Why it matters
Churn sets the ceiling on how large a subscription business can grow. Every lost customer has to be replaced before the base can grow at all, and a high rate means acquisition spend is refilling a leaking bucket.
It also drives lifetime value directly. A customer lifetime is roughly one divided by the monthly churn rate, so small changes in churn move the value of every customer you win. Measuring it the same way each month is what makes the trend trustworthy.
The formula
Start from the customers who were paying when the period opened. Count how many of those same people are gone when it closes. Divide the number lost by the opening count. Anyone who signed up during the period sits outside the opening group, so they are excluded from both numbers, even if they also left before it ended.
Churn rate = customers lost / customers at start
Annual churn = 1 - (1 - monthly churn)^12A worked example
A business starts the month with 500 paying customers. These numbers are made up for illustration.
| Example numbers | Value |
|---|---|
| Customers at start of month | 500 |
| Customers lost during the month | 15 |
| New customers during the month (not counted) | 60 |
| Monthly churn rate | 3.0% |
| Annual churn, compounded | 30.6% |
| Annual churn, wrongly multiplied by 12 | 36.0% |
15 lost out of 500 is a monthly churn of 3.0%. Compounded over twelve months, that leaves 69.4 of every 100 subscribers, so annual churn is 30.6%, not the 36.0% you would get by multiplying by twelve. Putting the 60 new customers into the denominator would show 2.7% and flatter the result.
- 3.0% monthly churn
- Customers left
How to improve it
Churn falls when customers reach value sooner, stay engaged, and are not lost to avoidable events.
- Shorten the time to first value, since customers who see results in the first weeks are far less likely to leave.
- Read cancellation reasons and group them. Fix the top cause before spreading effort across the rest.
- Recover failed card payments quickly, because customers who never meant to leave still count as churn.
- Offer a pause or a lower plan as an alternative to cancelling for customers whose needs have shrunk.
- Track churn by signup cohort and plan, so a problem in one group is not averaged away.
Common mistakes
- Counting customers who joined during the period in the denominator, which makes churn look lower than it is.
- Multiplying the monthly rate by twelve to get an annual rate. Churn compounds, so the correct annual figure is smaller.
- Mixing a monthly churn rate with an annual price or an annual lifetime without converting one of them.
- Counting a customer who downgrades as lost. A downgrade is lost revenue, not a lost customer, so it belongs in revenue churn.
- Treating a failed payment that is later recovered as churn, or ignoring one that never is. Decide how long you wait and apply it every month.
Calculate it and read next
Work it out with your own figures in the churn rate calculator. Then read about Revenue churn rate, Net revenue retention and Customer lifetime value.
- Revenue churn rate: the same idea measured in dollars instead of heads.
- Net revenue retention: what is left of the revenue after churn and expansion.
- Customer lifetime value: what churn does to the value of each customer.
Frequently asked questions
How do customer churn and revenue churn differ?
Customer churn counts how many customers left. Revenue churn counts how much recurring revenue left, including downgrades. A business can lose few customers and still lose a lot of revenue if the leavers were large.
Should I measure churn monthly or annually?
Monthly is the better working figure because it reacts faster. Convert to an annual figure by compounding, and state which one you are quoting.
Do paused or failed payment customers count as churned?
Pick a rule and keep it. A common rule is to count a customer as churned once an uncollected failed payment has run out of retries, and to count a paused customer as retained until the pause ends.
Can churn be zero?
It can for a short period with a small base, but a single month of zero is a poor guide. Look at a trailing average across several months.
How is a churn rate used to estimate lifetime?
The expected lifetime in months is one divided by the monthly churn rate. A 3% monthly churn gives about 33 months. It is an average and assumes churn stays constant.