Customer churn is the percentage of customers who stop using your product or service over a given period of time. It is a key metric to measure customer retention and loyalty, as well as the health and profitability of your business. In this article, we will explain the basic theory of customer churn, the procedures to calculate it in excel, and a scenario to illustrate the process with real data.
What is Customer Churn and Why is it Important?
Customer churn, also known as customer attrition, is the rate at which customers leave your business. It can be calculated by dividing the number of customers who churned by the total number of customers at the beginning of the period. For example, if you had 100 customers at the start of the month and 10 of them left by the end of the month, your customer churn rate for that month is 10/100 = 10%.
Customer churn is important because it reflects how satisfied and loyal your customers are with your product or service. A high churn rate indicates that your customers are not happy with your value proposition, or that they have found a better alternative elsewhere. A low churn rate means that your customers are satisfied and loyal, and that they are likely to continue using your product or service, as well as recommend it to others.
Customer churn also affects your revenue and profitability. Losing customers means losing recurring revenue and future sales opportunities. It also costs more to acquire new customers than to retain existing ones. Therefore, reducing customer churn can help you increase your customer lifetime value (CLV), which is the total revenue generated by a customer over their relationship with your business.
How to Calculate Customer Churn in Excel
To calculate customer churn in excel, you need to have two pieces of data: the number of customers at the beginning of the period (B), and the number of customers who churned during the period ©. The period can be a month, a quarter, a year, or any other time frame that is relevant for your business. The formula for customer churn rate is:
To apply this formula in excel, you can follow these steps:
- Create a table with two columns: one for the period, and one for the number of customers at the beginning of the period. For example:
| Period | Number of customers at the beginning of the period |
|---|---|
| Jan | 100 |
| Feb | 90 |
| Mar | 85 |
| Apr | 80 |
- Add another column for the number of customers who churned during the period. You can either enter this data manually, or use a formula to calculate it based on the previous and current number of customers. For example, the formula for the number of customers who churned in February is
=B2-B3, where B2 is the number of customers at the beginning of January, and B3 is the number of customers at the beginning of February. The table will look like this:
| Period | Number of customers at the beginning of the period | Number of customers who churned |
|---|---|---|
| Jan | 100 | 10 |
| Feb | 90 | 5 |
| Mar | 85 | 5 |
| Apr | 80 | 4 |
- Add another column for the customer churn rate. Use the formula
=C2/B2*100, where C2 is the number of customers who churned in January, and B2 is the number of customers at the beginning of January. Drag the formula down to fill the rest of the column. The table will look like this:
| Period | Number of customers at the beginning of the period | Number of customers who churned | Customer churn rate |
|---|---|---|---|
| Jan | 100 | 10 | 10% |
| Feb | 90 | 5 | 5.56% |
| Mar | 85 | 5 | 5.88% |
| Apr | 80 | 4 | 5% |
- You can also create a chart to visualize the customer churn rate over time. Select the data in the table, go to the Insert tab, and choose a line chart. You will see a chart like this:
!Customer churn rate chart
A Scenario to Illustrate Customer Churn Calculation
To make the customer churn calculation more concrete, let us consider a hypothetical scenario. Suppose you run an online subscription service that offers access to various courses and tutorials. You charge $10 per month for each customer. You want to calculate your customer churn rate for the first quarter of 2024.
You have the following data for the number of customers at the beginning of each month:
| Month | Number of customers at the beginning of the month |
|---|---|
| Jan | 500 |
| Feb | 450 |
| Mar | 400 |
| Apr | 350 |
Using the same steps as above, you can create a table with the number of customers who churned and the customer churn rate for each month:
| Month | Number of customers at the beginning of the month | Number of customers who churned | Customer churn rate |
|---|---|---|---|
| Jan | 500 | 50 | 10% |
| Feb | 450 | 50 | 11.11% |
| Mar | 400 | 50 | 12.5% |
| Apr | 350 | 40 | 11.43% |
You can also create a chart to see the trend of customer churn rate over time:
From the table and the chart, you can see that your customer churn rate is high and increasing over time. This means that you are losing customers faster than you are gaining them, and that your revenue and profitability are declining. You need to find out the reasons why your customers are leaving, and take actions to improve your customer retention and loyalty.
Other Approaches to Calculate Customer Churn
The customer churn rate formula that we used above is the simplest and most common way to calculate customer churn. However, there are other approaches that can provide more insights and accuracy, depending on your business model and data availability. Some of these approaches are:
- Cohort analysis: This is a method of grouping customers based on a common characteristic or behavior, such as the time of sign-up, the type of product or service, the channel of acquisition, etc. By analyzing the churn rate of different cohorts, you can identify which segments of customers are more or less likely to churn, and tailor your marketing and retention strategies accordingly.
- Customer churn prediction: This is a method of using machine learning algorithms to predict the probability of a customer churning in the future, based on their historical and current data, such as demographics, usage, feedback, etc. By predicting customer churn, you can proactively reach out to customers who are at risk of leaving, and offer them incentives, discounts, or solutions to retain them.
- Net Promoter Score (NPS): This is a method of measuring customer satisfaction and loyalty, by asking customers how likely they are to recommend your product or service to others, on a scale of 0 to 10. Customers who give a score of 9 or 10 are considered promoters, who are loyal and enthusiastic. Customers who give a score of 7 or 8 are considered passives, who are satisfied but not loyal. Customers who give a score of 0 to 6 are considered detractors, who are unhappy and likely to churn. The NPS is calculated by subtracting the percentage of detractors from the percentage of promoters. A high NPS indicates a low churn rate, and vice versa.
These are some of the other approaches to calculate customer churn that you can explore and apply to your business. However, keep in mind that customer churn is not a static metric, but a dynamic and complex phenomenon that can vary depending on various factors and circumstances. Therefore, you should always monitor and analyze your customer churn rate regularly, and use multiple methods and sources of data to get a comprehensive and accurate picture of your customer retention and loyalty.
