What is Churn in Product Management? Calculation, and Its Impact on Business

Churn in Product Management is a critical metric for businesses, particularly for subscription-based services, as it directly impacts revenue and growth. in the context of business, It refers to the rate at which customers or subscribers stop doing business with a company or cease their subscription to a service over a specific period. Understanding churn is essential for businesses to retain customers and maintain sustainable growth.

Churn refers to the percentage of customers or subscribers who discontinue their relationship with a company within a specific time frame, typically a month or a year.

What is Churn? Definition, Calculation, and Its Impact on Business

What is Churn?

Churn is often measured as a percentage of customers who have stopped using a company’s product or service within a given time frame, such as a month or a year. This metric helps businesses assess the health of their customer base and understand the extent of customer attrition. Churn refers to the rate at which customers or subscribers stop doing business with a company over a certain period. It’s a crucial metric for businesses, especially those in subscription-based services like streaming platforms, software as a service (SaaS), telecommunications, and more. Understanding churn helps in assessing customer retention, predicting revenue, and improving overall business performance.

There are typically two types of churn

Churn can be classified into two major categories, those are listed below:

types of churn

• Customer Churn: This refers to the loss of customers over a specific period. It may include those who cancel their subscriptions, do not renew their contracts, or simply stop purchasing products or services from the company.
• Revenue Churn: Revenue churn is the measure of lost revenue as a result of customer churn. It takes into account not just the number of customers lost but also the value of the lost business from those customers. Revenue churn can help businesses understand the impact of customer attrition on their bottom line.

Formula for Churn Rate

The following formula may be used for calculating the churn rate:

Formula for Churn Rate

Churn Rate = (Number of customers lost during a specific period )
                           /  (Total number of customers at the beginning of that period) * 100

Churn Rate = (Number of Customers at the Beginning of the Period -
                           Number of Customers at the End of the Period) / 
                          Number of Customers at the Beginning of the Period

For example, let’s consider a subscription-based company that had 1000 customers at the beginning of the month and 800 customers at the end of the month. Using the formula:

Churn Rate = (1000 - 800) / 1000 = 200 / 1000 = 0.2 or 20%

Churn Rate is the percentage of customers lost during that period, which in this case is 20%.

Churn Rate and Growth Rate are two crucial metrics that directly impact a business’s success. Churn rate represents the loss of customers, while growth rate indicates the rate at which the customer base is expanding.

For example, if a company has a 10% growth rate and a 5% churn rate, it means that for every 100 customers, the company is gaining 10 customers and losing 5. Thus, the net growth would be 5% (10% – 5%).

Impact of Churn on the Product Metrics

Churn directly affects various key business metrics, including revenue, customer lifetime value, and customer acquisition costs. A high churn rate indicates that a company is losing a significant number of customers, which can impede growth and profitability. Churn rates are crucial in forecasting future growth. High churn can hinder projected growth rates and make it challenging to predict future revenue or user base accurately. Churn impacts qualitative metrics related to customer feedback and satisfaction. Departing users often leave feedback that sheds light on issues or aspects of dissatisfaction, which can impact metrics related to customer satisfaction scores or Net Promoter Scores (NPS).

Reasons for Churn:

• Poor customer service
• Dissatisfaction with the product or service
• Competitive offerings
• Pricing issues
• Changes in customer needs
• Relocation or change in business priorities

What Product Managers Need to Know About Churn

Product managers should closely monitor churn rates and understand the reasons behind customer attrition. They need to identify patterns and address customer pain points to improve customer retention and satisfaction. Product managers must also work collaboratively with customer support and marketing teams to implement effective retention strategies. Product managers need to be well-versed in churn metrics specific to their product or service. This includes understanding how churn is calculated, what constitutes churn (e.g., cancellation, non-renewal), and the factors contributing to it. Using churn data and customer feedback, product managers can prioritize feature enhancements, bug fixes, or new developments to improve the product. They need to balance adding new functionalities with maintaining a user-friendly and efficient experience. Product managers should encourage experimentation and A/B testing. Testing new features or changes on a smaller scale before full deployment allows for insights into their impact on reducing churn.

Difference between Churn Rate and Growth Rate

Churn Rate Vs Growth Rate

Characteristic	Churn rate	Growth rate
Measures	Loss of customers	Gain of customers
Calculated by	Number of customers who churned / Total number of customers at the beginning of the period	Net increase in customers / Total number of customers at the beginning of the period
Impact on company growth	Negative	Positive

Why Do Customers Churn?

Customer churn or leave the product or service due to following reasons. Understanding these reasons are important for an individual to reduce churn and retain their customer base. Here are some major reasons why customers churn:

Reasons why do customers Churn?

• Poor Customer Service: Unsatisfactory customer service experiences, such as unresponsive support, long wait times, or ineffective issue resolution, can lead customers to seek alternatives.
• Lack of Engagement: If customers feel disconnected or disengaged with a product or service, they are more likely to churn. This can occur if the business fails to provide relevant updates, offers, or communication that maintains the customer’s interest.
• Competitive Offerings: Customers might find better alternatives or competitors that offer similar products or services at a lower price, with more features, or superior quality. Failure to stay competitive can result in customer attrition.
• Unmet Expectations: When a product or service fails to live up to the expectations set by the marketing or sales team, customers may become dissatisfied and ultimately churn. It is crucial to manage customer expectations accurately and deliver on promises made during the sales process.
• Lack of Value: If customers perceive that the product or service does not provide sufficient value in relation to its cost, they may choose to discontinue their subscriptions or purchases.
• Changes in Customer Circumstances: Changes in a customer’s life, such as relocation, financial constraints, or shifts in business requirements, can lead to churn. These changes might make the product or service no longer necessary or feasible for the customer.
• Bad User Experience: A complex or unintuitive user interface, frequent glitches, or technical issues can lead to frustration and prompt customers to look for alternative solutions.
• Ineffective Onboarding Process: If the onboarding process is cumbersome or lacks adequate guidance, customers may struggle to understand how to use the product or service, leading to frustration and eventual churn.
• Lack of Product Updates or Innovation: Failure to introduce new features, updates, or innovations can cause customers to perceive the product or service as stagnant or outdated, prompting them to explore more dynamic options.
• Poor Relationship Management: Failing to build and maintain a strong relationship with customers can make them feel undervalued or unappreciated, leading to dissatisfaction and eventual churn.

What does churning mean in Business?

In a business context, “churning” typically refers to a situation where there’s excessive or repetitive trading or activity in a customer’s account, often driven by the financial incentive of the person or entity managing that account. In investment or brokerage firms, churning occurs when a broker excessively trades securities in a client’s account primarily to generate commissions, fees, or other compensation for the broker, without considering the client’s best interests. Churning can occur in telecommunications when customers frequently switch providers to take advantage of introductory offers or better deals, causing high turnover rates among service providers.

Example of Churn

An example of churn would be a subscription-based software company that loses 15% of its subscribers in a given month. If the company had 1000 customers at the beginning of the month, the churn rate would be 15%.

• Telecommunication Company Churn: A telecommunications company notices that a significant number of customers are switching to other service providers due to poor network coverage in certain areas. Despite competitive pricing and good customer service, this issue leads to a high churn rate.
• Subscription-Based Streaming Service Churn: A streaming service provider experiences a sudden increase in churn rate after they raised their subscription fees. Despite offering a wide range of content, the price hike prompted many subscribers to cancel their subscriptions and seek more affordable alternatives.

Steps to Reduce Churn

Businesses must focus on reducing turnover since it can significantly affect their long-term performance and profitability. The following actions may be taken to reduce the customer churn

Strategies to reduce customer churn

• Improve Customer Experience: Provide exceptional customer service and ensure a seamless experience throughout the customer journey. Actively seek and respond to customer feedback to address pain points and enhance satisfaction.
• Offer Personalization and Customization: Tailor products and services to meet the specific needs and preferences of individual customers. Use customer data to personalize interactions, recommend relevant products, and create targeted marketing campaigns.
• Implement Loyalty Programs: Reward loyal customers with exclusive offers, discounts, or other incentives. Encourage continued engagement and purchases by offering rewards for repeated business or referrals.
• Regular Communication and Engagement: Stay in touch with customers through regular updates, newsletters, and informative content. Use multiple channels such as email, social media, and mobile notifications to keep customers engaged and informed about new offerings or updates.
• Provide Value-added Services: Offer additional benefits or services that complement the main product or service, enhancing the overall customer experience. This can include providing educational resources, tutorials, or complimentary services that add value and keep customers invested in your offerings.
• Address Customer Concerns Promptly: Actively listen to customer complaints and concerns, and resolve issues quickly and effectively. Implement efficient customer support systems to ensure that customers feel heard and valued.
• Conduct Customer Surveys and Analysis: Regularly gather feedback through surveys and analyze the data to identify trends and areas for improvement. Use customer insights to make data-driven decisions and refine your products and services accordingly.
• Build Long-term Relationships: Focus on building strong, lasting relationships with customers. Foster a sense of community and belonging by engaging customers in forums, events, and social media groups, creating a loyal customer base that feels connected to your brand.
• Proactive Churn Prediction and Prevention: Utilize data analytics and predictive models to identify customers at risk of churning. Develop strategies to proactively reach out to these customers, offering special deals or personalized attention to retain their business.
• Continuous Product and Service Improvement: Regularly update and improve your products and services based on customer feedback and market trends. Stay ahead of the competition by consistently providing value and meeting evolving customer needs.

What do we mean by High Churn Rate?

A high churn rate refers to a situation where a significant percentage of customers or subscribers stop using a company’s products or services within a specific period. It’s a comparative measure that can vary across industries, business models, or even among companies within the same sector. High churn rates imply a substantial portion of customers leaving or discontinuing their relationship with a company during a given period. For example, if a business loses 20% or more of its customer base in a month, that would generally be considered a high churn rate. High churn rates often signal underlying issues such as dissatisfaction with the product or service, poor customer experience, intense competition, pricing concerns, or lack of perceived value.

What is Netflix’s Churn Rate?

Netflix’s emphasis has been on consistently providing valuable content, investing in original programming, enhancing the user experience, and expanding its global footprint to keep subscribers engaged and satisfied, thereby reducing churn. It is between 2.3% to 2.4%. Please note that this information might have changed since then, as companies periodically release their financial reports and metrics. For the most current and detailed churn rate data for Netflix, it would be best to refer to their official financial disclosures, investor relations updates, or recent company announcements.

FAQs On Churn

Q) What is the impact of churn on a business’s bottom line?

Churn significantly affects a company’s financial health, leading to decreased revenue and increased customer acquisition costs. High churn rates can hamper a company’s ability to grow and expand its customer base.

Q) How can businesses effectively measure customer churn?

Customer churn can be measured by tracking the number of customers who discontinue their subscriptions or stop using a service within a specific time frame. By calculating the percentage of lost customers against the total customer base, businesses can determine their churn rate accurately.

Q) What are some effective strategies to reduce churn?

Businesses can reduce churn by focusing on improving customer satisfaction, providing excellent customer support, offering personalized experiences, and continuously enhancing the value of their products or services.

Q) How does churn affect customer lifetime value (CLV)?

Churn has a direct negative impact on customer lifetime value as it reduces the total revenue a customer generates over their lifetime. By minimizing churn and retaining customers for longer periods, businesses can increase customer lifetime value and improve their overall profitability.