In concept, the customer churn rate is fairly simple. The basic concept behind the customer churn rate is to measure how many customers leave a business within a given time period. The customer churn rate helps businesses identify whether they are growing or shrinking and whether or not there is some kind of problem within the business. An increasing churn rate can be an indication of something fundamentally wrong within the business or that there is a problem area that needs to be addressed.
The customer churn rate is perhaps most often used with subscription services and has thus received more attention as service and software providers move toward subscription models in the cloud. The churn rate is also an important metric required in the predictive calculation of customer lifetime value (CLTV), which has recently gained wide acceptance within leading Fortune 500 firms (see the Calculating customer lifetime value recipe within this chapter). While simple in concept, the calculation of the customer churn rate can become complex as high growth rates and other factors can skew results. Despite this, leading authorities primarily advocate for the use of a simple model when it comes to calculating customer churn rate.
This recipe provides a method for calculating the churn rate based upon a relatively simple methodology. The methodology used is to first calculate the total number of customers at the beginning of a time period. We then calculate the number of lost customers by comparing this figure with the total number of customers at the end of the time period minus any new customers. Keeping things simple allows the calculation to be easily understandable, makes things comparable to outside entities, and provides a clear basis for further analysis.