What is churn
Churn is a metric that measures the number of customers (a.k.a clients or users) that stopped paying, and by extension using your product or service over a period of time.
Churn is a commonly used term in SaaS and other subscription-based companies whose user base pays on a recurring basis for product or service usage.
What is the churn rate?
Churn rate is one of the most important metrics for subscription-based companies and is associated with a company’s health.
Churn rate is defined as the percentage of users measured at the beginning of a specific period of time, e.g. month, quarter, or year.
The formula to calculate the churn rate is:
Lost Customers divided by Total Customers at the Start of Time Period and multiplied by 100.
What are the types of churn?
There are 2 types of churn: 1) Customer churn and 2) revenue churn.
Customer churn is the number of customers lost due to not renewing or canceling their subscription in a given period of time.
Revenue churn measures the revenue lost due to users stop using your service or product in a given period of time.
It is important to note that you need to calculate both customer churn and revenue churn as they provide a great picture of the health of an organization’s user base.
How to calculate churn rate
Simply put, to calculate the churn rate you need to define:
- The time period for which you want to calculate the churn rate, e.g monthly, quarterly, annually, or all time.
- The number of total users you had at the start of the period.
- The number of users lost in the period you are examining. For this, you need to subtract the number of users you had at the beginning of the period from the number of users you had at the end of the period.
For example, if at the beginning of May 2022, your business had 5,000 customers and at the end of May 2022 you had 4,000 customers then the churn rate for May 2022 would be:
(1000 ÷ 5000)*100=20%.
Some things you may want to consider and factor into your churn rate calculations are:
- The new users added during May 2022. In the case of say 1000 users added the churn rate now is: 1000 ÷ (5000+1000)= 16.7%
- The actual end of a user’s subscription. Does the user that cancels their subscription in May 2022 means that their subscription actually ends in that period? If not, then calculating the churn rate for May may not be as straightforward.
Knowing the above, may help your company adopt or either create a sophisticated approach to churn rate while taking into account your unique situation (i.e. using average number of users or even setting up and measuring cohorts, etc.).
Why is churn and churn rate important?
Churn and churn rate are 2 very important metrics to SaaS companies as it is tied to the perceived value of the product and by extension to the overall business’ health. A high churn means that you need to improve user retention in order to maximize revenue and make your business profitable.