# Churn Rate: Definitions, Examples, and Calculations

![Churn Rate: The rate at which customers stop doing business with an entity.](https://www.investopedia.com/thmb/UIeOo_jlqT87NSnHgx0-tN_5CmU=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/terms_c_churnrate_FINAL-7ad9d181f5bb4cef8a94becadd6ccad0.jpg)

*— Investopedia / Daniel Fishel*

> **Definition**
>
> The churn rate is the percentage of customers or subscribers that discontinue their relationship with a business over a specific period, indicating the company's ability to retain clients and overall health.

## What Is the Churn Rate?

Churn rate, also known as the rate of attrition or customer churn, is the rate at which customers stop doing business with an entity. It is most commonly expressed as the percentage of service subscribers who discontinue their [subscriptions](https://www.investopedia.com/ask/answers/042715/how-do-subscription-business-models-work.asp) within a given time period. It is also the rate at which employees leave their jobs within a certain period. For a company to expand its clientele, its growth rate (measured by the number of new customers) must exceed its churn rate.

### Key Takeaways

*   The churn rate, also known as customer attrition rate, is used to measure the percentage of subscribers or employees who leave a company during a specific time period.
*   Understanding and managing churn is critical for a company's growth; if the churn rate is higher than the growth rate, the company faces potential revenue and profit losses.
*   Calculating churn rate is straightforward: it is the number of subscribers lost divided by the total subscribers at the start of the period, multiplied by 100 to get a percentage.
*   High churn rates can signal underlying problems, such as poor customer service or product issues, while low churn rates suggest effective customer retention strategies.
*   Comparing churn rates within an industry helps businesses gauge their competitive position, but differences between startups and mature companies must be considered.

## Analyzing Churn Rate and Its Impact on Businesses

Churn rate reflects the rate at which a company loses customers or subscribers. A high churn rate could adversely affect [profits](https://www.investopedia.com/terms/p/profit.asp) and impede growth. What is considered a good or bad churn rate can vary from industry to industry.

The churn rate not only includes when customers switch providers but also includes when customers terminate service without switching. This measurement is most valuable in subscriber-based businesses in which subscription fees comprise most of the [revenues](https://www.investopedia.com/terms/r/revenue.asp).  

> **Important**
>
> The churn rate of a company is particularly meaningful in industries where customers can easily switch from one provider to another, such as telecommunications or streaming services.

## Comparing Churn Rate and Growth Rate: Implications for Business Growth

While the churn rate tracks lost customers, the growth rate tracks new customers. A company can compare its new subscribers to its loss of subscribers to determine both its churn rate and growth rate. The difference between the two shows whether there was overall growth or loss in a specific time period.

If the growth rate was higher than the churn rate, the company experienced growth. If the churn rate was higher than the growth rate, the company experienced a loss in its customer base.

For example, if in one quarter a company added 100 new subscribers but lost 110 subscribers, the net loss would be 10. There was no growth for the company this [quarter](https://www.investopedia.com/terms/q/quarter.asp) but rather a loss. This would be a negative growth rate and a positive churn rate.

> **Tip**
>
> It's important to pay attention to customer acquisition costs. If most customers churn before you have made back the money spent on acquiring that customer, then your customer acquisition costs are too high for your business model.

It is critical for a company to ensure that its growth rate is higher than its churn rate otherwise it will experience declining revenues and profits with the eventual scenario of having to close the business.

## Pros and Cons of Monitoring Churn Rate

### Benefits of Using the Churn Rate

The advantage of calculating a company's churn rate is that it provides clarity on how well the business is retaining customers, which is a reflection on the quality of the service the business is providing, as well as its usefulness.

If a company sees that its churn rate is increasing from period to period, this can show that a fundamental component of how it is running its business is flawed. This can indicate a few potential problems:

*   Faulty product(s)
*   Poor customer service
*   Cost is higher than [utility](https://www.investopedia.com/terms/u/utility.asp) to customers

The churn rate helps a company understand why customers leave and what needs fixing. Acquiring new customers costs more than keeping current ones, so reducing churn rate saves money.

### Limitations of Using the Churn Rate

One of the limitations of the churn rate is that it does not take into consideration the types of customers that are leaving. Customer decay is primarily seen in the most recently acquired customers.

Perhaps your company had a recent promotion that attracted new customers. Once this promotion was over or even if the benefit of the promotion never ended, customers that were trying out the product may determine it's not for them, canceling their subscription.

The impact of losing new customers versus long-term customers is critical. New customers are transient whereas old customers are entrenched and have enjoyed your product; if they leave, that is usually due to a significant reason. A high churn rate in one period may be indicative of a high growth rate from the previous period rather than a judgment on the quality of the business.

The churn rate also does not provide a true industry comparison of the types of companies within an industry. Most new companies will have a high acquisition rate as new people try the business, but they will also have a higher churn rate as these new clients leave.

A company that is [mature](https://www.investopedia.com/terms/m/mature-firm.asp) and has been around for decades will have a low churn rate as its clients are established, but its acquisition rate will also be lower. Comparing the churn rates of both these companies will be like comparing apples and oranges.

Pros

*   Provides clarity on the quality of the business
    
*   Indicates whether customers are satisfied or dissatisfied with the product or service
    
*   Allows for comparison with competitors to gauge an acceptable level of churn
    
*   Easy to calculate
    

Cons

*   Does not provide clarity on the types of customers leaving (new vs. old)
    
*   Does not differentiate between startups, growing, and mature companies
    

## Example of the Churn Rate

The churn rate is a particularly useful measurement in an industry like the [telecommunications](https://www.investopedia.com/ask/answers/070815/what-telecommunications-sector.asp) industry. This includes cable or satellite television providers, internet providers, and telephone service providers (landline and wireless service [providers](https://www.investopedia.com/articles/markets/030216/worlds-top-10-telecommunications-companies.asp)).

This is an industry in which most customers have multiple providers from which to choose, and the cost of switching between them isn't high. This means that church rates could be quite high. The churn rate helps a company determine how it is measuring up to its competitors.

For example, say in a quarter, a startup internet provider acquired 1000 new subscribers. That same quarter, the company lost 120 subscribers. The churn rate would be:

> 120 / 1000 = 0.12 x 100 = 12%

The startup could then use this number in a few different ways:

*   Compare it to previous quarters to see whether churn is increasing or decreasing over time.
*   Compare it to other startups in the same industry to see it is losing more customers than expected.

## Applying Churn Rate Analysis to Employee Turnover

You can also use churn rate to measure employee turnover, helping analyze hiring and retention patterns. This is especially helpful if employees don't stay long at the company.

When employee turnover statistics are examined on a department-by-department basis, it can highlight which particular departments are experiencing more frequent turnover within the company or at a higher rate than the business average. This can help determine factors such as pay satisfaction, management quality, and workload balance.

## What Is the Meaning of Churn in Business?

Churn rate in business refers to the number of customers or subscribers that leave a provider in a given time period. This is the opposite of growth rate, which shows the number of new subscribers or customers in that time frame. Churn rate can also refer to the number of employees that leave a firm in a given period.

## How Do You Calculate Churn Rate?

To calculate the churn rate, divide the total number of subscribers lost by the total number of subscribers acquired in the same time period. Then multiply by 100 to find the percentage.  

You can also calculate the churn rate by dividing the number of subscribers lost in a period by the total number of subscribers at the beginning of that period.

## What Is a Good Churn Rate?

Ideally, a churn rate of zero would be the best churn rate, as that would indicate a business is not losing any subscribers; however, that is never the reality. A business will always lose subscribers for one reason or another.

In this case, it is important to compare the churn rate of the business to its industry's average churn rate, taking into consideration if the business is new or mature. Knowing an industry's churn rate versus that of the business is the only way to understand if a churn rate is acceptable or poor. Every industry has a different business model and, therefore, will have different acceptable churn rates.

## What Does a High Churn Rate Mean?

A high churn rate indicates that a business is losing significant customers, certainly more than it is bringing in. This would mean that the business is doing something wrong, whether that be delivering a poor product, having poor customer service, or a host of other negative reasons that would explain why it is losing customers fast. A high churn rate would most likely mean a company is suffering significant losses.

## The Bottom Line

Churn rate is a calculation that shows the percentage of subscribers of a business that are leaving. It can also be used to show the percentage of employees who are leaving a firm. Understanding a company's churn rate is one metric in understanding its [financial health](https://www.investopedia.com/terms/f/financial-health.asp), growth, revenue, profits, and long-term prospects. Low churn rates indicate high customer satisfaction, while high churn rates indicate dissatisfaction and problems that need to be identified. Business must regularly analyze their churn rates to help them identify deficiencies.

Companies must maintain a higher customer growth rate than a churn rate to remain sustainable; therefore, efforts must be balanced between new acquisitions and customer retention.