Churn Rate

What Is Churn Rate?

The churn rate, also known as the rate of attrition or customer churn, is the rate at which customers stop doing business with an entity. It is most commonly expressed as the percentage of service subscribers who discontinue their subscriptions within a given time period. It is also the rate at which employees leave their jobs within a certain period. For a company to expand its clientele, its growth rate (measured by the number of new customers) must exceed its churn rate.

Key Takeaways

  • The churn rate measures a company's loss in subscribers for a given period of time.
  • Churn rates can be applied to subscription-based businesses as well to the number of employees that leave a firm.
  • The churn rate and growth rate are diametrically opposite factors, as the former measures the loss of customers and the other measures the acquisition of customers.
  • For a company to experience growth it must ensure that its new subscriptions are higher than its lost subscriptions in a given period.
  • Each industry will have a different average churn rate that companies can compare themselves with to understand their competitiveness.

Understanding Churn Rate

A high churn rate could adversely affect profits and impede growth. Churn rate is an important factor in the telecommunications industry. In most areas, many of these companies compete, making it easy for people to transfer from one provider to another.

The churn rate not only includes when customers switch carriers but also includes when customers terminate service without switching. This measurement is most valuable in subscriber-based businesses in which subscription fees comprise most of the revenues.

What is considered a good or bad churn rate can vary from industry to industry.

Churn Rate vs. Growth Rate

A company can compare its new subscribers versus its loss of subscribers to determine both its churn rate and growth rate to see if there was overall growth or loss in a specific time period. While the churn rate tracks lost customers, the growth rate tracks new customers.

If the growth rate is higher than the churn rate, the company experienced growth. When the churn rate is higher than the growth rate, the company experienced a loss in its customer base.

For example, if in one quarter a company added 100 new subscribers but lost 110 subscribers, the net loss would be 10. There was no growth for the company this quarter but rather a loss. This would be a negative growth rate and a positive churn rate.

It's important to pay attention to customer acquisition costs and to note whether a customer churns before you have made back the money spent on acquiring that customer.

It is critical for a company to ensure that its growth rate is higher than its churn rate otherwise it will experience declining revenues and profits with the eventual scenario of having to close the business.

Advantages and Disadvantages of Churn Rate

Advantages

The advantage of calculating a company's churn rate is that it provides clarity on how well the business is retaining customers, which is a reflection on the quality of the service the business is providing, as well as its usefulness.

If a company sees that its churn rate is increasing from period to period then it understands that a fundamental component of how it is running its business is flawed. The company may be providing a faulty product, it may have poor customer service, or its product may not be attractive to individuals who decided the cost is not worth the utility.

The churn rate will indicate to a company that it needs to understand why its clients are leaving and where to fix its business. The cost of acquiring new customers is much higher than it is to retain current customers, so as you ensure that the customers you worked hard to attract remain as paying customers, it makes sense to understand the quality of your business.

Disadvantages

One of the limitations of the churn rate is that it does not take into consideration the types of customers that are leaving. Customer decay is primarily seen in the most recently acquired customers.

Perhaps your company had a recent promotion that attracted new customers. Once this promotion was over or even if the benefit of the promotion never ended, customers that were trying out the product may determine it's not for them, canceling their subscription.

The impact of losing new customers versus long-term customers is critical. New customers are transient whereas old customers are entrenched and have enjoyed your product and there must be a more significant reason as to why they are leaving. A high churn rate in one period may be indicative of a high growth rate from the previous period rather than a judgment on the quality of the business.

The churn rate also does not provide a true industry comparison of the types of companies within an industry. Most new companies will have a high acquisition rate as new people try the business, but they will also have a higher churn rate as these new clients leave.

A company that is mature and has been around for decades will have a low churn rate as its clients are established but its acquisition rate will also be lower. Comparing the churn rates of both these companies will be like comparing apples and oranges.

Pros
  • Provides clarity on the quality of the business

  • Indicates whether customers are satisfied or dissatisfied with the product or service

  • Allows for comparison with competitors to gauge an acceptable level of churn

  • Easy to calculate

Cons
  • Does not provide clarity on the types of customers leaving: new versus old

  • Does not differentiate between types of companies in industry comparison: startups, growing, and mature

Examples of Churn Rate

Telecommunications Industry Churn Rates

The churn rate is a particularly useful measurement in the telecommunications industry. This includes cable or satellite television providers, Internet providers, and telephone service providers (landline and wireless service providers).

As most customers have multiple options from which to choose, the churn rate helps a company determine how it is measuring up to its competitors. If one out of every 20 subscribers to a high-speed Internet service terminated their subscriptions within a year, the annual churn rate for that Internet provider would be 5%.

Employment Churn Rate

Employee turnover within a business can also be measured with the churn rate, as it provides a method for analyzing the company's hiring and retention patterns. This can be especially helpful if overall employee longevity within a company is low.

When statistics are examined on a department by department basis, it can highlight which particular departments are experiencing more frequent turnover within the company, or at a higher rate than the business average. This can help determine if the pay is satisfactory, the quality of the managers in that division, as well as the workload that each employee bears.

Churn Rate FAQs

What does churning mean in business?

"Churning" in a business refers to the number of subscribers that leave a provider or the number of employees that leave a firm in a given period.

How do you calculate churn rate?

To calculate the churn rate, choose a specific time period and divide the total number of subscribers lost by the total number of subscribers acquired, and then multiply for the percentage.

For example, say in a quarter you acquired 100 new subscribers but you lost 12 subscribers, your churn rate would be (12 / 100) x 100 = 12%.

You can also calculate the churn rate by dividing the number of subscribers lost in a period by the total number of subscribers at the beginning of that period.

What is a good churn rate?

Ideally, a churn rate of zero would be the best churn rate, as that would indicate a business is not losing any subscribers; however, that is never the reality. A business will always lose subscribers for one reason or another.

In this case, it is important to compare the churn rate of the business to its industry's average churn rate, taking into consideration if the business is new or mature. Knowing an industry's churn rate versus that of the business is the only way to understand if a churn rate is acceptable or poor. Every industry has a different business model and, therefore, will have different acceptable churn rates.

What does a high churn rate mean?

A high churn rate indicates that a business is losing significant customers, certainly more than it is bringing in. This would mean that the business is doing something wrong, whether that be delivering a poor product, having poor customer service, or a host of other negative reasons that would explain why it is losing customers fast. A high churn rate would most likely mean a company is suffering significant losses.

What is Netflix's churn rate?

For the two-year period between July 2018 and July 2020, Netflix had a churn rate between 2% and 3%.

The Bottom Line

Churn rate is a calculation that shows the percentage of subscribers of a business that are leaving. It can also be used to show the percentage of employees that are leaving a firm. Understanding a company's churn rate is one metric in understanding its financial health and its long-term prospects.

Companies with high churn rates are losing a large number of subscribers, resulting in little growth, which significantly impacts revenues and profits. Companies with low churn rates are managing to retain customers.

Understanding the churn rate of your company will also shed light on how your business is operating, whether you are providing a quality product matched with good customer service or whether your business needs improvements to lower its churn rate.

Article Sources

Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts. We also reference original research from other reputable publishers where appropriate. You can learn more about the standards we follow in producing accurate, unbiased content in our editorial policy.
  1. The Motley Fool. "Netflix Is Killing the Competition in This One Key Category." Accessed March 1, 2021.