Churn rate is one of the crucial factors influencing the success and sustainability of a business, reflecting the quality of products and services in the eyes of consumers. Let’s delve into the details about this rate in the following article of ours.

What is churn rate?

Churn rate is a metric measuring the percentage of customers who stop using a company’s product or service within a certain period. The churn rate is the percentage ratio between the number of customers who leave and the initial number of customers within a specific period. Churn rate is commonly used to evaluate the effectiveness of marketing campaigns, sales, and customer care. It also impacts a business’s revenue and profit.

For example, if a business has 1000 customers at the beginning of the month and 50 customers leave during that month, then the churn rate is 5% (50/1000).

Important types of churn rate

There are several types of churn rates, depending on the calculation method and purpose of use. 2 important types of churn rates include:

• Customer churn rate: the percentage ratio between the number of customers lost and the initial number of customers within a specific period. Customer churn rate indicates the level of loyalty and satisfaction of customers with a business’s product or service.
• Revenue churn rate: the percentage ratio between the revenue lost due to customer departure and the initial revenue within a specific period. Revenue churn rate shows the impact of churn rate on the growth and profit of a business.

How to calculate churn rate?

The most common formula for calculating churn rate is:

Churn rate = (Number of customers lost / Initial number of customers) x 100%

However, this formula can be adjusted based on the type of churn rate, timeframe, and data source. For instance, to calculate revenue churn rate, the formula might be:

Revenue churn rate = (Revenue lost / Initial revenue) x 100%.

Formulas for calculating churn rate

Churn rate is an indicator measuring the level of customer or revenue loss of a business within a specific period. Churn rate can be calculated in two main ways: revenue churn rate and customer churn rate.

Revenue churn rate

Revenue churn rate is the percentage ratio between the lost revenue and the initial revenue within a specific period. Revenue churn rate indicates the impact of losing customers or reducing contract value on a business’s revenue.

Simple formula: Revenue churn rate = (Lost revenue / Initial revenue) x 100%

Adjusted formula: The simple formula applies only when there are no new customers or contract upgrades during that period. However, in reality, a business may engage in sales and marketing activities to increase revenue from current or new customers. Therefore, the adjusted formula subtracts the additional revenue generated from these activities.

Revenue churn rate = ((Lost revenue – Additional revenue) / Initial revenue) x 100%

Example: A company has an initial revenue of 100 million dong at the beginning of the month. During that month, the company loses 10 million dong in revenue due to contract cancellations but also gains 5 million dong in additional revenue from contract upgrades. So, the company’s revenue churn rate for the month is: Revenue churn rate = ((10 – 5) / 100) x 100% = 5%.

Customer churn rate

Customer churn rate is the percentage ratio between the number of lost customers and the initial number of customers within a specific period. Customer churn rate indicates the rate at which a business’s customer base decreases.

Simple formula: Customer churn rate = (Number of customers lost / Initial number of customers) x 100%

Adjusted formula: The simple formula applies only when there are no new customers during that period. However, in reality, a business may attract new customers through sales and marketing activities. Therefore, the adjusted formula subtracts the number of new customers from the number of customers lost.
Customer churn rate = ((Number of customers lost – Number of new customers) / Initial number of customers) x 100%

Example: A company has 1000 customers at the beginning of the month. During that month, the company loses 50 customers due to contract cancellations, but it also gains 20 new customers. So, the company’s customer churn rate for the month is: Customer churn rate = ((50 – 20) / 1000) x 100% = 3%

What does the churn rate indicate?

The churn rate reveals many aspects of a business’s operations, including: customer satisfaction and loyalty; product and service quality; customer retention rate and growth strategies; cost-effectiveness and profit…

A lower churn rate indicates higher customer satisfaction and loyalty with the business, higher-quality products and services, more effective customer retention and growth strategies, cost savings, and higher profits. Conversely, a higher churn rate indicates lower customer satisfaction, a propensity to leave, lower product and service quality, and lower profits…

How to reduce churn rate?

A high churn rate can negatively impact a business’s revenue, profit, and reputation. Therefore, reducing the churn rate is one of the crucial goals for businesses, especially in highly competitive markets.

To reduce the churn rate, businesses need to take the following steps:

Analyze the reasons for churn rate

Businesses need to understand why customers leave or stop using their products/services. Surveys, interviews, and data analysis can be conducted to gather information about customers. From there, key factors influencing customer decisions, such as product/service quality, pricing, customer service, marketing strategies, and competitive factors, can be identified.

Improve products/services

Businesses need to enhance the quality of their products/services to meet and surpass customer expectations. Methods like feedback collection, quality checks, feature updates, user experience optimization, etc., can be applied for continuous product/service improvement.

Enhance customer service

Businesses need to provide professional and dedicated customer service to create connections and trust with customers. Channels like phone, email, chatbot, social media, etc., can be used to receive and address customer requests, complaints, and feedback promptly and efficiently. Additionally, support programs and advice can be created to help customers use products/services effectively.

Develop effective marketing

Businesses need to design and implement marketing campaigns to attract and retain customers. Tools like email marketing, content marketing, social media marketing, influencer marketing, etc., can be utilized to enhance presence and interaction with customers.

Track and evaluate results

Businesses need to measure and analyze the results of activities aimed at reducing the churn rate. Metrics such as churn rate, customer loyalty rate, average value per customer, customer retention cost, etc., can be used to evaluate effectiveness and optimize strategies.

In summary, the churn rate is an important metric for the development and sustainability of businesses. Businesses can reduce the churn rate and enhance customer engagement.