Churn Rate Definition
The churn rate or customer churn rate refers to the rate at which customers end their association with an entity. It is often expressed as a percentage of service subscribers who cancel their subscriptions within a specific timeframe. To grow its customer base, a company needs its growth rate to surpass its churn rate. Additionally, the churn rate indicates the rate at which employees depart from their jobs during a particular period.
What Are The Advantages of Churn Rate?
The identification of the churn rate offers several advantages to each company. For example, it provides clarity regarding its customer retention which reflects the quality and usefulness of its service. By monitoring the churn rate, a company can identify the weaknesses in its business operations if the churn rate is surging increasingly over time.
An increasing churn rate signifies potential issues such as faulty products and poor customer service. Furthermore, churn rate is considered a business indicator that prompts a thorough investigation into the reasons behind customer attrition and the identification of areas requiring improvement. Retaining existing customers is generally more cost-effective than acquiring new ones. Thus by focusing on reducing churn rate, companies can save on customer acquisition costs and increase revenue by nurturing long-term relationships with satisfied customers.
What Are The Disadvantages?
There are several drawbacks of churn rates that should be considered. One drawback of the churn rate is its failure to consider specific characteristics of the departing customers. Customer attrition tends to primarily affect recently acquired customers, a phenomenon known as customer decay.
Differentiating between the impact of losing new customers and long-term customers is crucial. New customers are considered temporary whereas long-term are deeply rooted and have likely experienced and enjoyed the company’s product and customer service. Consequently, a high churn rate in a given period may be a reflection of a high growth rate in the previous period, rather than a direct judgment on the quality of the business.