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Churn Rate

The number of individuals or units leaving a group over a specified time period

What is Churn Rate?

Churn rate, also referred to as attrition rate, measures the number of individuals or units leaving a group over a specified time period. The term is used in many contexts, including in business, human resources, and IT.

Most notably, churn rate is referred to as the proportion of contractual (or subscribed) customers who terminate their contractual relationships/subscriptions with a company in a given timeframe. In this context, the term is primarily associated with companies operating on a subscription basis.

 

Churn Rate

 

Importance of Measuring Churn Rate

Churn rate is one of the most critical business metrics for the companies using a subscription-based business model. For example, a high churn rate or a churn rate constantly increasing over time can be detrimental to a company’s profitability and limit its growth potential. Thus, the ability to predict the churn rate is essential for the company’s success. Many companies rely on predictive analytics that allows creating models that forecast churn rates.

In order to decrease the churn rate, companies utilize different methods and strategies. Generally, the strategies are focused on improvements in customer retention and satisfaction by establishing proactive communication with customers, obtaining constant customer feedback on the company’s performance, and improving the company’s operations.

 

What is Customer Churn Rate?

Customer churn rate (also known as customer attrition rate) measures the proportion of contractual customers of a company who cease their subscriptions over a defined time period. Customer churn rate is one of the important business metrics for companies providing some services (such as SaaS companies) or those operating on a subscription-based model.

Companies can use two variations of customer churn rate: voluntary churn and involuntary churn. Voluntary churn rate indicates the proportion of customers who decide to cease their subscriptions as a result of their own decisions (e.g., dissatisfaction with the company’s services). On the other hand, involuntary churn rate is a proportion of customers who terminate their subscriptions due to some unavoidable circumstances (e.g., relocation). Generally, companies are primarily concerned with voluntary churn that is directly related to their core business operations.

 

Formula for Customer Churn Rate

The customer churn rate is calculated by dividing the number of customers left in a given period by the total number of customers at the beginning of a given period. Mathematically, it can be expressed using the following formula:

 

Customer Churn Rate - Formula

 

What is Employee Churn Rate?

In human resources, churn rate is referred to as a proportion of employees who leave a company in a given period of time. In this context, the churn rate is frequently referred to as employee attrition rate or employee turnover rate.

Employee churn rate indicates how frequently the company’s employees quit their jobs within a given period. Note that employee churn rates can significantly vary among companies and industries. For example, a consulting company is likely to see a significantly lower churn rate than a fast-food restaurant.

Generally, companies aim to either maintain churn rates corresponding to the industry average or lower than the industry average.

 

Formula for Employee Churn Rate

Employee churn rate is calculated by dividing the total number of employees who resigned within a period by the total number of employees in that period. The mathematical formula is given below:

 

Employee Churn Rate - Formula

 

Related Readings

CFI is the official provider of the Financial Modeling and Valuation Analyst (FMVA)™ certification program, designed to transform anyone into a world-class financial analyst.

To keep learning and developing your knowledge of financial analysis, we highly recommend the additional CFI resources below:

  • Average Revenue Per User (ARPU)
  • Customer Churn vs Revenue Churn
  • Engagement Rate
  • Monthly Active Users (MAU)