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Customer churn

| Article: 2 min read | Customer retention

Customer churn rate is the share of customers who left a group over a given period. The opposite measure is retention.

In plain words

Wikipedia defines churn rate as the share of customers leaving a defined group over a period and gives the formula Churn = L ÷ T × 100, where L is lost customers and T is the total. Example: 50 lost out of 500 customers in a month is 10% (Wikipedia).

The concept comes from subscriptions and telecoms, where the customer explicitly cancels a contract. In an online store, the customer simply stops buying, silently. So here you need to agree on a threshold: for example, "churn means no purchases for 12 months". For a store selling appliances this threshold will be longer than for coffee.

Formula

Churn = customers who stopped buying during the period ÷ customers at the start of the period × 100%

Retention = 100% − churn.

Example (illustrative figures)

The figures are made up for the example. A cosmetics store had 10,000 active customers (bought in the last 12 months). A year later, 6,500 of them bought again and 3,500 did not. Churn = 3,500 ÷ 10,000 = 35%, retention = 65%.

What else to know

From Wikipedia (Churn rate):

  • Annual churn of 25% means an average customer lifetime of four years, 33% means three.
  • Gross churn counts all losses, net churn subtracts new customers.
  • The overall figure can understate churn in a fast-growing base, so it is more accurate to look by cohort (cohort analysis).
  • There are "revolving door" customers who leave and come back for a new-customer promotion.

For subscriptions, a16z distinguishes unit churn (lost customers ÷ customers at the start of the month) from gross revenue churn, and warns that net revenue churn can mask real losses through upsells (a16z).

Common mistakes

  • Calculating churn by calendar without accounting for the purchase cycle.
  • Not separating customer churn from revenue churn.
  • Taking the average across everyone. Buyers from marketplaces, ads and email leave differently.
  • Treating 100% churn as bad. For one-off purchases it is normal; what matters is comparing with your category.

FAQ

What is churn in simple terms? The share of customers who stopped buying during a period.

How do you calculate customer churn? Divide the number of customers who left by the number of customers at the start of the period.

How does churn differ from retention? They are the same thing from two sides: retention plus churn equals 100%.

How can I reduce churn? Find the moment when customers disappear (cohorts, RFM) and work on it: reminders, email campaigns, a loyalty program, after-sales service.

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