Customer churn and retention are typical terms commonly used in business models. Customer churn (or attrition) refers to conditions when customers leave you. It means they stop using your products or services and no longer remain your customers. ARR churn will affect business income and performance to a great extent. On the other hand, customer retention is a good sign for businesses because customers return regularly. A high retention rate signifies customer satisfaction and sustainable earnings.
If retention exceeds churn, it suggests that customers feel satisfied with your services and are willing to continue buying your products.
Analyzing Retention and Churn
While Customer retention and churn are two sides of a coin, monitoring them is essential. To calculate their rate, you have to check the following aspects of the customer database:
- Number of customers
- Dates of their first and last purchases
- Value of products bought
- Frequency of returning
- Reasons for their leaving
1. Using Churn Rate Calculator
With a churn rate calculator, you can determine the number of people who stopped being customers. It can give results for a specific period, such as a year, a month, or a financial quarter.
The formula is as follows:
Churn rate = (Lost Customers ÷ Total Customers at the beginning of chosen period) x 100
So, if you initially had 4,000 customers, for example, and ended with 3800, you lost 200 customers. Accordingly, (200÷4000)×100, the churn rate is 5%.
2. Finding Gross Revenue Churn
Gross customer churn refers to the overall percentage of income you lost due to customer dissatisfaction. If you have a high gross churn rate, try to understand the reason for the loss. After recognizing the problem, find ways to improve customer experience and lower involuntary churn.
The formula to calculate gross revenue churn in a month is as follows:
Gross Revenue Churn = (Revenue lost to churn + revenue loss to downgrade ) / total income at the beginning of the month × 100
3. Determining Net Revenue Churn
ARR churn or net revenue churn is the proportion of income lost from existing customers over a specified period. A negative net churn rate could mean a business model grows without upsells, whereas a positive rate indicates that lost income is slowing business growth. On the other hand, a zero churn rate implies that churn negates your upsell income.
The formula for net revenue churn is as follows:
ARR Churn = (Revenue lost due to churn in the month + Revenue lost due to downgrading in the month – Revenue gained in the month due to upgrades) / Revenue at the beginning of the month × 100
4. Calculating the Customer Retention Rate
CRR (customer retention rate) is vital for a business to succeed. The metrics measure the percentage of customers you retain over a specific period. But before you start your calculations, identify the time frame you want to analyze. Generally, business models evaluate retention rates on a weekly, monthly, quarterly, or annual basis.
The CRR formula is as follows:
CRR = (total customers at the end of the chosen period – number of customers added within that period/ number of existing customers at the beginning of the time frame) × 100
5. Computing Gross and Net Revenue Retention Rate
NRR (Net Revenue Retention) and GRR (Gross Revenue Retention) rates are churn indicators. They help pinpoint things that are not working in your business. You can calculate these retention rates as follows:
NRR rate = Beginning MRR + Upsells + Expansions – Churn – Contractions/ MRR × 100
GRR rate = (Beginning MRR – Churned MRR + Downgraded MRR)/MRR
Strategies to Boost Customer Retention and Reduce ARR Churn
Get a customer success platform, which can help you effectively reduce the churn rate and retain existing customers. Generally, customers will not directly inform you that they are departing. You have to spot when they think of leaving through indicators. It may require you to take an omnichannel approach to listening and analysis that goes deeper than surface-level words.
If you implement a customer success platform you can try these technique to stop losing customers could be as follows:
- Providing personalized customer services
- Enhancing onboarding experience
- Starting an education program
- Rewarding customers for loyalty/referrals
- Ensuring regular upgrades or cross-sells
- Monitoring ARR churn & retention rates
- Using gamification to boost services
- Increasing engagement via feedback loops
Churn and retention rates help measure customer loyalty toward products and services. Retaining customers is essential for business growth and prosperity. Remember, maintaining existing customers costs much less than acquiring new ones, and loyal customers might invest more and refer others. On the other hand, churn is an unfavorable business aspect. It can significantly affect business income and growth potential. An effective customer success platform helps you understand your customers’ behavior through analytics, surveys, and interviews.
