How to calculate churn rate
There are two churn rates, and both are useful. Customer churn counts people: the customers who left during the period divided by the customers you had at the start. Revenue churn counts money: the MRR lost to cancellations and downgrades divided by the MRR at the start.
Use the count at the start of the period as the denominator, and leave out customers who joined during it. A customer who signed up on the 20th could not have churned for the whole month, and including them makes churn look lower than it is.
Churn has two causes. Voluntary churn is a customer choosing to leave. Involuntary churn is a customer lost because a payment failed and was never recovered. They need different fixes, so count them separately.
Customer churn rate = customers lost in the period ÷ customers at the start of the period
Revenue churn rate = MRR lost to cancellations and downgrades ÷ MRR at the start of the period
Worked example
A business starts the month with 200 customers and $20,000 of MRR. During the month 6 customers cancel, taking $500 of MRR with them, and 4 others downgrade, losing another $300. It also signs 15 new customers.
- Customers who canceled
- 6
- Customers at the start
- 200
- Customer churn rate: 6 ÷ 200
- 3.0%
- MRR lost: $500 canceled + $300 downgraded
- $800
- MRR at the start
- $20,000
- Revenue churn rate: $800 ÷ $20,000
- 4.0%
The 15 new customers enter neither calculation. They show up in new MRR, not in churn.
Why churn rate matters
Churn sets a ceiling on growth. Every month you replace what you lost before any new sale adds to the total, so a business losing 3% of its customers a month has to win back close to a third of its base each year just to stand still.
Customer churn and revenue churn can tell different stories. If small customers leave and large ones stay, customer churn looks bad while revenue churn looks fine. The reverse is a warning that your most valuable accounts are at risk.
Common mistakes
- Putting new customers in the denominator Customers who joined during the period were never at risk for all of it. Divide by the count at the start.
- Turning monthly churn into annual churn by multiplying 3% a month is not 36% a year, because the base shrinks each month. Compounded, 3% a month is about 31% a year. State the period every time.
- Counting failed payments as cancellations If customers whose cards failed are counted as leaving by choice, you will try to fix the product when the fix is a retry schedule.
- Measuring yourself against someone else's number Churn varies widely with price, market and contract length. Your own trend, month over month, is the comparison that means something.