How to calculate customer churn rate

In the formula above, we calculated churn rate by using a snapshot of the number of customers a company had at the beginning of a time period and the number of customers that left during that entire time period. But for companies that are scaling quickly, the number of customers at the start of the month might be drastically different from the amount at the end of it. A business might have a seemingly bad churn rate but a high influx of customers that offsets these departures.

Fortunately, there’s a way to tweak the usual customer churn formula to account for this high growth rate. To calculate your adjusted customer churn rate, you’ll need the following values:

• Number of customers at the start of the period (W)

• Number of customers at the end of the period (X)

• Number of churned customers during that time period (Y)

Then, use the following formula to determine your customer churn rate (Z) as a percentage.

Let’s take a look at what that means with a real-world example. Let’s say a dog treat subscription box was growing quickly but wanted to account for both lost and acquired customers within the month. At the start of March, the company had 15,000 customers. During the month, 5,000 new customers sign up to get their pups the latest tantalising treats, and 5 percent of the total customers (1,000) unsubscribe.

If we were using our original formula, the churn rate for March would seem to be higher—at 6.66 percent—since the new customers wouldn’t be accounted for. But when using our adjusted customer formula, which accounts for the new customers acquired, the churn rate drops to 5.71 percent.

To be useful, a customer churn rate formula needs to figure in all facets of a business as it changes—including the customers it’s successfully gained. The adjusted customer churn rate formula accounts for this growth while also providing an accurate picture of those who’ve dropped off.

Aside from quick growth, another factor that can easily skew customer churn rates is business seasonality.

“Churn” is never a positive word in business, but a higher churn rate in a seasonal business is par for the course. A small tutoring company, for instance, will likely have a much higher churn rate at the end of the school year than it does in October or February when students are still in class. Its growth rate will also likely be much higher in August and September than it will be in June.

Luckily, a seasonal business can still use a fairly straightforward formula to calculate churn. Since their growth and churn rates differ drastically throughout the year, these types of businesses will want to make sure they take these fluctuations into account when calculating churn.

To calculate a seasonal business’ customer churn rate, choose a period of time you’d like to measure and identify the following values:

• The total number of customers you had during the busy period (W)

• The churn rate during your busy period (X)

• The total number of customers you had during the slow period (Y)

• The churn rate during your slow period (Z)

Then, use the following formula to determine your revenue churn rate (A) as a percentage.

Let’s take our tutoring company as an example and say that, from August through May, it usually has around 100 customers and a churn rate of 5 percent. At the end of each school year, the vast majority of its customers—approximately 80 percent—will churn. Twenty percent might stay on throughout the summer months to support their summer school learning or work on subject areas that need improving, but there’s a small churn rate of 5 percent. In August, the number of students in tutoring will generally balloon back up to 100 or more and stay fairly steady.

If we were to calculate the tutoring company’s annual customer churn rate (from January to December) using the simplified churn rate formula, its churn rate would appear artificially high. The 80 percent churn rate in May would pull the yearly average churn rate from up to 11 percent. Using the seasonal churn rate formula above, however, we get a weighted average of 5 percent.

Because we’re grouping customers into two cohorts—those in the high season and those in the low—we get a more realistic view of the success of the business.

While a straightforward customer churn rate formula might work well for a company whose customers bring in an equal amount of revenue, not every business is structured that way.

A corporate networking SaaS platform might offer clients several tiers of service, such as free, premium, business-level, and enterprise-level subscriptions. The simple churn rate formula might indicate the business has a 10-percent customer churn rate. But considering that customers are bringing in dramatically different amounts of revenue each month, it’s not clear how much value that 10 percent actually represents.

That’s why most businesses will want to look at revenue churn rate in addition to their customer churn rate. To calculate revenue churn, choose a period of time you’d like to measure and identify the following values:

• Churned revenue (X)

• Total revenue (Y)

Then, use the following formula to determine your revenue churn rate (Z) as a percentage.

Let’s say our corporate networking SaaS platform wanted to calculate its monthly revenue churn rate, knowing it had a customer churn rate of 10 percent. If the company’s churn was mostly made up of enterprise customers, that 10-percent customer churn rate might be costing them $30,000 in monthly recurring revenue (MRR).

If the company’s total MRR was $120,000, its monthly revenue churn rate would be a whopping 25 percent. That’s a much bigger hit to their revenue than their 10-percent customer churn rate might lead you to expect—and a sign that the company might want to take a closer look at its enterprise offering.

For any business with variable pricing, calculating revenue churn is going to be just as important as understanding customer churn. The more granular a company is with churn analysis, the more effective it can be when working to reduce churn with its customers.