As a (small) business owner, it is crucial to understand your company's annual churn rate. This provides you with good insight into your business's health and helps you understand your product or service issues. However, many people are unaware of the best way to calculate an annual churn rate. This is why we've compiled this guide to calculating your business's annual churn rate.
Churn rate - explained
Your customer churn rate identifies how many clients are leaving your business within a specified period. On the other hand, revenue churn describes the percentage of revenue your business loses within a specified period. Of course, if your business model is based on a subscription, that means all clients pay the same amount every month, your customer and revenue churn will be the same. Of course, if not all subscribers pay the same amount, your customers' churn and percentage of monthly recurring Revenue lost will differ.
Companies should calculate their respective churn rates as it helps determine when your business is making a loss (eg, identify for how many customers the customer lifetime value outweighs their cost of acquisition). If your monthly churn rate amongst existing customers is high over a more extended period, this is likely to indicate issues with your service or product.
Calculating your business's annual churn rate
There is no single formula to calculate your churn rate. However, there is a simple method to calculate customer churn rate and revenue churn rate.
The formula for the annual churn rate for customer churn is as follows: Customer churn rate = Number of churned customers within a given period / total number of customers up for renewal during given period.
The formula for the annual revenue churn rate is as follows:
Revenue churn rate = Revenue canceled or lapsed within a given period / total Revenue up for renewal during given period.
Company X had 50,000 customers due to renew their software in 2021. During this period, 3,000 clients churned.
To calculate the customer churn rate, apply the formula above:
3,000 / 50,000 = 0.06 x 100 = 6%
The customers churning means a total revenue loss of GPB 25,000 out of their total Revenue of GPB 500,000. This is how you calculate their revenue churn rate:
25000 / 500000 = 0.05 x 100 = 5%
Other ways to identify your company's annual churn rate
While there are several other options to calculate a company's churn rate, however, it is advisable to keep churn calculations as simple as possible and use them as a starting point for a more thorough analysis. Keeping the calculation simple also means it is easier to compare.