Churn Rate

As companies grow, it's essential to have a clear picture of customer satisfaction and business performance. By tracking churn rate, developers and product owners can gain valuable insights into user behavior, forecast future trends, and address potential challenges before they impact customer retention.

What Is Churn Rate?

Churn rate is the percentage of customers or users who stop using a service in a given period. It's commonly used in subscription businesses such as SaaS, but it's also used across industries to track customer retention. Churn rate is typically reported monthly, quarterly, or annually.

There are two main types of churn:

• Voluntary churn happens when clients choose to end the services, often due to poor service, a dissatisfactory experience, or changing needs.

• Involuntary churn occurs when the service ends without the user's intent, typically due to failed payment, card expiration, or account issues.

A lower rate signals that a company is better at retaining customers. On the flip side, a higher rate indicates that a business is struggling to keep customers.

How Does Churn Rate Work?

There are several ways to calculate and analyze churn, from basic formulas to advanced approaches. They include:

Customer Churn Rate

This metric tracks the percentage of lost customers against the total number of customers at the beginning of the period.

You can calculate it using the following formula:

(Number of lost customers during the period / Number of customers at the start of the period) × 100%

For example, if a marketplace application had 100 customers at the beginning of the month and 85 at the end, the customer churn rate is:

 15/100 x 100 = 15%

Revenue Churn Rate

This metric tracks the percentage of recurring revenue lost over a period, rather than just the number of customers lost.

It's crucial to note that not all customers have the same revenue impact. Losing high-value customers can result in a significantly higher rate, even when customer attrition is low.

There are two methods of calculating this rate:

• Gross Revenue Churn: This measures the percentage of monthly recurring revenue lost from downgrades and cancellations, not the percentage of customers. Below is the formula for calculating gross revenue churn:

(MRR lost in the period / MRR at start of the period) × 100%

Gross revenue churn measures raw revenue leakage. For instance, if your edtech app starts the month at $30,000 MRR and loses $2,000 to downgrades and cancellations, gross revenue churn is:

(2000 / 30000) x 100 = 6.67%.

• Net Revenue Churn: Net revenue churn factors in revenue lost from cancellations and downgrades and revenue gained from expansions (upsells) among existing customers.

Below is the formula for calculating net revenue churn:

(MRR lost from cancellations + downgrades - expansion MRR) / MRR at start × 100

Using the same month from before, if expansion from existing customers adds $1,000 MRR, net revenue churn is:

($2,000 - $1,000) / 30,000 x 100 = 3.33%

When expansion outweighs losses, net revenue churn turns negative. 

Advanced Metrics and Analyses

Besides the two methods above, you can also use the following:

• Adjusted Churn Rate: This is an advanced formula that is an improvement on the simple customer churn formula, factoring in both customer acquisition and losses within the period. It provides a more accurate picture of customer retention, especially for fast-growing companies.

You can calculate adjusted churn using the following formula:

(Customers at the start + Acquired customers -- Customers at the end) / Customers at the start × 100%

If you had 120 customers in your online marketplace, gained 70 new customers, but ended up with 150 customers (meaning 40 of the original customers left), your rate would be:

(120 + 70 - 150) / 120 x 100% = 33.3%

This metric is non-standard and can obscure underlying retention problems, so always pair it with standard customer and revenue churn.

• Cohort Analysis: Cohort analysis is an analytical approach to analyzing churn for groups of customers acquired at the same time to help identify common patterns. Instead of aggregating customers, you divide them into cohorts based on a start date or other characteristics (such as when you introduced a new feature).

  For example, if the Q2 cohort churns faster than the Q1 cohort, investigate what changed after Q1. This could signal onboarding issues or a subpar product experience.

Common Causes of Churn

Below are some of the main reasons why customers churn:

Poor Product-Market Fit

Customers churn early when the product does not solve the problem your audience purchases it for, or the perceived value is low. For instance, if your AI chatbot is designed to be an SDR agent but lacks sales-focused features like lead scoring or CRM integration, sales teams can drop off quickly.

Lack of Moderation

When your app includes community or messaging features like gaming or dating apps, users expect a safe, well-managed environment. If spam, harassment, or abusive content goes unchecked, users lose trust and disengage, sometimes permanently.

Buggy Products

Frequent crashes or slow or inconsistent performance frustrate users and interrupt workflows. Users expect a reliable product, especially during key actions, and won't tolerate a bad experience. Your app can have the greatest interface and features, but long loading times or undelivered messages will drive users away.

Lack of Modern Features

When apps lack modern features that mimic the experience of popular apps that users already know and trust, they're more likely to favor a better one. So, if you add chat to your app but it doesn't provide a polished experience like WhatsApp or Messenger, you'll likely see lower app retention.

Uncompetitive Pricing

If customers don't see enough value for the price, or if there is no flexibility in your plans, they'll look for more affordable or better-fitting alternatives. Even minor pricing differences can drift users toward competitors.

Best Practices for Reducing Churn

While you can't eliminate churn entirely, there are measures you can take to reduce it. These include:

Improve Onboarding

Design an onboarding process that delivers a great first impression to new customers, making it easy for them to get started and understand the product's value.

Use welcome emails, product tours, and in-app checklists to guide users towards performing actions. Support that with clear documentation they can reference as they explore your product.

Improve User Engagement

Connect with users proactively to keep them interested in your offerings. Use channels such as push notifications, in-app messages, and emails to prompt action when activity drops. You can also implement re-engagement strategies, such as offering a discount or unlocking a feature.

Improve Customer Support

Offer responsive and accessible support through live chat, help centers, and dedicated success teams. Treat each customer issue individually with personalized support to improve resolution speed and build trust during critical moments.

Leverage Data Analytics

Use product analytics to track how users interact with your product, and spot friction points that lead to churn. Monitor key metrics like activation rate, feature usage, session frequency, and net promoter score. Apply these insights to optimize flows, reduce friction, and reinforce the value of your product at critical touchpoints.

Adopt a Competitive Pricing Strategy

Choose a competitive, flexible pricing point based on market research and user feedback. Compare your pricing with competitors, so you don't overcharge or sell short.  Also, provide discounts and loyalty incentives for existing customers.

Regularly review your pricing, packaging, and feature set to stay aligned with market expectations. This could mean updating plan tiers or matching competitors' offerings. For example, if a competitor launches a major feature update, counter that with targeted upgrades or incentives to existing users.

Frequently Asked Questions