Monitoring customer metrics and understanding their impact on cash flow is essential while making important business decisions such as operational, financial, technological, and related to product development.
Furthermore, uncovering the number of customers cancelling their subscriptions is an important way to track which products or services are most successful and will help in identifying key areas that may need adjustment.
Let us understand what is churn rate, its importance in the subscription business, and how it is measured.
What is the churn rate in the subscription business?
The churn rate, also known as the attrition rate, is the rate at which customers cancel or stop renewing a service or subscription within a given time frame. Churn rates can be indicative of success or failure depending on their value; generally lower percentages indicate higher retention levels while higher percentages signify lower retention levels. Retaining loyal customers is thus paramount for any successful organization in order to thrive and grow over time.
How to calculate churn rate?
To calculate the churn rate of your subscription business, you need to analyze the number of customers you acquire versus those that have moved on over a set period. To calculate your customer churn rate, you can use monthly, quarterly, or yearly data.
The formula for determining this metric is straightforward:
(Churned customers divided by the total number of customers) multiplied by 100%.
For instance, if 1,000 customers were present at the start of December with 10 leaving before its end – then this translates to an overall churn rate of 1%.
Hence, the churn rate formula is:
CUSTOMER CHURN RATE = [(CUSTOMERS AT THE BEGINNING OF THE MONTH – CUSTOMERS AT THE END OF THAT MONTH)/ CUSTOMERS AT THE BEGINNING OF THAT MONTH] *100
When using the formula in the above case,
[(1000-10)/1000] *100 = 1%
|CUSTOMERS AT THE BEGINNING OF THE MONTH||1,000|
|CUSTOMERS AT THE END OF THAT MONTH||990|
As you can see, the company has a 1% churn rate and 990 subscribers by the end of December.
What is a good churn rate for a subscription business?
Establishing an appropriate churn rate for a subscription business is imperative in determining the success of their enterprise. Though it can vary based on various factors, such as client size and product maturity, most small-to-mid-sized firms typically strive towards 3-7% every month, while larger businesses require rates closer to 1%.
Startups may anticipate higher numbers until they reach greater levels of market stability.
With this, it is important that all types of businesses calculate their current churn rates accurately if they wish to remain competitive in today’s economy.
How to get a good churn rate?
With the right strategies in place, companies can minimize customer churn to maintain their competitive edge. It’s important to take proactive measures in order to ensure that customers are retained and continue enjoying your products and services.
1. Understand the reason for a higher customer churn rate.
Understanding what drives customer attrition is essential in creating strategies that strengthen your relationship with them. By genuinely engaging with the customers who have transitioned away from you, you can uncover invaluable insights into why they chose to do so.
2. Equip your customers with the knowledge and resources necessary for success.
Customers who feel they don’t understand your product run the risk of abandoning it altogether. Consider providing digital resource centers, blog updates, and automated educational email onboarding. This will ensure that customers have all the information needed to make informed decisions and get the most out of using your products in the long run.
3. Recognize the signs that a customer is preparing to leave.
If a customer has gone a month without logging in and is disinterested in engaging in meetings, it may be an indication that he/she is intending to leave your service altogether. Acting promptly is key to re-engaging customers. Intervene with resources and support before it’s too late.
According to research, retaining existing customers is significantly more cost-efficient (6-7 times) than gaining new ones. Furthermore, satisfied customers are not only reliable repeat customers – but they also bring in abundant potential business via referrals and social media promotions.
How to automatically track customer churn rate?
Now that you’ve understood how to calculate churn rate, it’s time you enhance that knowledge with a skill invaluable for subscription businesses – tracking churn. Tracking it manually can be a time-consuming endeavour. However, there are ways to make this exercise automatic and more efficient using an automation platform like RackNap.
RackNap’s business intelligence and analytics dashboard offers a comprehensive analysis of customer subscriptions. Real-time reports such as customer order visibility, invoices, and smart forecasting allow you to gain insights into your churn rates for each plan—and reduce them.
Utilize this powerful tool to achieve top performance – Book a free demo now!