Calculating and defining “churn rate”
“Churn rate” is now commonly used but do you really know what it means, how is it calculated and how can it be reduced ? Finally, what is the difference between “retention rate” and churn rate ?
What is the “churn rate” ?
If some of your customers cut ties with your firm or what you offer, it is said that they have “churned”. Therefore, your churn rate represents the amount of subscribers or clients who have churned during a given time period. Banks and Insurance companies often use churn rate and used to have low rates for a long time. Nowadays, switching bank or insurance company has become easy and it forces companies to innovate quickly to keep their churn rate as low as possible.
Retention rate is simply the opposite: it represents the number of customers you have succeeded to keep during a given time period. Consequently, if you add your churn rate to your retention rate, you get the number of your customers.
Calculating your churn rate
Calculating your churn rate is simple: take the number of clients you have lost during a time frame and divide it by the number of clients you had at the start of that time frame. Then, multiply it by 100 to get a percentage. Easy. Here is an example:
- time frame : a month
- number of customers you had at the beginning of the month: 1000
- number of customers you have lost over the month : 100
Your churn rate is: (100/1000)*100 = 10%
This indicator often reflects your clients’ satisfaction. The more your churn rate is close to 0, the more your clients are “satisfied”. Obviously, it also depends on the market you are in and your position in it. If you have a dominant position, your churn rate tends to be low. Sometimes, you can even keep a low rate only because consumers do not have many other alternatives.
Nowadays, it is all about understanding how to reduce your churn rate, and how Big Data and Artificial Intelligence can help you do so.