Know Your Churn: How to Identify Your Retention Roadblock

What’s in this article:

• There are three types of churn that every business encounters: customer churn, dollar churn, and good churn
• Before you can develop an effective retention strategy, you need to know how the different kinds of churn impact your business
• As a brand, it’s more cost-effective to retain an existing customer than attract a brand new one

All organizations know that high churn is a problem, but often fail to get specific. Customer churn is just one type to pay attention to — depending on your industry, metrics like dollar churn might also be worth monitoring. Before you can develop an effective retention strategy, you need to know the different kinds of churn and how they impact your business.

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The different types of churn

Depending on who you ask, there are four, five, or sometimes seven types of churn, each with different levels of granularity. If you’re reading this guide, you probably don’t need to consider your turnover with that level of exactitude. For now, focus on the three types of churn that every business encounters: customer churn, dollar churn, and good churn. (Yes, there is such a thing as good churn!)

What is customer churn?

This is the kind of loss that tends to come to mind when you think about churn: the rate at which customers stop using your company. It’s important to note that this rate is calculated by considering how many customers left during a particular time period relative to the total customer count at the start of that time period.

If you start with 100 clients in May and lose 30, you have a churn rate of 30%. If you don’t add any new clients, and then lose another 30 clients in June, your churn rate will shoot up to 42%, because you only started the month with 70.

Customer churn can be offset by attracting new clients, retaining existing clients, or reactivating lapsed clients. Which approach makes the most sense will depend on your business, but generally speaking it’s more cost-effective to retain an existing customer than attract a brand new one.

What is dollar churn?

Customer churn is an important statistic to monitor to judge the health of your company, but keep it in context; dollar churn — sometimes referred to as revenue churn — is just as meaningful. Dollar churn refers to the rate at which monthly returning revenue (MRR) is lost.

Just as with customer churn, context for your dollar churn is critical. Loss of MRR can be offset by signing new clients, but if you’re suffering high customer churn, you may instead want to focus on upselling existing customers or delivering a higher quality of service to ensure they stick around.

What is good churn?

Not all churn signals doom and gloom for your business. A certain amount of turnover is to be expected as satisfied clients cycle out of needing your service, or customers that weren’t an ideal fit weed themselves out. It’s tempting to cling to every single customer, but a client who won’t upsell or renew because they’re a bad match for your business is a waste of valuable resources.

What’s a good churn rate?

That’s the million-dollar question, isn’t it? The simple answer is 0 but shooting for 100% customer retention isn’t realistic — or necessary! As we just discussed, even thriving businesses are likely to experience some churn.

So, if 0 isn’t the number, what is? The answer to that varies wildly based on industry and business. What matters more is improving the churn rate for your specific situation. First, figure out what your current rate is, then look into techniques for reducing churn.