Define Churn rate
Churn rate refers to the percentage of customers who end their relationship with a business within a given period. In general usage, churn rate is also known as ‘attrition’, although within the contact centre industry, attrition tends to refer to staff losses rather than customer losses.
Churn rate can most readily be applied to subscriber-based service models where the number of active customers is easily quantified. Non-subscriber businesses can still evaluate churn rate but only as a net value rather than as a gross value.
Calculating gross churn:
To calculate net churn, the same process applies. However, the value of ‘customers lost in this period’ is reduced by the number of customers gained over the same period.
For example, consider the net and gross churn rates of a small, subscription-based company.
|Customers at start of period||2200|
|Existing customers lost||416|
|New customers gained||403|
|Gross Churn Rate||18.9%|
|Net Churn Rate||0.59%|
Gross Churn Net Churn
As this example shows, there can be a substantial difference between net and gross churn rate, with each saying something different about the business’s performance. While the total number of customers in this example has reduced by less than 1%, almost a fifth of the existing customer base has chosen to leave.
This information can be immensely important for business planners when allocating resources. In the simplest terms, net and gross churn inform planners of whether they should prioritise attracting new customers or retaining existing customers.
Because the number of customers gained can be greater than the number of customers lost, net churn can be a negative value. Gross churn, however, could not sink below zero; zero gross churn would indicate that no customers had left.
Churn rate is a measure of a business’s current performance, but it can also be used to gain an understanding of longer-term performance. ‘Average customer life time’ is a metric that can be extrapolated from churn, and it indicates the length of time a customer is likely to remain with a business.
If (gross) churn for a year is 20%, it is understood that one fifth of the existing customer base ‘churned’ in that time. If 20% is a steady churn rate over time, then we are able to anticipate that, after five years, the company’s pool of customers will have been replenished. As such, the average customer life time is five years.
In a poll carried out in October 2014 with a sample of 148, the results showed that 34% of respondents had a 6 to 10% churn level, with 26% stating an 11 to 20% churn. See the full results here.