Churn Benchmarks: Enhancing Customer Retention
7 MIN READ
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Updated on August 15, 2024
Mastering customer retention is essential for success in the subscription market, where understanding and applying churn benchmarks directly influences growth and survival. This guide, enhanced by Chargebee’s retention solutions, equips you with effective strategies and insights to manage churn.
By focusing on critical metrics, you can improve customer satisfaction and boost revenue, turning theoretical insights into practical actions that foster a resilient business.
Regardless of your company’s size, from SMBs to large enterprises, your annual recurring revenue (ARR) hinges on successful customer retention. Learning what constitutes a good churn rate—essentially the percentage of customers leaving over a specific period—enables you to refine your strategies.
Table of Contents
The Impact of Customer Churn
Customer churn can impact your business’s annual revenue and overall success. It should be a metric you monitor closely to avoid a mess you can’t resolve. Here are a few ways churn can affect your organization.
- Customer Retention
- Loss of Revenue
- Brand Distrust
Let’s take a closer look.
Customer Retention
Dissatisfied customers are more likely to switch to a competitor than to continue using your services after a negative experience. This can be from high price points, odd annual contracts, and downgrades to features that offer little value.
Loss of Revenue
If you’re ending the month with fewer customers than you started with, you can see an impact on your monthly recurring revenue (MRR). This means you’ll have to put more effort into trying to upsell or cross-sell the customers you retained to cover the gaps in revenue.
Brand Distrust
When unhappy customers share their lackluster experiences, it could impact other consumers’ trust in your brand. This can be highly detrimental to first-year businesses in the early stages of creating their foundation.
Without focusing on customer experience and retention, this can create a snowball effect in customer churn. One of the best ways to manage retention efforts is to monitor specific churn benchmarks.
What Are Churn Benchmarks?
Churn benchmarks refer to the average percentage rate of customer attrition within an industry or company. It should be used as a reference point to gauge your customer retention strategies’ effectiveness.
By identifying the acceptable churn range for your industry, you can compare your results and adjust your strategies accordingly.
Churn Rates and Benchmarks Across Industries
Benchmarks can vary depending on the industry, so it’s essential to determine which are the most relevant to your company. Here are some average churn rates for various subscription services and industries:
- Media: anything over 8% is high
- Consumer Goods: anything over 10% is high
- Software: anything over 6% is high
- Finance and Accounting: anything over 7% is high
- Healthcare: anything over 8% is high
- Others: anything over 7% is high
- Real Estate, Rental, Leasing: anything over 4% is high
- Subscription Services: anything over 8% is high
- Technology: anything over 5% is high
7 Key Churn Metrics to Focus On
There are a lot of different metrics you can focus on to gain a better understanding of what could be driving the churn. The seven benchmarks below will help you monitor your retention efforts monthly and annually.
- Monthly Churn Rate
- Gross Churn Rate
- Net Churn Rate
- Customer Lifetime Value (LTV)
- Customer Acquisition Cost (CAC)
- Average Revenue Per User (ARPU)
- Customer Satisfaction
Let’s explore that further.
Monthly Churn Rate
This is the most common metric, offering the percentage of customers who stop or cancel their monthly purchases. Higher churn rates can indicate low levels of customer satisfaction or poor customer experience.
To calculate:
Monthly Churn Rate = (Number of Churned Customers / Number of Customers at the Start of the Month) * 100
For example, if you had 1000 customers at the start of the month and 30 canceled or stopped using your product or service, your monthly churn rate would be 3%.
Gross Churn Rate
To cast a wider net, organizations will calculate the percentage of revenue lost due to churned customers over a specific time. This can be valuable when comparing quarterly performances and identifying problems before they cause significant impact. You can even use this approach to determine your annual churn rate.
To calculate:
Gross Churn Rate = (Number of Customers Lost / Total Number of Customers at the Beginning of the Period) x 100%
For example, if you had 1,000 customers at the beginning of the month and lost 50 customers during that month, your gross churn rate would be: Gross Churn Rate = (50 / 1,000) x 100% = 5%
This means that during that month, you lost 5% of your customer base.
Net Churn Rate
To really understand the bottom line impact, organizations can calculate their net churn by subtracting the revenue generated by new customers in a period of time from the overall gross churn rate. This helps businesses gain a full picture of their financial performance.
To calculate:
Net Churn Rate = ((Number of Lost Customers – Number of New Customers Acquired) / Number of Customers at the Start of the Time Period) * 100
For example, if a company had 1000 customers at the start of the time period, lost 30 customers, and acquired 20 new customers, the net churn rate would be 2% ((30-20)/1000 * 100).
Customer Lifetime Value (LTV)
As the name suggests, this is a projected value the customer could bring over their entire relationship with your company. This can help organizations understand whether they should prioritize customer acquisition or retention.
A high LTV means higher potential return on investment (ROI), while a low LTV means focusing more on customer satisfaction.
To calculate:
Lifetime Value = Average Revenue Per Customer * Average Customer Lifespan
For example, if a customer generates $100 in revenue per month, and you expect them to remain a customer for 24 months, their lifetime value would be $2,400.
Customer Acquisition Cost (CAC)
Factors that contribute to customer acquisition costs include the expenses in marketing, sales, and other departments to create a lifetime customer. The ultimate goal for businesses is to minimize their CAC while maximizing their LTV.
To calculate:
Customer Acquisition Cost (CAC) = Total Cost of Acquiring New Customers / Number of New Customers Acquired
For example, if a company spent $50,000 on acquiring new customers and acquired 100 new customers over a given time, the CAC would be $500.
Average Revenue Per User (ARPU)
Rather than offering a projection, ARPU averages each customer’s revenue within a certain time. By monitoring this, organizations can determine whether or not they need to diversify some of their revenue streams to improve their pricing strategies.
To calculate:
Average Revenue Per User (ARPU) = Total Revenue / Total Number of Users
For example, if a company generated $100,000 in revenue from 10,000 users over a given time period, the ARPU would be $10.
Customer Satisfaction
This metric gauges how happy your customers are with your products or services and can be a big factor in retention. Maintaining customer satisfaction means more brand loyalty, higher lifetime value, and improved ROI.
To calculate:
Use surveys and encourage customer feedback to continue monitoring your customers’ happiness or satisfaction. This can be done following onboarding, after each purchase, or throughout the year to ensure you quickly address any negative aspects they might mention.
How to Monitor Churn Benchmarks
Organizations would benefit from using specific data-driven platforms to monitor performance and get the most accurate real-time insights. To reduce churn and improve the success of your business model, organizations should use a platform that has the functionality to:
1. Accurately defines key metrics—these should be specific or relevant to your business, establishing clear and measurable insights.
2. Collects and stores customer insights—A centralized database for all your data on past customer behavior and interactions to quickly analyze.
3. Visualizes data—This feature makes it easy to identify trends and patterns through the visual representation of dashboards and graphs.
4. Analyzes for behavior—Through machine learning algorithms, your platform can help predict future churn rates and uncover some contributing factors.
5. Monitors metrics—With a constant view of your performance over time, you can quickly adjust strategies to address emerging trends or industry changes to ensure you’re doing what you can to improve your retention rate and reduce customer churn.
6. Generates reports—It’s essential to keep all of the decision-makers informed on progress and performance, so having the ability to generate insights can help with alignment quickly.
With Chargebee’s Retention solution, you can automate reports, monitor the relevant metrics and benchmarks, and quickly implement strategies to reduce churn, improve retention, and identify ways to improve the overall customer experience.
Schedule a demo with Chargebee today!