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churn

Also called: churn rate, customer churn

The share of paying customers who stop paying during a period, usually a month: customers lost ÷ customers at the start. It includes voluntary cancellations and failed payments that are never recovered.

Churn (customer churn rate) is the share of paying customers who stop paying during a period, usually a month. The formula: churn = customers lost during the month ÷ customers at the start of the month. Customers who join during the month are left out of the denominator, so a busy sales month doesn't make churn look better than it is.

Churn counts everyone who stops paying, not only those who press "cancel". A card that keeps failing and is never recovered is churn too (involuntary churn), and in small subscription businesses it can be a large part of the total. The reasons behind voluntary churn are worth collecting one by one: customers who never got the product set up, businesses that closed or were sold, a switch to a cheaper tool, or a price that no longer matches the value.

Monthly churn compounds. At 5% a month you lose about 46% of a year's starting customers within twelve months, so a business must win almost half its customer base again every year just to stand still. That is why lowering churn by a point or two often does more for growth than a new marketing channel.

Example

GarageDesk starts October with 58 paying shops. During the month 3 of them stop paying: one shop's card expired and nobody noticed, one never loaded its client list, so no reminder ever went out, and one moved to a cheap general CRM. The 9 shops that joined in October are not in the denominator.

Churn = 3 / 58 ≈ 5.2% a month. If that rate held for a year with no new shops, about (1 − 3/58)¹² ≈ 53% of today's customers would still be paying twelve months from now: almost half would be gone.

Common mistakes

  • Putting new customers in the denominator. Divide by customers at the start of the period only.
  • Ignoring failed payments. Involuntary churn is still churn, and often the easiest part to fix.
  • Comparing monthly and yearly churn. 5% a month is not 60% a year; it compounds to about 46%.
  • Averaging across very different plans. Yearly customers can only leave at renewal; mixing them with monthly ones hides where churn really comes from.