What Is Churn Rate? Meaning, Formula and Worked Example

The word churn comes from the image of agitation in a butter churn. In business, it means people stirring their way out the door: customers who were with you at the start of a period and have gone by the end.

If you run anything with subscribers or members, churn rate is one of the first numbers worth understanding. I've put together a plain-English guide from Wikipedia's entry on the subject and an explainer from the payments company GoCardless, with a worked example you can follow with a calculator.

Churn rate definition

Churn rate, also called attrition rate or customer turnover, is the share of individuals, customers or items that leave a defined group over a set period. It's widely used to judge customer retention and recurring income, especially for subscription and contract-based services.

It shows up in telecoms, subscription media, software-as-a-service and utilities. A low churn rate means most people stay, and a high one means a business must keep finding new customers just to stand still.

The churn rate formula

The basic calculation is the number of customers lost during the period, divided by the total number of customers, multiplied by 100. GoCardless describes the same idea as picking a period, such as a month, and dividing the customers lost by the number you had at its start.

Here's a worked example from the Wikipedia entry. A company with 500 customers at the start of a month loses 50 during it. Divide 50 by 500 and multiply by 100, and the churn rate is 10%.

1. Choose a period, for example one month.
2. Count your customers at the start of that period.
3. Count how many of those customers left during it.
4. Divide the number lost by the number at the start.
5. Multiply by 100 to get a percentage.

Keep the period the same every time you measure, otherwise the numbers can't be compared.

Customer churn rate versus revenue churn rate

GoCardless separates two versions. Customer churn is the share of customers who cancel in a given period. Revenue churn is the share of revenue lost from existing customers in that period.

They can tell different stories. Losing ten small customers and losing one very large one might give the same customer churn but very different revenue churn, so it helps to track both if your customers differ in size.

Voluntary and involuntary churn rate

GoCardless also splits churn by cause. Voluntary churn is when the customer chooses to cancel, often because of dissatisfaction or weak perceived value. Involuntary churn is when access is lost by accident, usually from payment problems such as expired cards, lost or stolen cards, network errors or exceeded credit limits.

The GoCardless guide says failed payments are the number one cause of involuntary churn, which matters because the two types need different fixes: one is about the product and the relationship, the other is about the mechanics of taking a payment.

What churn rate says about customer lifetime

Wikipedia notes that churn implies an average customer lifetime. An annual churn rate of 25% implies about four years, and 33% implies about three. Put another way, customer lifetime is the inverse of the expected churn rate. This is why churn is a key input when businesses estimate customer lifetime value.

Why one overall churn rate can mislead

For a fast-growing customer base, Wikipedia warns that an aggregate churn rate can understate the true rate, because many customers are new and haven't had time to leave. Cohort analysis fixes this by following a group of customers who joined at the same time, for example everyone who signed up in one particular month, and watching how many remain.

Two other quirks are worth knowing. Rotational churn is when a customer leaves and rejoins straight away, often to get new-customer offers. And in some fields, such as healthcare, weight loss and online dating, churn can signal success rather than dissatisfaction, because people leave once they've reached their goal.

Ways to bring a churn rate down

Wikipedia says churn can be reduced through contractual barriers, loyalty programmes or retention activities. GoCardless lists these ideas for voluntary churn:

• Deliver value quickly, so customers see the benefits early.
• Keep the value of the service visible during regular use.
• Encourage more use, for example through onboarding videos.
• Make the service accessible across devices.
• Provide templates, guides and shortcuts.

For involuntary churn it suggests dunning processes, smart payment retries and automatic account updaters to recover failed payments, and using bank-to-bank payment methods to reduce reliance on cards.

Churn rate in a product-led business

Businesses that let people start on a free tier or trial tend to watch churn closely, because the customer decides alone whether to stay. I've covered that model in product-led growth.

Sharing what you know about churn

If you've worked on retention for a subscription business and have lessons to pass on, there are blogs open to hearing from practitioners.

If you work in subscription software, here are SaaS blogs open to articles from practitioners.

Frequently asked questions

Is a high churn rate always bad?

Usually it signals customers are leaving faster than a business would like. Wikipedia notes an exception: in fields such as healthcare, weight loss and online dating, people leaving can mean they've reached their goal.

What time period should I use to measure churn?

GoCardless gives a month as an example, but the key is picking a period and using it consistently so results can be compared.

What's the difference between customer churn and revenue churn?

Customer churn is the share of customers who cancel in a period. Revenue churn is the share of revenue lost from existing customers in that period.

What causes involuntary churn?

GoCardless says it's usually payment problems, such as expired or lost cards, network errors or exceeded credit limits, and that failed payments are the number one cause.

How does churn relate to customer lifetime?

Customer lifetime is the inverse of the expected churn rate. Wikipedia gives an annual churn rate of 25% as implying about four years.