Customer turnover, also known as churn rate, refers to the percentage of a company's customer base that leaves in a given period of time. Typically, turnover is measured on a monthly or annual basis. As a general rule, high churn is damaging to a company's revenue and profitability.
Customer Turnover Formula
The simple formula for customer turnover is the number of customers lost in a given period of time divided by the number of total customers at the start of that period. If a company starts the year with 1,000 customers and loses 50 during the course of the year, its turnover rate is 50 divided by 1,000, or 5 percent. Similarly, losing 16 customers from a starting base of 200 equals an 8 percent turnover rate. Average customer churn varies by industry. American credit card industry churn is 20 percent, while banks experience churn between 20 and 25 percent, according to a May 2014 WordStream article. In contrast, software-as-a-service providers only turn over 5 to 7 percent of their clients.
Renewals and Cancellations
Customer turnover is easiest to track when a business sells recurring solutions to a customer. For a company that sells annual subscription services, for instance, churn is based on the number of customers that renew their service relative to those who cancel. If a business starts the year with 4,000 customers and only 3,600 renew, its annual churn is 10 percent. The contrasting view is that its customer retention rate is 90 percent. This rate is the percentage of starting customers that stay with the provider.
Causes of Turnover
Customer turnover results for a variety of reasons. In some cases, customers find a better price or solution from a competitor. In competitive industries, companies have to offer high-value solutions that improve as the industry evolves. Upsetting customers with poor products or services also contributes to churn. A company with a high turnover rate often looks first to figure out the causes. If poor solutions are the cause, making improvements is a first major strategy to reduce turnover.
Alternative Churn Formula
Some companies prefer to calculate customer turnover by comparing lost customers to total customers at the end of the month. This approach allows the business to consider the net effect of customer acquisitions and lost customers. If a company starts with 100 customers, loses three and gains five, it ends the year with a net gain of two customers. The turnover rate in this scenario is three divided by 102, which is 2.94 percent. While this alternative formula yields a lower churn rate, it may cause a business to ignore the fact that high rates of lost customers lead to higher costs of acquisition to replace them.