Churn rate is a challenging aspect for any business. For any app or business to be successful, they should closely have an eye on the churn rate. In this blog let us see about calculating customer and revenue churn. 

As per statistics, on an average, the app loses over 77% of its DAU within the first 3 or 4 days after installation and the percentage jumps up to 90% within 30 days and 95% in 90 days of installation. 

If you are happy about hundreds of downloads and installations, then you do not have a complete understanding of the churn rate. The number of downloads can only increase the acquisition, but it doesn’t mean there is a boost in the customer retention rate. If you don’t want to lose the invested money, time, and energy in acquiring new customers, then you should give more focus on customer retention strategy. This is the reason why calculating customer revenue churn is important.  This is where the churn rate comes in. However, calculating the churn rate is not as easy as you read

In this article, we will explain in detail why churn analysis is important and how to calculate customer and revenue churn. 

Why is Churn Rate important?

Let’s begin from why you should care about the churn 

It suppresses financial growth 

Selling a product to an existing customer is easier than selling the same to a new customer. The probability of selling to a new customer is 5 -20%, whereas to an existing customer it is 60 – 70%

Acquiring new user is more expensive (over 5 to 25 times) than retaining new user 

Lesser churn rate gives a boost in profit. A 5 % lesser churn leads to 75% more profit

Greater impact on your brand growth

It becomes expensive, as you spend a lot on acquiring a new customer and they leave immediately. The process keeps on continuing to lead to a lot of expenses. 

What Causes Churn?

Churn is a reflection of the value of your service/product and the benefits of the feature that you are providing to your users.  You should continuously optimize your service level and product to reduce customer churn rate. When your service is good and aligned with a customer value metric, the churn rate will automatically decrease every month. 

Above all, customer churn directly has impacts on your financial metrics such as MRR, LTV, and CAC. Certainly, churn affects all of the above factors:

– Monthly recurring revenue 

– Customer lifetime value

– Customer acquisition costs

– Net Negative MRR Churn

Customers don’t leave your brand without a cause; several factors come into the picture during churn analysis. However, if you can address the customer issues and feedback effectively and figure out the pain points within your app then you can easily overcome this challenge. 

Below are some of the common factors of churn:

– Cost

– The poor user interface or user experience

– Poor onboarding experience

– Better Competitor products

– Poor market/ product fit

– Lack of features

– Lost value perception of the app

What is Churn Rate?

The churn rate is also called the rate of attrition, which is the percentage of customers who leave your app or stop using within a given time frame. For any app or business to be successful, the number of customers should be greater than the number of customers who leave. 

When we talk about churn, there are two types of churn which are customer churn and revenue churn.

Customer Churn

To figure out the percentage of users who have churned, you should consider all the users who you lost during a certain period such as one month or six months, and divide it by the total number of users you had at the starting period. 

Note: You should not include any particular new sales from that period.

Customer Churn Rate = (Customers beginning of the month – Customers end of the month) / Customers beginning of the month

Below is an example scenario to elaborate on the calculation: 

Consider an app XYZ had 1000 users in the month beginning and by the end of the month, they only have 950. 

Hence, in this scenario, the churn rate would be 

(1000-950)/1000 = 50/1000 = 5%

Revenue Churn

If you want to figure out the revenue that had been churned, consider your MRR (Monthly Recurring Revenue) at the month beginning and divide it by the MRR you had lost in that particular month minus additional revenue acquired from the existing users. Similar to the customer churn, you should not consider any new sales happened in the month, as we are looking to determine the total revenue you lost. New gaining from existing users is the revenue you have gained. 

Revenue Churn Rate = (MRR beginning of the month – MRR end of the month) – MRR in upgrades during month] / MRR beginning of the month

The revenue churn rate can be calculated with the above formula. 

Below is an example scenario to elaborate on the calculation: 

For instance, if a brand XYZ gained $500,000 MRR at the month beginning, and had $450,000 MRR at the month-end. $65,000 MRR is the revenue upgrades for that particular month from existing users. In the above scenario, the revenue churn rate would be:

 (($500,000 – $450,000) – $65,000)/$500,000 = ($50,000 – $65,000)/$500,000 = – 3%

Note: A negative churn rate implies that you have gained revenue that particular month. 

Before you decide on a time frame, such as monthly, quarterly or annually, you should remember that if you do, you should also look at monthly, quarterly, or annual recurring revenue, not for every month. Also, one of the main benefits of calculating revenue churn, as the example showed it is possible to add upgrade revenue.

Takeaway

After understanding about the churn, do you think you can fix the high churn rate? Certainly, with proper data analytics and strategies, you can reduce the churn rate. 

By using the right data, you can understand why customers leave, so you can optimize the user experience of your app and get more customers and be placed on the favourite list. This was all about calculating customer and revenue churn. .