The Customer Churn Rate reports the rate at which your customers are cancelling their subscriptions.
How is it calculated?
The value for the current month is an estimation based on churn so far this month.
A customer would only contribute the calculation of this rate if all subscriptions have been cancelled. If the customer has multiple subscriptions and only one of them is cancelled, it would be considered a contraction activity rather than customer churn.
There is no hard rule on how to calculate Customer churn. At ChartMogul we give two options, a B2B Formula and a B2C Formula. There is no reason why a B2B or B2C company couldn't use either formula. If you are dealing with large data sets, we recommend that you use the B2B formula as using the B2C formula might take more than 30x as long to calculate because churn is calculated for each day individually.
Number of customers who churned in the period (excluding any customers who both joined & churned in the period) / Total number of customers at the start of the period.
Example: You have 100 customers at the beginning of the month. Unfortunately, 11 customers cancelled their subscriptions during the month. One customer created an account in the same month that they cancelled, so they can be excluded from the calculation.
10 / 100 = 0.1
This means the Customer Churn Rate is 10% for this month.
For each day we count the customers who were active at the start of the day and then see how many of these customers are still active at the end of the day. (Note that this means that that day's new customers are excluded from the calculation, as are customers who churn and then reactivate on the same day.)
Iterating through each day in the selected period (e.g. month/quarter) we calculate as follows:
SUM((#_active_customers_at_the_start_of_day - #_active_customers_at_end_of_day / #_active_customers_at_the_start_of_day))
This gives us our Customer churn rate for the given period.
When calculating churn rate it’s important not to mix subscriptions with significantly different billing periods, e.g. monthly & annual plans. For younger startups, renewal rate can be a more meaningful metric to gauge the churn of customers subscribed to annual plans.
What analysis can be gained?
This graph is useful if you want to see the rate at which your customers are churning over time. Understanding your customer churn is important as keeping existing customers is much cheaper than acquiring new ones. Further, maintaining a healthy revenue growth to scale becomes harder over time if your customer churn is too high. You can segment this graph using the segmentation tools. For example, you could see the Customer Churn Rate for customers who gave you a negative NPS score, segment by plan or by marketing channel to do a cost-benefit analysis.