By Spencer Altman,
Head of Customer Success
What is churn rate?
As a concept, churn is simple: How much of our business did we lose?
It can quickly get messy in the details, though.
Let us use one simple definition and then calculate churn based on % of customers and separately based on % of revenue.
Annual Contract Business Model – Annual Churn Rate
Annual Churn Rate (Revenue) =
Revenue churned in year X / Revenue in year X-1
Annual Churn Rate (Quantity of Customers) =
Quantity of customers churned in year X / Quantity of customers in year X-1
Thus, as an example, revenue that churned in 2017 / Tool Revenue in 2016.
This calculation would make sense for businesses with annual contracts.
To calculate the monthly churn for a business with annual contracts, you can simply take the annual churn rate and divide by 12.
Thus, from the above example:
There are more complex methods. The above is just a simple one.
Factors to consider
There are various factors to consider when determining the data to be used in the calculation. The answers to these questions can differ from business to business and, to be honest, can depend on how optimistic or pessimistic you want to be with your churn figures.
In the end, a metric is just what it measures – the reality is not changed, just how the reality may be perceived. The important part is that your churn metric is useful for your business in terms of driving actions towards reducing churn, and that the communication of the criteria is transparent.
At what point in time do you consider a customer to be churned?
Could be one of the following. The important part is to be consistent and confer with your accounting department to see if one definition makes more sense for your company than another:
- the date on which the cancellation is communicated to your company.
- the date when the contract ends.
Consider if you want to include just fixed costs or also variable costs.
For instance, should only the base value of the contract be used in the calculation or also add-ons that can maybe be removed?
Should services (such as consulting or support) be included or just software?
Here are some other potentially helpful churn rate resources:
Spencer Altman is Webtrekk's Head of Business Consulting. Since joining Webtrekk in 2009, he has been working with companies around the world to help them get the most out of their digital business. His journey in digital analytics began in 2006 as Business / KPI Analyst for weeworld.com, a social network based in the UK. Previously, he spent six years at Accenture in Business Process Consulting in Telecommunications. Spencer can be reached at firstname.lastname@example.org and followed on Twitter @spenceraltman.