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.
April Bewell

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.

Except it’s not.

Both churn and retention are linked to one another inextricably. To reduce churn, one must maintain - or even increase - retention.

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 customers at a sustainable rate.

How to Calculate Retention Rate

It’s important to start 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 is how you track over time is critical to have integrity in your numbers.

The formula for calculating retention is simple:

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

To put this in a practical application, say you sell a SaaS subscription service and want to measure your retention rate over a 1 month period.

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

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 customers in September while churning 10 again:

Do you see how this is an unsustainable path?

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 less paying customers than it did in July. A death spiral, 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 reaching ARR goals for the year.

No matter how effective your revenue team is at generating leads and closing sales, without a customer retention strategy in place to retain them and maximize lifetime value, the retention rate will drag on your business.

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

  • Improved Customer Onboarding
  • Ongoing NPS Tracking
  • Regular In-person or Video Conferencing
  • Proactive Relationship Building
  • Anonymous Surveying
  • Controlling Involuntary Churn

Improving Customer Onboarding

The first interaction a new customer has with your company is critical in 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.

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

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

Seriously, companies prioritizing customer experience are exceeding their goals 3x more than companies who 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.

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 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

Relationships extend beyond the 9 - 5, too. Getting to know your client outside of just a working relationship does wonder to build rapport. This 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 reduces the likelihood of your client churning.

Anonymous Surveying

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

That’s okay. You can still get their true feelings by asking them 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 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.

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

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 a cohort analysis to measure client behavior 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.

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 data using a classic triangular chart.

Why Track Net New Churn?

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 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.

This is why investing in and prioritizing customer service 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 are especially prone to increased numbers of lost customers and high monthly churn rates due to bad customer service.

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, products, and services. The key is to maintain a consistent program and agreed-upon formula to measure, 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 your company's profitability.

We work with SaaS, subscription box, startups, and other subscription businesses to reduce their annual churn rate. We'll do churn rate calculations to ensure that cancellations for your subscription service are reduced by the end of the month.

To discover how much we can save your business and how quickly, hit the Chat on the bottom right to get started.

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