What is Churn Rate?
The churn rate, also known as the rate of attrition, is most commonly known 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.
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 it 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.
[Important: The churn rate measures the number of customer or employees transitioning away from a service or job over a specific period.]
Churn and Growth Rates
A company can compare its churn and growth rates to determine if there was overall growth or loss. 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.
- The churn and growth rates are diametrically opposed factors as one measures the loss of customers and the other measures the acquisition of customers.
- The churn rate is especially important in industries where revenues are heavily dependent on subscriptions.
Example of Churn Rates
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%.
Churn Rate in Employment
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.