Churn Rate: How to calculate and reduce it?

Learn how to calculate churn rate and know the effective strategies to reduce it to keep your clients satisfied and your business growing.
Churn Rate
Churn Rate
Churn Rate: How to calculate and reduce it?
Learn how to calculate churn rate and know the effective strategies to reduce it to keep your clients satisfied and your business growing.
Table of Contents

Table of Contents

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Customer Retention is vital for the survival of any business. It is mandatory for the subscription-based business models like SaaS, Telecom and E-Commerce.

When a new client is gained, it seems like a win. But the real battle here is, holding on to the already existing ones.

Here comes an important indicator that reveals how successfully you are retaining client loyalty known as Churn Rate.

A high churn rate is a silent growth killer that all businesses, especially SaaS companies should be very aware of.

This could be due to poor service, tempting offers from the competitors, unfulfilled expectations and more.

So, in this blog, let us explore the ins and outs of churn rate and actionable strategies to reduce it. Let’s get started….!

What is Churn Rate?

Churn Rate is a valuable metric which is used to track customer retention. It gives a clear understanding of how well you are engaging your clientele.

At its core, it is referred to as the percentage of clients who discontinue doing business with your company within a given time frame.

The potential customers will be canceling their subscriptions, no renewing contracts or quitting the service entirely will result in high churn rate.

How to calculate Churn Rate?

The step by step process of calculating the churn rate is as follows,

Step 1 – Select a Time Frame:

Choose whether to calculate churn on a monthly, quarterly or yearly basis.

Step 2 – Determine the Number of lost clients:

During that selected time frame, keep track of the clients who stopped or canceled their subscriptions.

Step 3 – Figure out the total number of clients at the beginning:

This represents the total number of active clients at the start of the selected time duration.

Step 4 – Calculate the Churn Rate using the following formula:

Churn Rate Formula:

The basic formula for calculating churn rate is,

Churn Rate Formula

Consider for example,

  • You are starting the month with 500 clients and 
  • By the end of the month you are losing 50 clients. 
  • Then your Monthly Churn Rate will be,
Churn Rate Formula Example

What is a Good Churn Rate?

A good churn rate varies depending on the business model and industry. This is due to the nature of the services, market conditions and customer base.

The average churn rate of different industries are as follows:

1.SaaS Churn Rate

B2B SaaS – The annual churn rate of B2B SaaS ranges from 5% to 7%. Because of the longer contracts and higher switching costs, B2B SaaS churn tends to be lower. However, balancing the churn rate directly aligns with your B2B SaaS Marketing efforts.

For Example, companies like HubSpot or Salesforce cater to large businesses with delicate requirements. So they strive for lower churn rates.

B2C SaaS – The annual churn rate ranges from 10% to 15% and

The monthly churn rate ranges from 3% to 7%.

For Example, services like Spotify and Netflix deal with individual customers who will cancel easily. So they face higher churn.

2.ECommerce Churn Rate

The monthly churn rate of subscription-based E-commerce ranges from 6% to 10%.

For Example, Blue Apron is a meal kit delivery service which struggles with churn. This is due to the fact that the customers cancel when they no longer see the value or after the freshness wears off.

3.Media and Entertainment Churn Rate

The monthly churn rate of media and entertainment ranges from 5% to 10%.

For Example, Moderate Churn is faced by streaming services like Netflix or Hulu. This is because the customers discontinue during off-seasons or following episodes that they have watched endlessly.

4.Churn Rate for Mobile Apps

The monthly churn rate in the first month of mobile apps is 20% to 50%.

For Example, Candy Crush and Snapchat are free-to-use apps with in-app purchases. Their churn rates are high, especially in the first month. Because the users will decide whether to continue using the app during this time frame.

5.Churn Rate for Telecommunications

The monthly churn rate of telecommunications ranges from 1% to 3%.

For Example, Companies like AT&T or Verizon face lower churn. Because the long-term contracts and bundled plans encourage customers to stay with specific internet or mobile service providers.

Leading Causes of High Churn Rate:

To develop the strategies to reduce the churn rate, first we need to comprehend why customers churn.

The following are the most common reasons the potential clients leave:

1.Insufficient Product Value

  • The potential users should perceive the value of your product. Otherwise they will be more prone to discontinue.
  • Miscommunication and low expectations could be the reason for this high churn rate. 

2.Poor Customer Support

  • Customers who experience poor customer service and slow response times will be feeling ignored.
  • This will force them to look for other options.

3.Product-User Fit Issues

  • The product should be well aligned with the needs of the customer.
  • Once they realize the product is not a good fit for them, they will probably churn.

4.Offerings of the Competitors

  • The users will decide to switch if competitors offer a better offer, more features or superior customer service.

5.Ineffective Onboarding Process

  • Unclear instructions will frustrate the users. If a new user signs up, they should quickly understand how to use the product.
  •  If not they will leave early.

6.Excessive Costs or Invoice Problems

  • Hidden fees, recurring billing issues or confusing and high pricing schemes will drive the customers away.

7.Low Usage or Engagement

  • The buyers should regularly use your product. If they are not utilizing it, they might disregard it or decide it’s not necessary.
  • This in turn raise the churn rate.

8.Insufficient Product Updates

  • The product that is unchanging is another main cause of high churn. 
  • The product should be frequently updated, improved and new features should be added.
  • If not, the prospective clients will look elsewhere for more creative solutions.

9.Misaligned Expectations

  • The prospective clients have different expectations based on your sales and marketing pitches.
  • But the reality doesn’t match up. Thus the likelihood of churn increases.

10.Unresolved Technical Issues

  • The users will be frustrated with persistent bugs, performance issues or outages. This will push them towards the competitors.

How to reduce Churn Rate?

Reducing churn rate will maintain a healthy and growing business. Here are some actionable strategies to reduce churn rate with practical examples:

Strategies to reduce Churn Rate

1.Enhance the Onboarding of Customers

The onboarding phase of customers is crucial because it establishes the foundation for how customers perceive and use the product.

So a smooth and informative onboarding process should be provided to the users. This helps them to understand the value of the product early. They will start reaping its benefits without frustration.

How to Implement:

  • Provide step-by-step instructions based on the specific requirements of each guide.
  • Offer users interactive instructions within the product itself to help them learn as they go.
  • After the user signs up, send them a series of emails with useful links, guides, and best practices.

Example:

  • HubSpot offers new users customized onboarding sessions depending on their subscription tier.
  • Additionally, they provide a vast resource library, video tutorials, and in-app guides to aid users in learning how to use their sales, marketing and CRM tools quickly.
  • Thus, HubSpot lowers the chance of early-stage churn by making sure users understand how to take full advantage of the platform.

2.Improve Client Assistance

Superior customer service can mean the difference between a satisfied and departing customer. 

After a negative experience, a customer’s loyalty may depend on how well you handle their needs. 

Clients who run into problems and don’t get help right away are more likely to leave.

How to implement:

  • Provide 24/7 live chat or customer support via multiple channels like phone, email and live chat.
  • Before they churn, get in touch with clients who are exhibiting warning indications like low usage or reported problems.
  • Offer readily available resources like help centers and knowledge bases for self-service assistance.

Example:

  • Zappos is well-known for providing excellent customer service. 
  • It provides 24/7 support with real humans who are empowered to go above and beyond for clients.
  • Zappos makes sure that its customers are satisfied with quick refunds and assistance with odd requests.
  • Thus it significantly reduces the likelihood of churn.

3.Provide Flexible Pricing Structures

A lot of customers churn because they think the product is too pricey. Sometimes the businesses also fail to provide enough flexibility in pricing.

When multiple pricing options are provided, the Customers will select a price tier that best suits their needs and budget.

How to Implement:

  • Provide different levels of features at multiple pricing tiers.
  • Let customers pay based on how much they use the product. This is particularly useful for SaaS.
  • To keep customers coming back, offer temporary discounts during off-peak seasons.

Example:

  • Adobe moved from selling expensive one-time software licenses to a subscription-based business model through Adobe Creative Cloud.
  • Now the users will select between monthly and annual subscriptions.
  • This makes the software more affordable and accessible which reduces the user churn.

4.Re-engage Inactive Users

Sometimes the customer churn is not because the client dislikes the product. It is due to the client having the product stopped engaging.

In such a scenario, send timely reminders and promotions to re-engage the users. So this will prevent the churn before it happens.

How to Implement:

  • Send tips via email to inactive users to get them back engaged with the product.
  • Provide discounts or rewards to users who come back after a period of inactivity.
  • Make use of analytics to determine the times when users begin to drop off and engage them before they leave.

Example:

  • Dropbox sends re-engagement emails to users who haven’t accessed their account in a long time.
  • These emails emphasize the benefits of using the product. It also offers incentives like additional storage or features to make the users return.

5.Establish a Community or Forum

When you build a vibrant community around your product, it will increase the user engagement and loyalty.

The client will feel like they are part of a bigger community. So they will stay with your product and are less likely to churn.

How to Implement:

  • Create an online community. Make the users discuss the product, share tips and support one another.
  • To foster a feeling of community, highlight client endorsements and success stories.

Example

  • Peloton is a fitness platform which successfully created a social community around it.
  • In the community, the users join live classes, follow instructors and compete in challenges.
  • This makes the user experience more engaging and decreases the likelihood of churn.
  • So, here the customer retention over the long run is fueled by a sense of belonging accomplishment.

6.Consistently Provide Product Updates

When a product is continuously enhanced and new features are added, it will keep the users interested and satisfied.

Also when a user perceives that a business is enhancing its product actively, they are less-likely to leave.

How to Implement:

  • Introduce new features regularly. It should address the user pain and enhance the overall product experience.
  • Use email, in-app notifications or blog posts to notify users about the new features, bug fixes or performance enhancements.
  • Ask users for their opinions on upcoming updates by involving them in the development of the product.

Example:

  • Slack updates its platform regularly with new features like workflow automations and integrations with other software. 
  • In response to user needs, it improves and expands the tool regularly.
  • Thus slack keeps the customers engaged. It reduces the customer churn brought on by inactivity or lack of value. 

7.Analyze Churn rate and Respond to Feedback

Businesses need to address the reasons behind the customers’ churn. So that they can take proactive measures to prevent future churn.

Data analysis, feedback loops and exit surveys help to identify issues that need to be fixed.

How to Implement:

  • Ask customers their reasons for cancellations. Provide them with options like unmet expectations, service issues, pricing and more to identify why they are leaving.
  • Utilize customer data to identify patterns like when and why the customers leave.
  • In response to recurring feedback from the customer, put changes into action.

Example:

  • Netflix continuously compiles information on the reasons behind membership cancellations.
  • After that, they take care of these problems by enhancing the recommendation algorithm, including more pertinent content and device-specific app optimization. 
  • By tackling the underlying reasons for dissatisfaction, this customer-centric strategy aids in their reduction of churn.

8.Introduce Reward or Loyalty Schemes

If a company rewards its customers for their loyalty, they are more likely to stick around.

By putting an extra layer of commitment in place, a strong rewards program discourages churn and promotes repeat engagement.

How to Implement:

  • Give users rewards or points for every purchase or action they make on the platform.
  • Provide different levels of rewards depending on how long a customer has been with you or how often they engage.
  • Offer special access to discounts, promotions and features to your most devoted customers.

Example:

  • Starbucks offers a highly successful rewards program. Here the customers will earn points called stars for their every purchase.
  • They can redeem these stars for free drinks or food. The more often they make purchases, they will receive more rewards.
  • This promotes continued engagement and lowers churn.

9.Offer Incentives for Engagement

Having customers actively use your product means they will consistently recognize its worth.

This lessens the churn caused by perceived lack of relevance or inactivity.

How to Implement:

  • Introduce achievements or prizes for utilizing the product to make it more competitive.
  • To get inactive users back on the radar, send them customized emails and notifications.
  • Provide customers who haven’t used the service in a while with discounts or special offers.

Example:

  • Users of Spotify receive customized playlists, such as “Discover Weekly,” according to their musical tastes. 
  • Spotify lowers the chance of user churn by consistently delivering relevant content. 
  • They remind inactive users about new content to get them back on the site.

10.Use Personalized Communication

The personalized interactions with the clients demonstrates to them that you understand their needs. 

Customized messages and suggestions have the power to drastically increase client satisfaction and lower churn rate.

How to Implement:

  • Based on the user behavior and demographics, customize the marketing and re-engagement emails.
  • Based on the past activity and preferences of the user, customize the user experience.
  • Give personalized offers or discounts to every user according to their usage habits.

Example:

  • Amazon personalizes the whole shopping experience by making product recommendations. This is based on the user’s past purchases, preferences and browsing history.
  • These specific suggestions keep the customers engaged and encourage repeat purchases. 
  • They implemented this in an effort to minimize churn brought on by uninteresting or  irrelevant product suggestions

Conclusion

To sum up, effective churn rate management is indispensable for any businesses to succeed in the long run.

A Low Churn Rate signals strong product-market fit and happy customers whereas

High Churn Rate signals the areas in need of improvement.

Deliver value and consistently enhance the user experience. So the churn rate gets reduced and revenue gets increased. You can build long-lasting relationships with the customer.

In an increasingly competitive market place, reducing churn rate also drives the growth and stability of any businesses along with retaining customers.

Founder of 7 Eagles, Growth Marketer & SEO Expert

Ashkar Gomez is the Founder of 7 Eagles (a Growth Marketing & SEO Company). Ashkar started his career as a Sales Rep in 2013 and later shifted his career to SEO in 2014. He is one of the leading SEO experts in the industry with 8+ years of experience. He has worked on 200+ projects across 20+ industries in the United States, Canada, the United Kingdom, UAE, Australia, South Africa, and India. Besides SEO and Digital Marketing, he is passionate about Data Analytics, Personal Financial Planning, and Content Writing.
Discover How 7 Eagles Help Your Business

Founder of 7Eagles, Growth Marketer & SEO Expert

Ashkar Gomez is the Founder of 7 Eagles (a Growth Marketing & SEO Company). Ashkar started his career as a Sales Rep in 2013 and later shifted his career to SEO in 2014. He is one of the leading SEO experts in the industry with 8+ years of experience. He has worked on 200+ projects across 20+ industries in the United States, Canada, the United Kingdom, UAE, Australia, South Africa, and India. Besides SEO and Digital Marketing, he is passionate about Data Analytics, Personal Financial Planning, and Content Writing.
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