July 10, 2019 // 3:30 pm

How to Calculate Your Customer Churn Rate (And Why)

By Chris Frampton

Your customer churn rate is one of the key stats that your business should be fully aware of. Knowing how many customers are leaving your business is the first step to working out why. Then you can come up with a strategy on how to stop them. In this blog you’ll find out exactly how and why you should calculate your customer churn rate and a free customer churn calculator to help you.

Calculate Your Customer Churn

Why You Should Calculate Your Customer Churn

Research suggests that the cost of acquiring a new customer can be between 5 and 25 times higher than the cost of retaining an existing customer. If you assume that your new customers are bringing the same value to your business as the old ones, you’re essentially spending a whole lot of money just to replace lost revenue.

Not only that, small differences in customer churn can have a dramatic impact on the growth of your business.

As an example, two B2B companies both start with 50 customers in 2014. Both companies acquire new customers at the same rate, acquiring around 20% of their current customer base every year in new business.

However Company A has an average annual customer churn rate of 10%, whilst company B has a rate of 15%.

This doesn’t seem like much of a difference, especially when the two companies only have 50 customers to begin with. And initially you’d be right, after year 1, Company A has 55 customers, while Company B has 53. However, if this trend continues year-on-year, see what happens to the relative growth of the two companies –

CompanyNumber of CustomersEnd of Year 1End of Year 5End of Year 10End of Year 20
Company A505581130336
Company B50536481133

There are also a number of other business KPI’s that you can calculate if you know your customer churn rate. You’ll be able to work out the customer acquisition rate you need to achieve in order to maintain growth.

You can also use it to work out your average customer lifetime value. Once you know what the value of a customer is to your business, you can use that information to inform your marketing strategies, such as which ABM tactic to adopt.

You’ll also be able to segment different revenue streams for your business by churn rate to take the appropriate action. This could mean monitoring different products, platforms or services and checking the churn rates of each. It could also mean segmenting your churn rate by demographics, checking if a particular age group is churning more than any other.

How to Calculate Your Churn

Firstly, download our customer churn calculator to help you accurately calculate your customer churn.

Once you’ve done that, you’ll need to work out whether to use monthly or yearly metrics. This is really simple – are your clients tied into deals lasting 1-5 years or are they on monthly rolling contracts?

If they’re able to leave you after just a few months, then use monthly metrics – they’ll be far more accurate.  If the majority of your clients work with you for more than 12 months, use annual metrics to calculate churn.

Then you’ll need access to your customer metrics. Let’s use annual metrics in this example. You’ll need to know –

  • The number of customers you had at the start of a given year
  • How many new customers you acquired over the course of that year
  • How many customers you had at the end of that year

 

Simply input your annual metrics into our free calculator and it will calculate your customer churn for each year and also an average annual churn rate.

* This calculator is designed to work for B2B organisations. If you have customers who can sign up with you and then churn within less than a month, we would suggest finding a B2C specific calculator.

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