Churn Rate vs. Retention Rate: Differences and Formula
By Indeed Editorial Team
Published 8 May 2022
The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.
Churn rate and retention rate are calculations that businesses utilise to acquire and maintain customers. These calculations may provide businesses with information regarding customer satisfaction. Understanding the concepts of churn rate and retention rate is beneficial for businesses to evaluate the performance of their products or services. In this article, we discuss what churn rate and retention rate are, what are the differences between the two and how to do the calculations of churn rates and retention rates.
Churn rate vs. retention rate
Churn rate and retention rate are concepts that businesses utilise to acquire and maintain customers. Both concepts are useful in analysing customer satisfaction with certain products or services. Mastering the concepts of churn rate and retention rate may help businesses gain customer insight that can eventually generate more profit.
What is churn rate?
Churn rate is the percentage rate of customers who stop making transactions with the business after a certain period. On some occasions, the churn rate is the calculation of the number of employees who leaves a job after a certain period. Having a low churn rate typically results in an increase in profit and business growth.
For instance, a video-streaming platform calculates its churn rate to determine the percentage of customers who don't renew their subscriptions after a certain period. A low churn rate usually means that numerous customers constantly renew their subscriptions. A high churn rate indicates that most customers choose to terminate remove their subscriptions. By obtaining this value, the company can evaluate its services and create alterations as needed.
Calculating the churn rate
In comparison to other formulas within the business industry, churn rates are relatively easy to calculate. The calculation of churn rate requires different variables, including the amount of lost customers and the total of customers at the beginning of the set period. Divide the number of lost customers with the total of customers at the beginning of the period. Multiply the result by 100 to transform the value into a percentage.
For example, at the beginning of the month, a video streaming platform has a total of 1,600 customers that own a subscription. By the end of the month, only 1,500 remain. This means that the company have lost a total of 100 customers throughout the month. To calculate the churn rate after a month, divide 100 by 1,600 which results in 0.0625. Multiply this value by 100 to provide the churn rate in percentage.
What is a good churn rate value?
A good value of churn rate may differ due to various factors. Several factors that contribute to the assessment of churn rate values include the type of industry a company is in and the period companies measure their churn rates. The measurement of churn rates over a longer period may result in a higher churn rate in comparison to measurements over a short time. For example, annual churn rate values are typically higher than monthly churn rate values.
Advantages of churn rates
Most companies utilise churn rates to plan for future sales strategies and analyse the performance. The calculation of churn rates is beneficial for multiple reasons. Here are a few advantages of churn rate values:
Evaluates the quality of a business
Most businesses can utilise churn rates to evaluate the quality of their business. Obtaining a churn rate value may inform a business on its performance and whether the quality they offer meet the needs of the market. Having a high churn rate can be an indicator for businesses to alter the quality.
Indicates customer satisfaction
Customer satisfaction holds a significant role in the amount of profit a business generates and the projected growth. The calculation of churn rate value provides reliable information regarding the level of customer's satisfaction. Obtaining a low churn rate indicates a high level of customer satisfaction.
Allows comparison with competitors
Businesses may utilise churn rate values as a tool to compare their business performance with their competitors. Having a churn rate lower than a competitor's can be an indication that the business is doing better overall in comparison to its competitors. Although businesses can use the concept of churn rate for this purpose, it's important to understand that many factors contribute to the performance of a business.
What is retention rate?
Retention rate refers to the percentage of customers that pays for a product or service continuously over a certain period. Similar to churn rates, the calculation of retention rates can help a business in understanding their customers' satisfaction. Obtaining a high retention rate shows that a large number of customers choose to continue their subscriptions, increasing cost-effectiveness and profit.
For instance, a music-subscription platform is calculating its retention rate over a year. Acquiring a high retention rate means that most customers continue their subscriptions until the end of the year, but obtaining a low retention rate may mean that many customers terminate their subscriptions within the year.
Calculating retention rate
Before calculating the retention rate of a certain service, businesses prepare three variables. The first variable is the number of customers that are available at the beginning of the set period. The second variable is the number of customers that the business still has at the end of the period. The last variable to collect is the number of new customers the business acquire throughout the set period.
Subtract the new customers from the total of customers at the end of the period. Afterwards, divide this value by the number of customers at the beginning of the period. Multiply by 100 to transform the value into a percentage.
What is a good retention rate value?
Similar to churn rates, the criteria for a good retention rate value vary depending on different factors. The type of industry and period of time of a retention value affects the standard of retention values. Most businesses strive for a retention value of 100%, although a retention level of 90% is already an incredible feat for companies.
Advantages of retention rates
The calculation of retention rates is beneficial for businesses as it provides an overview of customers' satisfaction. Obtaining a high retention rate may decrease the effort a business has to put in searching for new customers, as their current customers generate profit. Here are a few advantages of retention rates:
Maintaining a high retention rate generates more profit for a business. Retention rates indicate the number of customers who continuously use a certain product or service over a period of time. This value also shows the amount of consistent profit a business may generate over a certain period of time.
Evaluates the performance of products and services
Finding the retention rate of a certain product or service enables a business to evaluate its performance over a period of time. A decreasing retention rate may indicate that the product or service is no longer in demand for customers. For instance, a decrease in the retention rate of video-streaming platforms may mean that the customers no longer need the service. This can also occur due to the rise of competitors offering similar services.
Allows comparison with competitors
Retention rate can be a tool that businesses use to compare their performance with existing competitors. This advantage is particularly beneficial for business owners that are starting their company. By evaluating the retention rate of competitors, small business owners can set a standard on the retention rate their products or services have.
Tips to obtain a low churn rate and a high retention rate
Most businesses strive for a low churn rate and a high retention rate. The existence of these values indicates that the service or product that the business offers to satisfy their customers. There are a few steps that a business can take to maintain a low churn rate and a high retention rate:
Evaluate variables. Evaluating different variables that may affect the retention of customers may help a business in maintaining a low churn rate and a high retention rate. Different variables include advertising and marketing strategies.
Display strong customer service. Customer service holds a significant role in maintaining a low churn rate and high retention rate. Receiving great customer service when encountering problems while using a certain product or service increases customers' satisfaction.
Offer incentives. Offering incentives to loyal customers may decrease the churn rate and increase the retention rate of a business. Incentives include discounts, giveaways and access to free products.
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