Churn Rate

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What is a churn rate?

The churn rate is the rate at which you lose customers or revenue within a time period, usually monthly or yearly. You can calculate churn rates based on your customer count or recurring revenue. Exclude new customers or new recurring revenue won during the period.

 

How to calculate churn rate based on customer count

Churn Rate Based on Customer Count = # of Customers Lost in the Period
# of Customers at the Start of the Period

Monthly churn rate by customer count example

You want to calculate your monthly churn rate in January. Your business entered January with 900 existing customers. You acquired 50 new customers in January. (Note: This does not count towards your monthly churn rate for January.)Exiting January, you lost 30 of the 900 existing customers. Your monthly churn rate for January is 3.33% (30 lost customers ÷ 900 existing customers).

Annual churn rate by customer count example

You want to calculate your yearly churn rate. Your business entered January with 500 customers. You acquired 250 brand new customers during the year. (Note: This does not count towards your yearly churn rate for the year.) * Exiting December, you lost 150 of the 500 existing customers. Your annual churn rate for the year is 30% (150 lost customers ÷ 500 existing customers).

* Businesses may count “win-backs”—former customers that return as customers within a period (i.e., 12-24 months)— as a renewed customer. In that case, it would be possible to have a negative churn rate.

How to calculate churn rate based on recurring revenue

The churn rate based on recurring revenue includes price changes, upsells, and downgrades.

Churn Rate Based on Recurring Revenue = Recurring Revenue Lost in the Period
Recurring Revenue at the Start of the Period.

Monthly churn rate by recurring revenue example

You want to calculate your monthly churn rate in January. Your business entered January with 900 customers. Let’s say they have an Average Revenue Per User/Unit (ARPU) of $30. That means you entered the month with a Monthly Recurring Revenue (MRR) of $27,000. Exiting January, you lost 30 of the 900 existing customers. Let’s say those were some of your higher-paying clients with an ARPU of $40. That means you lost $1,200 of MRR.  While your monthly churn rate by customer count for January is 3.33% (30 lost customers ÷ 900 existing customers), your MRR churn rate is 4.44%. MRR churn is higher than your churn by customer count because you lost your higher-paying customers ($1,200 ÷ $27,000).

Annual churn rate by recurring revenue example

You want to calculate your yearly churn rate. Your business entered January with 500 customers and an ARPU of $20,000. Therefore, your Annual Recurring Revenue (ARR) is $10,000,000. Exiting December, you lost 150 of the 500 existing customers. These lost clients pay less, with an average ARPU of $12,000. Therefore, you lost $1,800,000 in ARR. While your annual churn rate by customer count is 30% (150 lost customers ÷ 500 existing customers), your ARR churn rate is 18%. ARR churn is much lower than customer count churn because you lost your lower-paying customers ($1,800,000 ÷ $10,000,000).

More complex churn rate calculations

Above, we calculated the churn rate based on the lost revenue of customers who did not renew. But businesses are more complex than that and have many types of renewals.

Types of renewals in subscription-based businesses

  • Non-renewal (customers leave and contribute nothing)
  • Downgrade (customers buy a different product that contributes less revenue than their previous purchase)
  • Discounts or price cuts (customers use the same product but pay less)
  • Straight renewal (customers renew the same product at the same price)
  • Lower discount or price increase (customers renew the same product but pay more)
  • Upsell (customers buy a more expensive product tier that contributes more revenue than their previous purchase)
  • Win-backs (former customers who returned, generally restricted to a dormancy period)

Using these renewal types, we typically categorize churn in the following ways:

  • Churned recurring revenue
    • Non-renewals
  • Contracting recurring revenue
    • Downgrade
    • Discount or price cut
  • Renewed recurring revenue
    • Straight renewals
  • Expansion of recurring revenue
    • Lower discount or price increase
    • Upsell
    • Win-Backs

Monthly churn rate calculation example accounting for downgrades, discounts, upgrades, non-renewals, and win-backs

You want to calculate your monthly churn rate in January.

  • Your business entered January with 900 customers and an Average Revenue Per User/Unit (ARPU) of $30. That means you entered the month with a Monthly Recurring Revenue (MRR) of $27,000.
  • Exiting January, you lost 30 of the 900 existing customers. Let’s say those were higher-paying clients with an ARPU of $40. That means you lost $1,200 of MRR.
  • Your business also had contracting revenue:
    • 75 customers downgraded your product to a lower level, losing $10 ARPU
    • 20 customers were given discounts, losing $5 ARPU
  • The good news, though, is that there was also expansion revenue:
    • 100 customers upgraded your product to a higher level, gaining $10 ARPU
    • 10 customers phased out of discounts, gaining $5 ARPU
    • 10 customers were won back, gaining $30 ARPU
Customer Count ARPU MRR
Start of January 900 $30.00 $27,000
Customers Churned -30 $40.00 -$1,200
Contracting Revenue
Downgraded 75 -$10.00 -$750
Discounted 20 -$5.00 -$100
Expansion Revenue
Upgraded 100 $10.00 $1,000
Stopped discounting 10 $5.00 $50
Win-Backs 10 $30.00 $300
End of January 880 $29.89 $26,300
Customer Count Churn 2.22%
MRR Churn Rate 2.59%

While your monthly churn rate based on customer count for January is 2.22% (880 ÷ 900), your MRR churn rate is 2.59% ($1,350 ÷ $2,050).


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