The rate at which customers stop using an application or doing business with an entity is called the churn rate. It can also be analyzed by knowing the rate of attrition of customers over a given period.
Understanding the churn rate helps handle the business better. It gives an insight into how many customers are actually retaining. At the same time, it helps improve the shortcomings of the business to improve the retention rate.
Generally, the churn rate is calculated quarterly or annually; however, for better know-how of an application or business, it is recommended to be done quarterly.
The churn rate can be calculated in regard to the following:
- Total number of users lost
- Percentage of users lost over a period
- Value of recurring business lost
- Percentage of recurring value lost
Since acquiring new users is more expensive and exhaustive than retaining existing users, knowing the churn rate can help significantly.
Let’s dig a little deeper and get more insight into the churn rate and how it differs from the growth rate.
How Does Churn Rate Affect a Business?
If the churn rate is high, it affects the growth and profits of the business negatively. In the app sector, the churn rate holds an important place. Since a plethora of apps in every niche has taken over the industry, the level of competition has raised a new bar. Compelling users to check out the new app and dragging them to try new features has become a cakewalk.
At the same time, customers also look forward to better services, more features, and improved versions. In the search for perked-up services, users switch from one provider to another easily.
Apart from switching, the churn rate also includes users who terminate the services of an application without transferring to another one. This measurement holds more value in businesses based on subscribers, especially when most of the company’s revenues lie on subscription fees.
Therefore, the value of the churn rate being good or bad varies from industry to industry.
How Churn Rate Differs from the Growth Rate?
Often new businesses get confused about the churn and growth rate. The basic difference between them is churn rate calculates the lost customers while the growth rate determines the new customers. Thus, a company can compare its loss of customers and new customers to know if there was an overall escalation or loss in a specific period.
An application is performing well and doing good business if the growth rate is higher than the churn rate. However, when the numbers are reversed, it implies the business is experiencing a loss in its customer/user base.
For instance, if an application has managed to add 1000 new subscribers in one quarter but lost 1100 subscribers at the same time, the business is in a net loss of 100. It implies the business is at a loss for this quarter, and there is no growth.
Here, the application had a positive churn rate and a negative growth rate.
It is critically essential that companies pay attention to customer acquisition costs and know whether the customer left before they had made money back spent on getting that customer.
Keeping the churn rate lower than the growth rate is important to ensure high revenues and profits. Efforts should be made to retain the customers as long as possible and at the same time increase the new ones.
Pros and Cons of Churn Rate
Pros of Churn Rate
The foremost advantage of churn rate is that it helps clarify how well the application is able to retain its users. It depicts the standard and quality of the services, features, value, and usefulness of an application. It also helps determine whether the users value what the application serves them.
If the churn rate increases every quarter, businesses should take steps to improve their fundamental components. An increasing churn rate indicates that an application cannot provide services that users anticipate. A high or increasing churn rate could be due to glitches in the app features, poor services, or other shortcomings.
Knowing the churn rate makes it easy to speculate on the weaknesses of the application and work on ways to fix them. Since the cost of acquiring customers takes a toll, making efforts to retain them is equally essential. Therefore, knowing the churn rate is one of the best steps to improve an application’s services.
Cons of Churn Rate
The churn rate calculates the number of customers who have left an application over a period. However, one thing that it doesn’t take into account is the type of customers that are leaving. Often, the recently acquired customers show the highest leaving rate. It could be because of an incorrectly targeted audience.
Some other reasons why the users leave the app include the following:
- Stale content
- Confusing onboarding process
- Limited feedback options
- No loyalty program or reward system
- Poorly targeted audience
If the company has attracted an audience with lucrative rewards and offers, the users may cancel their subscription or uninstall the app once the offers end. Likewise, stale and ubiquitous content may cause people to abandon the app. Apart from these, there could be other reasons that lead users to leave an application or switch to another one.
The churn rate doesn’t provide any information about the users or why they left the application. Therefore, a critical examination by the companies to determine the low churn rate is essential.
How to Calculate Churn Rate?
The best way to calculate the churn rate is by dividing the total number of subscribers lost in a specific period by the total number of subscribers acquired and then multiplying for the percentage.
For instance, if there are 100 new subscribers in a quarter but the 5 subscribers uninstalled the app, the churn rate would be (5/100) X 100 = 5%