January 01, 2009

Churn Rates Mask Retention Problems

We frequently read about a metric called "Churn Rate".

For subscription-based services, the churn rate illustrates the percentage of customers who leave the service in any given month.

Typically, churn rates look favorable. A company will report a monthly churn rate of 6%, suggesting that it keeps 94% of subscribers each month.

But churn rate has a damaging cumulative impact that can be illustrated on an annual basis.

For instance, a 6% monthly churn rate yields an annual retention rate of just 48% (1 - 0.06) %^ 12.

In the Multichannel Forensics framework, monthly churn rates translate as follows.
  • Retention Mode (60% or Greater Annual Retention) = Less Than 4% Monthly Churn.
  • Hybrid Mode (40% to 60% Annual Retention) = 4% to 7% Monthly Churn.
  • Acquisition Model (0% to 40% Annual Retention) = Greater Than 7% Monthly Churn.
In other words, if your monthly churn is less than 4%, you're in Retention Mode. If your monthly churn is greater than 7%, you are in Acquisition Mode.