How to Calculate Churn and Customer Retention

Stop Customer Churn
Knowing your churn and retention rates are critical for decision-makers. How does one calculate those rates? Gravy can help you retain customers.

Churn and retention.

Two words intertwined with the success and health of your business.

The former like nails on a chalkboard. The latter the sweet sound of angels harping.

In truth, neither churn nor retention is words that make your VP of Sales or your CEO jump for joy. After all, one serves as a drain on your business and its financial metrics, and the other comes off as a byproduct of your customer service team doing its job. One is brand loyalty, the other, is a result of poor customer service.

Except it’s not.

Both churn and retention are linked to one another inextricably. To reduce churn, one must maintain - or even increase - retention. The best customer is always the one you already have.

So how to push one out while pulling the other in the right direction?

The answer comes down to accurate measurement as well as understanding the implications of churning or retaining existing customers at a sustainable rate.

How to Calculate Retention Rate

It’s important to calculate retention rate by starting with the time period by which you’re measuring the retention rate. This is normally measured over a month, then rolled into quarterly and yearly measurements.

Regardless, consistency in how you track over time is critical to have integrity in your numbers.

The formula for calculating retention is simple:

Retention Rate = Number of Loyal Customers Users Continuing Their Subscription / Total User in Given Time Period

To put this in a practical case study, say you sell a SaaS subscription service and want to calculate your retention rate and customer spends over a 1 month period.

If you started July with 100 current customers and ended the month with 90, you’d have a 90% retention rate from your customer base:

Say you added 8 customers in August, but maintained the same average churn of 10 customers per month:

You maintain the same retention rate, but still, end up with fewer customers total than you did the month before.

Let’s do this exercise one more time, and suppose you add 6 new customers in September while churning 10 again:

Do you see how this churn rate is an unsustainable lifecycle?

When your churn is at an unacceptable level, your ability to grow is exponentially inhibited.

Even with adding 14 customers in a two-month span in this example, the retention rate dropped month over month and the company had 16 fewer paying customers than it did in July. A death spiral to your bottom line, basically towards meeting revenue goals for your business.

This makes customer acquisition a race to maintain as opposed to a race to grow.

Not being able to control the backdoor revenue for your business can be the single largest contributor to not getting the conversion rate you need and not reaching Annual Recurring Revenue (ARR) goals for the year.

No matter how effective your revenue team is at generating leads from social media and marketing automation, closing sales through content marketing, research shows that without a customer retention strategy in place to retain happy customers and maximize lifetime value, the retention rate will drag on your subscription business.

Here are some ways to maintain a decent customer retention rate:

Improving Customer Onboarding

According to customer retention statistics, the first interaction a new customer has with your company is critical to the success of the partnership. Most of your revenue is going to come from your existing clients, and you’ll spend significantly less time keeping them happy and engaged than you will try to warm up prospects to turn into clients. So making it right the first time via excellent onboarding can spell a big difference in keeping customers for your subscription business or online course. Email marketing, blogs, free ebooks, can help your onboarding experience to make new customers feel better with their purchasing decisions in getting your service.

In fact, 86% of your clients will pay more to keep you if you provide a stellar customer experience.

Customer success starts at the onboarding process, Don’t underestimate what a clear set of messaging, expectations, a shared goal, and a consistent human touch will engender warmth and empathy in your product or service during the onboarding phase.

Seriously, companies prioritizing customer experience and excellent customer service are exceeding their goals 3x more than companies that are not.

Performing Ongoing NPS Tracking

Net Promoter Score®, or NPS, is a critical measurement that lets your better anticipate churn-risk accounts. Any score that’s a 6 or lower deserves your attention as an account at risk of being lost.

Another NPS metric, eNPS®, or Employee Net Promoter Score, does the same for your employees, and that's a powerful tool as well. Having ongoing and strong eNPS can empower your Customer-facing team members to be proactive in fostering a strong customer relationship in real-time.

Regular In-person or Video Conferencing

Part of maintaining a high NPS and getting your client engaged with your product or service is regularly checking up on them and using monthly reporting updates and follow-up to stay top of mind.

Doing spontaneous check-ins as well, be that via email or Slack, is a great way to show your clients how top of mind they are to you and gives them comfort that you are working to help them achieve their goals and are readily available whenever a question or need arises.

Proactive Relationship Building for Customer Retention

Relationships extend beyond the 9 - 5, too. Getting to know your client outside of just a working relationship does wonder to build rapport. A personalized experience allows for you to be viewed less of a vendor and more as an extension of their team and an indispensable part of their go-to-market strategy.

No matter the method, that improves your NPS, increases product usage and customer loyalty, and reduces the likelihood of your client churning.

Anonymous Surveying of Customer Experience

Face it, not all of your clients are going to be 100% truthful to you in your correspondences. Some might now have an issue or a bad experience, but others are so congenial it’s just not in their nature.

That’s okay. You can still get their true feelings by asking repeat customers to complete an anonymous survey every now and then.

This isn’t a tool that you should use too often, but doing so once or twice a year can unearth some findings in your company’s customer experience and loyalty program that may have been blind spots that merit attention to shore up and less churn.

Controlling Involuntary Churn

This is a mind-blowing stat, but Customer Service Managers who are in charge of collections - i.e., delinquent payments or failed payments - are 10% less successful controlling client churn than Customer Service Manager NOT in charge of collections.

What gives with that?

The thought is that a Customer Service (or Success) Manager who has to ask the customer for money tends to erode trust in the company. The customer feels like the relationship is more transactional than relational which turns a positive experience into a less than ideal relationship..

It’s also simply more work than keeping a current paying customer engaged, happy, and actively using your product or service.

So how do you control churn then?

First - it might be a task that’s better off outsourced to a failed payment recovery service.

Or - you could look to shift that responsibility to another department such as Sales or Marketing - though neither of those departments seems equipped at first glance to best handle an involuntary churn customer.

Regardless, involuntary churn prevention is often an underserved topic among growing subscription-based companies, and warrants closer examination to determine the root cause and potential remedies to improve retention.

Analyzing Your Churn Rate and Monthly Recurring Revenue (MRR)

Churn isn’t just a customer number - it’s a Revenue number as well.

It’s even more important when measured in revenue compared to the subscriber or customer count.

TO get a better view of your customer retention statistics, you need to understand that there’s two different types of churn rate to be aware of - Net New Churn and Previous Month Churn.

Both present themselves differently and need to be interpreted differently, as well.

The previous month's churn is a flat measurement of your churn rate for that month in question.

You would measure that using the following formula:

(Last Month Churn / Total MRR) x 100

Say your Total MRR is $315,000 and your Last Month Churn is $5,000.

Here’s how your Previous Month Churn would calculate:

(5,000 / 315,000) x 100 = 1.58%

You churned 1.58% of your total monthly revenue.

But what about Net New Churn? How much revenue did you churn compared to the revenue you gained?

That would be formulated by calculating the following:

[ (Churn MRR - New MRR)  / Total MRR ] x 100

Let’s apply the same numbers, and assume a new MRR of $12,000 for the month:

[ ($5,000 - $12,000)  / $315,000 ] x 100 = -2.22%

You Net New Churn for the month is -2.22%, which is a good thing! Any negative churn as it relates to net new indicates a positive direction for your revenue.

Measuring Net New Churn in Cohort Analysis

You can use the net new churn as part of cohort analysis to measure client behavior such as loyalty statistics, customer engagement or customer satisfaction, over an extended period of time, to notice if there are any trends in regards to certain time periods where a client will typically churn on your product or service. This can help you create the perfect customer loyalty programs patterned after these trends.

Net New Churn Formula

To perform that analysis, simply use the Net New Churn formula and then reflect the duration of the cohort instead of the month in question:

[ (Churn MRR of cohort - New MRR of cohort)  / Total Cohort MRR ] x 100 = % of Net New Churn for Cohort

You would display this customer data using a classic triangular chart.

Why Track Net New Churn for Customer Retention?

Tracking Net New MRR Churn is a critical number to look at to assess growth. Think of it as monitoring the front AND back door of your revenue model.

You depend not only on acquiring new customers on a given month but retaining a high number of customers as well. Without a low churn rate (or ideally, a negative churn rate), your marketing and sales departments will be in a constant state of catch up to achieve business growth. Your marketing strategy might be overwhelming your marketing department and marketers because they are in a constant race to overcome last months deficit.

This is why investing in and prioritizing customer service and customer support and the steps outlined below as crucial towards maintaining a healthy business model poised to grow reliably and consistently.

Don’t use Net New Churn as a panacea, however. Those active client tracking metrics - things like NPS®, survey results, or constant check-ins from the Customer Service team to get a pulse for client satisfaction, are the front lines of maintaining a high retention rate and low Net New Churn.

Have an internal system in place to keep track of perceived client satisfaction from your Customer Service team on top of the self-reported metrics and feedback mechanisms already in place. Small SaaS businesses and e commerce subscription boxes are especially prone to increased numbers of lost customers and high monthly churn rates due to bad customer service and not managing customer complaints as well as customer expectations. A single bad customer service experience can fuel word-of-mouth that might affect even satisfied customers.

Having strong links between churn and retention metrics will keep your company in a steady and reliable position to grow as you add new people, new products, and services. The key is to maintain a consistent program and agreed-upon formula to measure your CRM, track, and then enact countermeasures to deal with warning signs or bad trends that lead to high churn rates.

Need help with your involuntary customer churn? The team at Gravy prioritizes our relational revenue model to get your failed payment customers back online and engaged with your company effectively and at scale.

We'll take a look at your revenue churn, types of churned customers, monthly recurring revenue, customer churn rate, and more to increase repeat purchases, your customer lifetime value, and therefore, your company's profitability.

The Gravy FIO and support team works with SaaS, ecommerce, subscription box, startups, online course providers, and other subscription businesses to keep customers and reduce their annual churn rate. We'll do churn rate calculations and an effective customer retention program to ensure that cancellations for your subscription service are reduced by the end of the month, maintaining existing customers, and even better customer experience. No dunning automation required!

Our advocacy is to recover $1 BILLION by 2023! To discover how much we can save your business and how quickly, hit the Chat on the bottom right to get started. Referrals are also welcome!

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