Step-by-Step Guide to Calculating and Reducing Customer Churn
Table of contents
You onboarded a customer three months ago. Your team personalized the onboarding experience, resolved their initial doubts, and set them up to succeed. Now they’re gone—no complaints, no warning—just another name on the churn report.
For customer experience teams, this isn’t just a statistic. It’s a recurring frustration. Hours of effort go into acquiring and onboarding customers, yet it often unravels when they fail to see lasting value. Churn doesn’t happen overnight. It’s a slow process, driven by weak onboarding, delayed ticket resolutions, or unaddressed product gaps—each one eroding the customer’s confidence over time.
And here’s the reality: reducing churn can transform your bottom line. According to a Forbes report, cutting *churn by just 5% can boost profits by up to 95%.*
This blog dives deep into customer churn: how to measure it, understand its causes, and most importantly, reverse it. You’ll learn practical strategies to identify at-risk customers, re-engage them, and build loyalty that fuels business growth.
Table of Contents
- What is Churn Rate?
- Why is Churn Rate Important for Business Growth?
- How to Calculate Churn Rate?
- What are Different Types of Churn?
- Top 5 Strategies to Reduce Churn Rate
- What are Some Advanced Techniques for Reducing Churn?
- Conclusion
What is Churn Rate?
Customer churn rate is the percentage of customers who stop doing business with a company within a specific time frame. It measures the rate at which customers discontinue their subscription, stop purchasing, or otherwise disengage from a product or service. Churn rate is a critical indicator of customer satisfaction, loyalty, and overall business health.
A high churn rate suggests that customers are leaving at a significant rate, which could be due to factors such as poor service, lack of perceived value, or competition. On the other hand, a low churn rate indicates that a company is effectively retaining its customers, which is essential for stable growth and recurring revenue.
This metric is particularly important for subscription-based businesses, where ongoing customer relationships are key to profitability.
Why is Churn Rate Important for Business Growth?
Churn rate means more than just keeping customers—it tells you how healthy and lasting a business is. Dealing with churn doesn’t keep customers around; it strengthens revenue streams, makes customers happier, and opens up chances to grow in the long run. Here’s why keeping an eye on and tackling churn matters so much:
1. Makes Customer Retention Better
Churn analysis helps companies spot customers who might leave before it’s too late. By using methods like cohort analysis and customer grouping, teams can find out where customers start to lose interest—maybe during sign-up when they’re learning to use the product, or as they use it over time. Fixing these problem areas cuts down on customers leaving, makes each customer worth more over time, and creates a group of happy loyal customers.
2. Protects Recurring Revenue
Churn analysis highlights how much revenue is at risk due to customer loss. For subscription businesses, tracking customer churn and revenue churn identifies high-value accounts, ensuring efforts focus on minimizing revenue loss and maintaining financial stability.
3. Fosters Data-Driven Decisions
Churn data provides measurable insights into customer behavior. Metrics like Net Promoter Score (NPS) or Customer Satisfaction (CSAT) help identify product or support issues. These insights guide product development, customer success strategies, and operational improvements, all contributing to retention and growth.
4. Improves Customer Experience (CX)
High churn often reflects poor customer experiences, such as onboarding issues, unclear product value, or weak support. Tracking churn helps businesses identify these gaps and refine the customer journey to ensure engagement and satisfaction.
5. Supports Sustainable Growth
Fostering sustainable business growth means taking a cost-effective route. That entails retaining customers rather than acquiring new ones. Lower churn reduces Customer Acquisition Cost (CAC),increases Monthly Recurring Revenue (MRR) stability, and supports scalable growth.
How to Calculate Churn Rate?
Calculating churn rate is the first step to improving customer retention and overall business health. Depending on your business model, different formulas can provide valuable insights.
Here, we’ll explore the most commonly used methods to calculate churn and understand its impact:
1. Basic Churn Rate Formula
At its core, churn rate measures the percentage of customers who stop doing business with your company over a specific period.
Formula:
For instance, Company ABC has 1,000 customers at the beginning of the month and is left with 950 customers towards the end of the month. The churn rate would be 5% churn rate during that month.
2. Customer Churn vs. Revenue Churn
While customer churn and revenue churn are closely related, they measure different aspects of customer loss:
- Customer Churn: Talks about the number of customers lost in a specific period.
- Revenue Churn: Talks about the revenue lost in a specific period.
3. Revenue Churn Rate
Revenue churn rate measures the percentage of recurring revenue lost over a specific period due to customer attrition or downgrades. Unlike customer churn, which focuses on the number of customers lost, revenue churn emphasizes the financial impact of those losses.
This metric is particularly important for subscription-based businesses or SaaS companies with tiered pricing models, where not all customers contribute equally to revenue.
Formula:
This formula accounts for offsets like upsells or expansions from existing customers, providing a more accurate picture of overall revenue retention.
While customer churn and revenue churn are often related, they serve different purposes and offer unique insights into business performance. But which metric should you follow?
Imagine Company ABC 2 pricing plans- Basic and Premium.
- For the basic plan: 5,000 customers paying $500/month = $2,500,000 MRR.
- For the premium plan: 1,000 customers paying $1,250/month = $1,250,000 MRR.
Total: 6,000 customers and $3,750,000 MRR.
However, during the month:
- 180 Basic Plan customers churn. Customer churn rate – 3.33%
- 20 Premium Plan customers churn. Revenue churn rate- 3.07%
While the customer churn rate might seem significant, the revenue churn rate highlights the disproportionate financial impact of losing Premium customers.
Timeframes: Monthly, Quarterly, and Annual Churn Rates
When measuring churn, the timeframe you choose provides unique insights into customer retention. Shorter timeframes like monthly churn offer immediate feedback, while longer periods like annual churn reveal long-term trends.
- Monthly Churn Rate: Captures customer attrition over a single billing cycle. It’s commonly used for SaaS businesses with Monthly Recurring Revenue (MRR) models to evaluate retention performance in real time.
- Quarterly Churn Rate: Measures churn over three months, smoothing out seasonal variability and short-term anomalies.
- Annual Churn Rate: Tracks long-term attrition trends across a year, providing insights into Customer Lifetime Value (CLV) and the overall effectiveness of retention strategies.
The timeframe you choose to analyze churn provides different insights into customer retention.
Monthly churn works for real-time diagnostics, quarterly churn captures medium-term patterns, and annual churn helps with long-term planning. Combining these analyses ensures a comprehensive understanding of retention, enabling businesses to drive growth and revenue stability.
What are Different Types of Churn?
Not all churn is the same. Customers leave for different reasons, and understanding the type of churn is critical to addressing the root causes and improving retention. Here are the three main types of churn:
Voluntary churn
Voluntary churn occurs when customers actively cancel their subscriptions or stop using your service. It’s often driven by dissatisfaction, pricing concerns, or competitors offering better solutions.
Why it happens?
- Poor customer experience or support
- Misaligned expectations during onboarding
- Better pricing or features from competitors
Involuntary Churn
Involuntary churn happens when customers leave unintentionally, often due to failed payments or billing issues, such as expired credit cards.
Why it happens?
- Payment processing errors
- Outdated billing information
- Lack of reminders for expiring payment methods
Hidden Churn (Dormant Customers)
Hidden churn refers to customers who remain subscribed but stop using your product or service. While they may not cancel immediately, these customers are less likely to renew, posing a long-term risk.
Why it happens?
- Customers no longer see the value in the product
- Features fail to meet evolving needs
- Lack of regular engagement or follow-up from the business
Top 5 Strategies to Reduce Churn Rate
Reducing churn isn’t just about quick fixes—it’s about building deeper customer relationships, ensuring they see consistent value in your product, and addressing the root causes of attrition.
1. Improve Onboarding Experiences
Onboarding is your first opportunity to show customers the value of your product. A seamless onboarding experience can reduce early churn by eliminating friction and ensuring customers feel confident using your service. Here’s what you can do:
- Streamline the Experience: Address common challenges like navigation issues, unclear instructions, or feature overload. Use in-app guides or chatbots to provide instant support.
- Deliver Value Quickly: Reduce the time to value by guiding customers to their first “success moment” with tutorials, email sequences, or in-product prompts.
- Personalize the Journey: Tailor onboarding to match the customer’s goals using sign-up data and user personas. Deliver role-specific onboarding flows or recommend features based on their industry or use case.
2. Proactively Engage At-Risk Customers
Customers often provide subtle signals before they churn, such as reduced activity or engagement. By proactively identifying and addressing these risks, businesses can reduce customer churn.
- Track Customer Health: Use customer health scores and engagement analytics to detect declining activity. Monitor login frequency, feature usage, and ticket requests for signs of disengagement.
- Personalize Outreach: Contact at-risk customers with solutions to their challenges. Offer tailored advice, tutorials, or use-case examples to reestablish value.
- Create Incentives to Stay: Offer loyalty discounts, free consultations, or feature upgrades to encourage continued engagement and loyalty.
3. Streamline Billing Processes
Involuntary churn is one of the easiest churn types to mitigate because it stems from preventable payment issues like expired cards or failed transactions. Automating and simplifying billing processes ensures fewer customers are lost due to these technicalities.
- Automate Payment Recovery: Implement dunning processes to retry failed payments automatically and reduce manual intervention.
- Send Timely Reminders: Notify customers well in advance of expiring payment methods to give them time to update their information.
- Offer Self-Service Tools: Simplify how customers manage their billing details by providing user-friendly account management portals.
4. Re-Engage Dormant Customers
Hidden churn happens when customers stay subscribed but disengage from your product or service. These dormant users represent a valuable segment, and re-engagement efforts can rekindle their interest.
- Launch Re-Engagement Campaigns: Use targeted emails or notifications to remind customers of your product’s benefits. Highlight new features or relevant use cases to reignite interest.
- Offer Exclusive Incentives: Encourage dormant users to return with special offers like discounts, free trials of premium features, or access to new tools.
- Use Behavioral Insights: Analyze previous activity and recommend features they haven’t explored or ways to maximize the product’s value.
Dormant customers often disengage because they don’t experience consistent, reliable value. Streamlining processes can reverse this. Get It Made, a manufacturing-as-a-service company, improved team efficiency by 250% and response times by 25% using Hiver. This operational improvement enabled them to stay responsive, re-engage customers, and strengthen ongoing relationships.
5. Leverage Customer Feedback
Customer feedback provides critical insights into the reasons behind churn and highlights opportunities for improvement. Actively listening and acting on this feedback builds trust and reinforces loyalty.
- Conduct Exit Surveys: Ask churned customers about their reasons for leaving, and identify patterns that require immediate attention.
- Monitor Satisfaction Metrics: Track Net Promoter Scores (NPS) and customer satisfaction (CSAT) scores to detect dissatisfaction early.
- Act on Feedback: Implement changes based on feedback, then communicate those improvements back to customers to show you’re listening and adapting.
What are Some Advanced Techniques for Reducing Churn?
Reducing churn requires advanced insights into customer behavior. These techniques allow businesses to predict risks, take proactive actions, and strengthen retention strategies.
1. Cohort Analysis
Cohort analysis groups customers by shared characteristics, such as sign-up date or usage behavior, to track retention trends and uncover patterns.
- Identify when and why certain groups of customers are more likely to churn, offering actionable insights to refine strategies for specific cohorts.
- Tools like Mixpanel and Amplitude enable detailed tracking, while Google Analytics offers a simpler approach to cohort behavior analysis.
- Segmenting customers based on relevant attributes, tracking retention over time, and addressing pain points such as onboarding friction or engagement drops within specific groups.
2. Predictive Churn Modeling
Predictive churn modeling leverages historical data and machine learning to forecast which customers are most likely to churn.
- Analyze patterns like declining usage or reduced feature adoption to identify and reach out to at-risk customers.
- Tools such as ChurnZero and Salesforce Einstein Analytics use AI to identify churn risks, while Tableau visualizes trends for easy prioritization.
- Feed these tools with customer engagement metrics, satisfaction scores, and churn history.
- Use predictive insights to craft personalized retention strategies, such as offering support to re-engage or providing discounts to encourage continued use.
3. Customer Health Scores
Customer health scores combine multiple data points, including usage patterns, NPS responses, and support interactions. This provides a single metric that predicts the likelihood of retention or churn.
- A declining health score signals a need for immediate action, allowing businesses to prioritize at-risk accounts.
- Define key metrics that reflect engagement, track scores regularly to identify trends, and intervene with tailored solutions for customers showing low scores.
Conclusion
Churn is a challenge that can undermine business growth, but with the right strategies and tools, it’s manageable. By using the right tools, businesses can reduce churn, protect recurring revenue, and foster stronger customer relationships.
Hiver, as a customer service platform, equips businesses with the tools and insights needed to reduce churn and foster customer loyalty. Here’s how Hiver can help:
- Faster Response Times: Hiver ensures that customer emails never slip through the cracks. Features like shared inboxes, SLA tracking, and real-time alerts allow teams to prioritize and respond to queries quickly, reducing customer frustration.
- Improved Collaboration: Hiver’s internal notes and collaboration features allow teams to work together seamlessly without relying on external tools. For instance, team members can discuss a query internally using notes directly on the email thread, ensuring quick and accurate responses.
- Actionable Insights with Analytics: Hiver provides detailed analytics on team performance, customer response times, and email resolution metrics. These insights help identify bottlenecks in customer service and enable proactive steps to improve the customer experience, reducing churn.
- Effortless Onboarding: Hiver integrates directly into Gmail, and also works in an Outlook-like interface, making it easy for teams to adopt without extensive training or disruptions.
