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Churn Rate Formula

Updated on March 21, 2024
Article byWallstreetmojo Team
Edited byWallstreetmojo Team
Reviewed byDheeraj Vaidya, CFA, FRM

What is Churn Rate Formula?

The churn rate formula measures the rate of percentage with which company subscribers discontinue their subscription to the service in the company or with which company employees leave their jobs within a period. Mostly, a company that has its business based on subscribers uses this measurement. The standard form of expression is in terms of percentage.

Churn-Rate-Formula

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Source: Churn Rate Formula (wallstreetmojo.com)

Typically, 5-7% is a good churn rate annually. That means, the company loses bout 0.60% of its customers or employees monthly. The annual churn rate formula helps in calculating these numbers. This calculation helps in reviewing customer retention rates. Therefore, a low churn rate indicates customer satisfaction or a sense of security for employees of the company.

Key Takeaways

  • The churn rate formula measures the percentage of customers or employees who discontinue their subscriptions or leave their jobs within a specific period. 
  • This metric is particularly important for companies that rely on subscribers or employee retention. 
  • The churn rate provides valuable insights into the percentage of customers who have stopped using a company’s services, resulting in potential losses. Companies can make informed decisions and take appropriate actions by calculating this rate. 
  • The churn rate also helps calculate the employee attrition rate, allowing companies to identify the number of people leaving their jobs and the reasons behind it. 

Churn Rate Formula Explained

We can derive the formula for the churn rate by using the following steps: –

  • In the case of the company’s subscribers discontinuing their service subscription, the churn rate determines the percentage of such subscribers concerning total subscribers.

Step 1: Firstly, determine the total number of customers receiving company services.

Step 2: Then, determine the total number of customers availing of the company’s services at the beginning of the period.

Step 3: Finally, we will calculate the churn rate by dividing the value from step 1 by step 2. Mathematically, for churn rate, the formula is shown below.

Churn Rate = (Total No. of Customers Lost During Period / Total No. of Customers of Company at the beginning of period) * 100

  • In calculating employees leaving jobs from the company, the churn rate determines the percentage of such employees concerning total employees.

Step 1: Firstly, determine the total number of employees who ended up providing their company services.

Step 2: Then, determine the total number of employees providing the services to the company at the beginning of the period.

Step 3: Finally, we will calculate the churn rate by dividing the value from step 1 by step 2. Mathematically, for churn rate, the formula is shown below.

Churn Rate = (Total No. of Employees that Left Job During Period / Total No. of Employees of Company at the beginning of period) * 100

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How to Calculate?

There are two areas where the churn rate is calculated: the regions and the formula used in the enlisting below.

#1 Customers

In the case of subscribers of the company, discontinuing their subscription of the service in the company.

The formula for calculation of the churn rate, in this case, is mathematically represented as below: –

Churn Rate formula = (Total No. of Customers Lost During Period / Total No. of Customers of Company at the beginning of period) * 100

Here,

  • The total number of customers lost during a period is the number of customers who received their company services.
  • The total number of customers of the company at the beginning of the period is the count of the customers availing company’s services at the beginning.

#2 Employees

For the calculation of employees leaving jobs from the company,

The formula for evaluating the churn rate, in this case, is mathematically represented as below: –

Churn Rate Formula = (Total No. of Employees that Left Job During Period / Total No. of Employees of Company at the beginning of period) * 100

Here,

  • The total number of employees who left the job during a period is the number of employees who ended their employment.
  • The total number of company employees at the beginning of the period is the count of the employees serving the company.

Examples

To understand the concept  better, let us see some simple examples of employee churn rate formula and customer churn rate formula.

You can download this Churn Rate Formula Excel Template here – Churn Rate Formula Excel Template

Example #1

Let us take an example of a subscription-based service providing a company with a total of 4,000,000 customers at the beginning of the year. During the year, 200,000 customers left the company and joined the competitor. What is the churn rate of the company for the year?

Solution:

Use the given data for the calculation of the churn rate.

Churn Rate Formula Example 1

The following is the calculation for churn rate: –

Example 1.1

Churn Rate = (200,000 / 4,000,000) * 100

The churn rate will be: –

Churn Rate Formula Example 1.2

Churn Rate = 5%

Therefore, the company’s churn rate for the year is 5%.

Example #2

Let us take another example of a company with 50,000 employees at the beginning of the period. During the month, 2,000 employees left the job. So, only 48,000 employees remained at the end of the month. What is the churn rate for the month?

Solution:

Use the given data for the calculation of the churn rate.

Example 2

The following is the calculation for churn rate: –

Churn Rate Formula Example 2.1

Churn Rate = (2,000 / 50,000) * 100

The churn rate will be: –

Example 2.2

Churn rate = 4%

Therefore, the company’s churn rate for one month is 4%.

Relevance and Uses

The churn rate formula is of great importance in companies with their business based on subscribers, where the company generates most of its revenue from the subscription fees received from its customers. In addition, the churn rate throws light on the percentage of the customers who terminated availing services from the company leading to losses for the company. With these calculations, a company can make informed decision-making.

Also, as the churn rate calculates the employee attrition rate, the company can analyze the number of persons leaving the jobs and why. With this help, the company takes corrective actions if required.

Frequently Asked Questions (FAQs)

1. Can the churn rate be negative? 

No, the churn rate cannot be negative. The churn rate represents the percentage of customers or subscribers who stop using a product or service within a given period. As it measures customer attrition, the churn rate is always expressed as a positive value.

2. What is the difference between churn rate and retention rate? 

The churn rate measures the rate at which customers discontinue using a product or service within a given period. Higher churn rates suggest a higher rate of customer loss. Retention rate, however, measures the rate at which customers remain loyal and continue using a product or service over a specific period. It represents the opposite of churn and is also expressed as a percentage. 

3. What are the limitations of churn rate applications? 

The churn rate calculation is based on a specific timeframe, which may not capture long-term trends or seasonal variations. A shorter timeframe can lead to more volatile or inaccurate churn rate measurements. Furthermore, calculating the churn rate requires accurate and reliable customer retention and attrition data. In some cases, obtaining complete and up-to-date data may be challenging, especially for businesses with complex customer relationships or data management systems.

This article is a guide to the Churn Rate Formula & what is it. Here, we discuss its calculation, uses, examples, relevance, and uses. You may also learn more about financial analysis from the following articles: –

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Comments

  1. cephas chemhere says

    so helpful thank you

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