Churn
If you sell on a subscription model, most likely you don’t look at retention as a key metric but instead look at churn. Churn can be calculated on a monthly, quarterly, or annual basis.
- where D = days between initial and current customer count
- and NCA = new customers acquired during the period
- and C1 = initial customer count
- and C2= current customer count
As an example, a carrier exits December with 5,000 subscribers. In January 100 of these subscribers leave and 600 new customers are added. As a result, the carrier exits January with 5,500 subscribers.
The churn rate for January is 2.0% or 100/5000. This amounts to an annualized churn rate of 24.3%. (While churn is a negative for your business, typically the churn rate is NOT expressed as with a negative sign in front of it.)
Alternatively, you can look at churn relative to when the customer must resubscribe to your service. This is called the renewal rate.
Best practices
Churn is a negative. The less churn you have the better your organization is at holding onto its customers. All things being equal, a reduction in churn will drive incremental customer value and profitability.
When your churn rate is dropping it’s cause to celebrate, right? For example, recently WebEX reported that churn had dropped from 4.0% in Q3 2003 to 2.8% in Q4 2004. Before you break out the champagne, take an in-depth look at the numbers. In a growing business, churn rates tend to move in only one direction: down. Even so, churn can be useful as a diagnostic, particularly when it comes to looking at trends over time as well as how churn varies by segment:
- Trends over time If your churn rate suddenly increases this may signal a drop in product quality, a problem with your pricing, and/or a new competitor with an offering that is a better fit for the customer’s needs than your offerings.
- By Segment Certain segments may be associated with a higher rate of churn than others. Understanding this can allow you to decide how much to invest in loyalty marketing for different types of customers. For example, the average consumer changes wireless carriers every 18 months* versus 36 months for business-to-business customers.
- Competitive Offers Many companies address churn directly with offers that match the competition. Examples in high technology include competitive upgrades, which are often designed to get customers using Intuit’s QuickBooks – for example – to upgrade to Microsoft Money. These types of offers can be an effective way to keep customers in their seats. That said, it is important to understand the value of the customers you keep. Bottom feeders – that is customers who routinely switch from one company to the next to get the best deal possible – may not be worth keeping.
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