What is Customer Churn Rate?
Customer churn rate is a metric that measures the number of customers that have discontinued using your product/service (aka stopped paying) out of the total customers you have acquired over a certain period of time (monthly/quarterly/annually).
The customer churn rate formula should look like this: (Lost Customers/Total Customers Acquired -over a period of time-) x 100
Maintaining a low customer churn rate is key for any business to achieve any substantial growth, more so, in businesses where the Customer Acquisition Cost (CAC) is high and the customer lifetime value (CLTV) should be high enough in order to break even and make a profit.
Why measuring Customer Churn Rate is essential?
For a business to be able to grow - maintaining a low churn rate is key to reducing that timeframe, on the flip side, if the churn rate is high/increasing the likelihood is that the business is losing money or barely breaking even, but definitely not growing.
Thus, measuring customer churn rate is essential to any B2B SaaS company as it will enable the main stakeholders to identify the key reasons customers are churning and develop action plans and strategies to combat churn, increase retention, and increase the customer lifetime value (CLTV) to reach profitability faster.
What are the risks of not measuring Customer Churn Rate?
If the customer lifetime value (CLTV) and churn rate are inversely correlated, and in order to be profitable the CLTV needs to be greater than the customer acquisition cost (CAC), not measuring the customer churn rate can severely hurt the company’s ability to create any kind of sustainable business plan, let alone, breaking even.
In addition to that, a company that doesn’t measure its churn rate over time won’t be able to know the reasons that are causing customers to churn so it becomes impossible to optimize the customer journey since we are not able to know if it’s due to a bad fit, the onboarding, price or any other reason
So if you want to avoid the risks of wrongly projecting/calculating numbers and allocating resources toward fixing the wrong cause, you MUST measure the customer churn rate.
How should you measure Customer Churn Rate?
So now that we’ve established that measuring customer churn rate is a must, let’s understand how to calculate customer churn rate properly and what other factors should be taken into consideration.
Earlier on, we said that the customer churn calculation = (Lost Customers/Total Customers Acquired -over a period of time-) x 100
Nonetheless, not every customer is created equal - which means that the revenue will not be the same across all customers, so if you would take the formula mentioned above you would be able to calculate the customer churn rate based on the number of clients, but if you calculate using revenue metrics, the number could be completely different.
Let’s do an example; during this month company X acquired a total of 100 customers that represent $100k in MRR, and let’s say that after the month over 3 customers left, so in the regular calculation our churn rate will be 3%.
Now let’s set a revenue value for those customers and say they represented $30k in MRR, if we do the calculation using the revenue metrics instead of the total number of customers we can see that our customer churn rate is 30%, 10X higher than the previous one.=
This is why when it comes to measuring churn rate, it is crucial to measure both the number of customers and revenue that churned over that period of time, this will allow CS leaders/executives to properly optimize the customer journey in order to increase the overall customer lifetime value (CLTV).