Tracking metrics is very important in any business. All indicators can be combined under one term unit economics. Unit economics deals with the description of business processes in figures. This helps to make the business predictable, manageable, and stable.
There are basic indicators that every entrepreneur should be familiar with. These are indicators such as LTV, ROMI, ROI, etc. In fact, there are quite a lot of these indicators, but it is very important to know the basic elements, what they affect, and how knowledge of these indicators can be applied in business.
In this article, we focus on two significant indicators such as the customer churn and revenue churn, how to calculate churn rate, analyze several formulas by which they can be calculated, and what numbers are the normal for these indicators.
What is a churn rate?
There are different types of churm that can be considered in business. The rates are usually considered for a certain period of time. For example, for a month. Monthly counting is very handy for building development strategies for the next period.
What is customer churn?
Churn rate or customer churn is the number or percentage of customers or subscribers (for instance, to website push notifications) who stay subscribed every month for the communication channel and have not left the service for a long period of time. To maintain growth of a company, the inflow of new clients should exceed outflow. The influx can be named as growth rate or growth ratio. This coefficient is usually considered as a percentage.
What is revenue churn?
The revenue churn is the number of customers who have left. It plays a key role in properly interpreting metrics and strategizing. One very valuable customer can replace several others in terms of profitability. This metric shows the outflow of profitability over a certain period. It helps not only to understand how much money the company lost because of the decrease in the number of clients, but also to determine the quality of those who stayed.
How do you calculate customer churn?
There are two approaches to how to calculate monthly churns. They are quite similar but have a slight difference.
The Basic Churn Rate Formula
To calculate customers, take the number of customers at the beginning of the month and the number of customers at the end of the month and subtract these two metrics from each other and then divide by the number of customers at the beginning of the month. The lower this number, the better. The number will be expressed as a percentage below is the basic formula.
A Better Churn Rate Formula
There is also another formula with a new number—the number of new customers. They are very similar but it reflects the current situation better. It is added to the number of customers at the beginning of the month. Thus we get the following formula:
What is a good churn rate?
For a startup, the normal customer churn percentage is 10-15%. If the figure does not decrease later, this may be a cause for concern.
Small and medium-sized businesses which exist for quite a long time may have a customer churn around 3-5%. With the time passing by and company’s presence in the market, a customer churn rate should be lower.
For large companies the normal rate of this figure is considered to be no more than 1%.
This is information about average rate, yet it may be considered according to a traffic channel like normal percentage for push-notification, subscription, mailing and others. So, for email marketing the annual rate is fine when it varies within 25-30%.
How to esteem the satisfaction level of your customers?
Net Promoter Score formula helps to define customer loyalty level. Many marketers define loyalty as the willingness to recommend a product to others. You do not have to do the math to estimate this score; The only thing you need is to ask your customers one question: "How often do you recommend our company to your friends or colleagues?". There are options in a ten-point scale, where 10 is very often and 0 is very rarely.
Those who put 9 and 10 are the most loyal customers, 7-8 are passive customers, they are generally happy with the product but do not influence your development. Users who put from 0 to 6 points are the so-called ill-wishers, you need to work actively with this group. The next block is devoted to this issue.
To esteem the results you should count the percentage of people from each group: detractors, passives, and promoters. Then subtract the percentage of detractors from the percentage of promoters; passives are not considered in the formula.
The score can range from -100 when all answers were negative to 100 when all answers were positive. The higher the score, the better.
Interpretation of results:
- 70 and above: very good
- 50 to 69: not bad
- 49 and below: there are some growth points
- Below 0: very bad
How to reduce customer churn?
- Analyze your target audience. Do not try to attract as many people as possible. This is a costly approach: every non targeted customer costs money anyway, while the targeted ones are interested in your services or products, and they will stay with you for longer.
- Customization. Build personalized interactions with your customers. Choosing the right channel of communication, segmentation by interests and needs will help you. Find the appropriate way to communicate with people, decide different pricing for different audience sectors, make sure you have personalized offers for VIP customers.
- Provide quality support. Negative moments when using services are remembered much more often. About 35% of customers are ready to leave the company if they are not satisfied with the service, another part will share the negative experience with friends or write a review. It affects your image and you should care about it a lot. This will affect not only existing customers, but also attracted customers.
- Take an interest in the opinions of the audience. Set up a survey or call your customers, find out their level of satisfaction. Ask about the wishes - this will help to become better for the client. And most importantly, if you promise to do something - do it!
- Encourage customers. Any customer wants to know that they are appreciated. Show it. But do it intelligently and not at a loss. For example, implement a loyalty program and sales.
How do you calculate revenue churn rate?
To calculate the profit of a business, you need to know the income and expenses of the company. Thу figure which can help here is MRR.
MRR—Monthly Recurring Revenue—is the total company income received per month usually in terms of business related to subscription way payment. The indicator increases due to new subscribers and increased sales. The decrease of MRR is due to a decline in sales and failures. It can be roughly calculated for a month or two ahead. This indicator will help optimize the budget, compare and select tariff plans, reduce billing periods to one common value, tracking changes over time. To calculate MRR there is a special formula.
As the business grows, MRR should also grow. There are two ways to increase the MRR. You can direct resources to increase the number of customers, or you can increase the indicator at the expense of existing customers. It is about increasing the value of a customer, for example by upgrading to a more expensive plan with more features. It is important that there is no negative impact of a client flow on MRR.
Taking into account MRR, it is possible to calculate the percentage of revenue churn, several types of MRR will be used in the formula. A common MRR per month (or MMR for previous month), the MRR that was lost this month and any upgrades of existing customers that took place in this month. From the first ordinary MRR, the other two are subtracted and this number is divided by the ordinary MRR. These figures do not include new sales per month. New revenue from current clients is the revenue you generated, and we focus on losses. Negative percentage is good. The more this negative number modulo, the better.
How do you calculate revenue churn?
The same formula as well as for customer churn are relevant for revenue churn. But customer metrics are replaced with money metrics related to the customer's figures.
Summing up, we can say that the unit economy is one of the most important parts of the business. Unit economics helps to identify effective sales channels, determine the direction of development of the entire company, business profitability, and growth points. Such metrics are especially valuable for startups in order to assess the relevance of an idea, and for an already established business, you can calculate the amount of investment needed for development.
In terms of marketplaces, unit economics can be a very important criterion, including metrics such as revenue and customer charn. If you are about to open your business online, you can look at this article, it contains 6 important steps on how to open your marketplace correctly.