As a business owner, you’re always looking for ways to improve your company’s bottom line. One way to do this is by comparing your churn rate vs retention rate.
Between churn rate vs retention rate, which is more important? It’s something that I’ve been thinking about lately, especially in light of my own experience running a small business. We all know that it costs more to acquire new customers than it does to keep existing ones happy and loyal. So why is it that so many businesses focus on acquisition instead of retention?
Churn Rate vs Retention Rate
The churn rate is the number of customers or subscribers who cancel their service within a given period, while the retention rate is the number of customers or subscribers who continue using a service over a given period.
A high churn rate indicates that a company is losing customers quickly, while a high retention rate indicates that a company is keeping its customers.
The retention rate metric allows companies to measure the effectiveness of their marketing strategies and efforts to keep their customers satisfied.
A higher retention rate can lead to increased profits, as customers are more likely to continue spending money on a service they know and trust.
It also means you won’t have to spend as much time finding new clients, which can save you both time and money.
What is Churn?
The churn rate is the percentage of customers that leave a company during a specific period.
Predicting your churn rate is incredibly important for any company, as it helps you understand why customers are leaving.
If you’re a small business owner, reducing your churn rate will have several benefits. Most notably, it will increase your customer lifetime value and monthly recurring revenue. Additionally, it will lead to higher levels of customer satisfaction and overall increased revenue.
Voluntary vs Involuntary Customer Churn
Customers leave your business either by choice or by force. When they choose to leave, it’s known as voluntary churn. When they’re forced to leave, it is referred to as involuntarily churn.
Involuntary customer churn is what happens when customers are forced to leave, such as if you stop offering a particular feature that they like.
Attrition vs Churn
Churn and attrition are two terms that are interchangeable in the SaaS industry.
Churn, or attrition, is an important KPI to track as a small business owner. It is imperative to stay on top of your churn rates to make sure you are gaining more customers than losing them.
Gross Churn vs Net Churn
There are two levels of customer churn: gross and net.
Gross customer churn is the rate at which your customers stop subscribing to your service, regardless of how they leave.
Net customer churn takes into account cancellations or downgrades after taking the revenue from existing customers into account.
For example, if you gain two new customers and you lose two existing customers, then your gross customer churn will be positive but your net customer churn will be zero.
Customer Churn Vs Revenue Churn
It’s important to distinguish between revenue and customer churn.
Customer churn is the measure of loss of customers whereas revenue churn is the measure of loss of revenue.
For instance:
A downgrade in a customer’s service plan would increase the revenue churn but wouldn’t affect the customer churn rate. An upgrade in a client’s plan would reduce revenue churn but it wouldn’t impact the customer churn rate.
How to Calculate Churn Rate
How often should you calculate your churn rate? This depends on the size of your user base. For larger companies, you may want to measure it daily.
Smaller companies, such as startups, can usually measure their customer turnover rates two or three times a year.
There are a few different methods for calculating your user churn rate. The most useful method for your company depends on what kind of service you are providing. Using the right calculation enables you to be more precise, plan your long-term goals, and increase your marketing reach through accurate planning.
Basic Churn Rate Calculation
Calculating your customer retention rate is simple. All you need to do is divide the number of customers you lost by the number you had at the beginning of the period.
There are both advantages and disadvantages to using this method. One advantage is that it is very straightforward. You only need two pieces of information: the total number of customers you had and the number of customers that are no longer using your product.
While this simple method for calculating churn is easy, it ignores users who haven’t used your product in a while. This can be a problem if your company’s marketing efforts are wide-reaching.
If a company is growing at a steady pace, this may not be an issue. But, if the company’s growth has slowed down, then its customer attrition rates should be calculated differently.
This is where different calculations come into play.
Adjusted Churn Rate Calculation
To calculate the churn rate, you first need to take into account the rapid increase in customers that may be due to a special reason. This is particularly important for services which see a spike in business during certain times of the year. By doing this, you can more accurately measure your churn rate.
The way to do this is by dividing the number of users who have churned by the average number of users you’ve had in a certain period.
The average number of your users is calculated by adding your users on the first and last days of the given period and dividing it by two. This will give you a more accurate idea of your churn rate.
This formula is best for use on a monthly basis. However, using it daily, weekly, or yearly may not be as accurate.
Customer Retention Metrics You Need to Keep Track
1. Customer Retention Rate
Measures how many customers continue to use your service over some time.
If you want to measure your customer retention rate, subtract the number of customers at the end of a period from the number of customers at the beginning of the period. Divide that solution by the number of customers you had in the beginning.
If you have a small list of customers, bi-annual or yearly monitoring will be sufficient.
2. Customer Churn Rate
Measures the rate at which your customers stop using your services.
Churned customers are those who have ended or opted out of renewing a subscription with your business. In other words, these are customers that your business didn’t retain.
Customer churn is natural and should be expected to a certain extent. For instance, customers may leave your company for any number of reasons, such as a change in their circumstances.
Perhaps they no longer require your services, or maybe they acquired another company.
How often you measure your rate of customer attrition will depend on how many customers your business has.
If your company has a large customer base, it may be beneficial for your marketing, sales, or customer success team to track churn every month. This way, you can identify any potential issues early and take steps to prevent them.
If you have a small customer base, it’s best to track churn semi-annually or annually. Keep in mind that any new customers acquired during the chosen period shouldn’t be factored into the churn rate.
To calculate the churn rate, look at the example numbers below.
Let’s say our company started September with 10,000 customers. At the end of the month, we found that 500 left our business. Our customer churn rate is 5%.
Now, let’s assume we acquired 275 new customers during September but lost 500 more during October. Our churn rate for November would be 5.11%.
Churn Rate vs. Retention Rate
The churn rate is the percentage of customers that a business loses over a period of time. Retention rate is the percentage of customers that a business keeps over a period of time.
In both of these cases, companies try to reach as close to zero percent for customer attrition and as high as possible in customer retention.
How businesses interpret the rates is different because a high churn rate means that customers are not satisfied and are leaving, while a high retention rate means that customers are satisfied and staying.
Both rates can reflect customer satisfaction and help businesses determine what they’re doing well and what strategies they can improve.
Conclusion
There’s no easy answer when it comes to deciding whether churn rate vs retention rate is more important. It really depends on your specific business and what your goals are. If you’re trying to grow quickly, then acquisition might be your priority. But if you want to build a sustainable business with long-term growth potential, then retention should be your focus.
