Churn rate is the proportion of a group’s members who leave that group within a certain period of time. Generally, churn refers to a specific cohort of people, such as customers, visitors, members, or employees. When the churn rate is high, it means that a large number of people have left that group. Low churn means that people are staying within the cohort.
How is Churn Rate Calculated?
To calculate the rate of churn, you need two figures:
C= number of cohort members at the start of a specified timeframe
L= number of cohort members at the end of the timeframe
The churn rate is given by the difference between C and L expressed as a percentage, or:
[C-L]--------- X 100 = Churn rate C
Here’s an example: imagine an app that has 10,000 daily active users (DAU) at the start of January and 8,000 DAU on the last day of January. The monthly churn rate for this app is:
[10,000 – 8,000]------------------- X 100 = 20%
This means that the app has churned 20% of its daily active users.
The rate of churn can be biased if there are lots of incoming new members of the cohort. In the example above, the app might lose 2,000 existing DAU but gaining 2,000 new DAU, which would give a churn rate of zero. But that figure doesn’t reflect the reality for the app owners, who are losing 20 percent of their DAU each month. In this instance, the analysts should exclude new users from their calculations to arrive at the true figure.
What Does Churn Rate Tell Us?
The rate of churn can tell us several things about current performance. For example, a business looking at customer churn might see the following
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Consistently high churn: This may indicate that the product or service is not “sticky.” There’s no incentive for customers to return, so the company may need to focus on retention techniques.
- Sudden spike in churn: This may indicate an issue with the offering, or a change in market conditions, such as competitor offering a lower price. The business would need to perform further analysis to discover what’s driving people away.
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Low churn: A high level of customer loyalty might represent an opportunity. The business could try raising prices or upselling other products, or even encourage the customers to become brand ambassadors.
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Steady churn over time: If the rate of customer churn is consistent over a period of years, it can reveal a lot about the customer lifetime value (CLV). For example, if the annual churn rate is 20%, it indicates that the customer base refreshes every five years, which means that the business can calculate CLV on the assumption of a five-year customer relationship.