dollar churn—measures the amount of revenue lost because of customer departures, downgrades, or subscription cancellations over a specific period. Unlike customer churn, which counts the number of customers leaving, revenue churn focuses on the financial impact of these losses.

This metric is especially important for businesses with variable customer spending levels or tiered pricing models, since losing a few high-value customers might have a bigger impact on the bottom line than losing many lower-spending ones. Companies monitor revenue churn to assess how customer losses affect their financial health, and to find ways to improve customer retention or upgrade existing customers to higher tiers to compensate for the lost revenue.

What is retention rate?

Customer retention rate (CRR) is the percentage of customers who continue to use a company’s products or services over a specific period. It’s a key indicator of customer loyalty and satisfaction, and it reflects how well a business can maintain relationships with its customers.

How to calculate retention rate

Here’s the formula for calculating customer retention rate.

Retention Rate = (Number of Customers at the End of a Period - Number of New Customers Acquired During the Period) ÷ Number of Customers at the Start of the Period x 100

To set up this calculation, follow these steps.

• Define the time period: Choose the time frame you want to analyze (e.g., monthly, quarterly, annually).

• Count end-of-period customers: Determine the total number of customers you have at the end of the selected period.

• Count beginning customers: Determine the total number of customers you had at the beginning of the period.

• Count new customers: Identify the number of new customers acquired during that same period.

• Apply the formula: Plug the numbers into the formula and calculate the percentage.

Sample calculation

Let’s say a company had 1,000 customers at the beginning of a month, acquired 100 new customers, and ended the month with 1,050 customers.

(1,050 - 100) ÷ 1,000 x 100 = 95% Retention Rate

What is a good retention rate? Benchmarks to know

What counts as a strong retention rate can vary. A good retention rate largely depends on the industry and the specific nature of the business. Generally, a higher retention rate is better because it suggests customers are satisfied and continue to engage with the product or service. Here are some typical benchmarks for different industries.

Industry-specific benchmarks

• SaaS (SMB): A 93%–97% monthly retention rate is considered a good benchmark for small to medium-sized businesses.

• SaaS (enterprise): A 98% or higher monthly retention rate is considered good for larger enterprise customers.

• Digital media and entertainment: A 93% or higher monthly retention rate is considered a good benchmark.

• Telecommunications: A retention rate around 70% is considered a good benchmark.

• Ecommerce: A 20%–30% retention rate is considered a good benchmark.

It’s important to consider retention rate in conjunction with customer lifetime value (CLTV). A high retention rate with low CLTV might not be as beneficial as a slightly lower retention rate with high CLTV. Further analyze retention rates to look at different customer cohorts (e.g., acquisition channels, demographics) and identify segments with higher or lower retention rates. Also look at retention rates over different time frames (e.g., 30-day, 90-day, 1-year) to see how customer loyalty evolves over time.

Metrics to determine churn and retention rate

To track churn and retention rates effectively, monitor a variety of metrics that can provide deeper insights into customer behavior, satisfaction, and engagement. These other metrics include:

• Revenue churn rate: This measures the amount of revenue lost due to churned customers. It helps show the financial impact of churn, especially if your business has a varied customer base with different revenue contributions.

• Customer lifetime value (CLTV): This metric estimates the total revenue a business can reasonably expect from a single customer account throughout the business relationship. Tracking changes in CLTV can help you understand the long-term impact of retention or churn.

• Customer acquisition cost (CAC): This is the cost of acquiring a new customer, including all marketing and sales expenses. Understanding CAC in relation to CLTV can help you assess whether you’re spending in a sustainable way to acquire new customers.

• Net Promoter Score (NPS): This measures customer satisfaction and loyalty. It’s based on how likely customers are to recommend your product or service to others. A higher NPS can correlate with higher retention and lower churn.

• Engagement metrics: These can include metrics such as usage frequency, session duration, and feature adoption, depending on your product or service. High engagement levels often predict better retention rates.

• Customer support tickets: Monitoring the number and nature of customer support tickets can provide insights into potential issues that might lead to churn. A sudden increase in tickets, particularly about the same issue, can be a precursor to higher churn.

• Product return rate: For businesses that sell physical goods, tracking the rate at which products are returned can be an indicator of customer dissatisfaction and potential churn.

Key differences between retention rate and churn rate

Retention rate and churn rate both provide valuable insights into customer behavior and loyalty. They measure different aspects of business performance and have distinct implications for businesses. Here’s a rundown of their key differences.