Churn rate – also called attrition rate – refers to the turnover of individuals leaving a collective over a given time period. Basically, this is the measurement of the number of subscribed customers who end their subscription over a given time period. Churn rate is measured where there are contractual customers (subscribers) involved such as with mobile telephone companies and pay-to-view television.
Churn rate is also used to describe employee turnover. That is, how long employees on average stay with a company before leaving for alternative employment. Revenue churn refers to the formula for calculating lost or gained revenue for a company in a given timeframe such as a month, or a year.
This article will focus on churn rate in terms of subscribing customers, as this is the context in which the term is most often used.
In terms of a customer-based service model, churn rate is important because it helps a company to know a customer’s lifetime value (a projection of how long the customer will subscribe to the service provided). This lifetime value for a customer is calculated by computing the inverse of the percentage churn rate. For example, if 1 out of 20 subscribers to a mobile telephone company’s service do not renew their subscription in a month, then the company’s churn rate is 5%. The projected customer lifetime value for this company is 20 years (inverse of 5%).
A high churn rate means that subscribing customers are leaving the company fast. For example, if company A has 4 out of 20 customers unsubscribing every month, and company B has 1 out of 20 customers unsubscribing every month, then company A has a higher percent churn rate (20%) than company B (5%). Meaning company A is losing more customers than company B per month. For a company to grow, or at least to be sustainable, the growth rate (number of customers acquired) has to be greater than the churn rate (number of customers lost).
Churn rate is important because it can indicate customer dissatisfaction, or that customers are getting a better, more affordable option from the competition. It can also mean that the competition has a more effective marketing/sales strategy. Churn rate can also indicate the average customer lifetime.
To minimize churn rate, a company can offer loyalty programs to their subscribers, or use contractual binding agreements to ensure a customer won’t leave before a prescribed time period. The company can also offer value added services that are attractive to the customer.