Churn Rate vs. Retention Rate: Similarities and Differences

By 

Rob Elgar

 on July 31, 2022. 
Reviewed by 

Joel Taylor

Five wooden building blocks stacked next to each other against a powder blue background, each with a smiley-face icon on the front. On the right-side of the image, a hand is holding a sixth block that is turned so that it displays a bit of two different sides. On this block, we can see a smiley-face icon with a bit of a less-satisfied expression poking out.

Retention rate and churn rate may be two closely related KPIs for determining website performance, but they are not the same. Retention rate measures the percentage of customers that continue to buy from your business over a set period of time, while churn rate measures the percentage of customers that are lost.

Calculating Churn Rate and Retention Rate

To calculate your retention and churn rate, you'll need the following metrics:

  • Number of new customers in the last 30 days
  • Number of new customers in the last year
  • Number of new customers that cancel after the first 30 days
  • Number of new customers that cancel after the first year
  • The average number of months a customer stays before canceling

Calculating Retention Rate

To calculate your customer retention rate, you will need to first determine the time period you wish to view. From there, you can fill in your data to the following formula:

[(Customers at the end of a period - new customers over that period) / customers at the beginning of the period] X 100

Calculating Churn Rate

There are two types of customer churn rates:

  1. Voluntary churn When customers leave because they're unhappy.
  2. Involuntary churn When customers leave for reasons such as failed payments.

Whichever reason, a high churn rate is not ideal and should be reduced whenever possible.

To work out your customer churn rate, use the following formula:

(Customers who left at the end of a period / Total number of customers at the start of the period) X 100

Churn Rate vs. Retention Rate: Key Differences

Churn rate and retention rate are inversely proportionate, meaning that as one rises, the other falls. This indicates that there are some major differences between the two metrics, including the following:

  • Churn rate refers to the percentage of customers that leave over a given period
  • Retention rate refers to the percentage of returning customers over a given period
  • A higher retention rate results in a higher ROI
  • High churn rates are directly related to a loss in sales
  • A high retention rate indicates customer satisfaction
  • A high churn rate indicates that customers are unsatisfied with your product or services
  • Businesses aim at a high retention rate and a low churn rate

Relationship Between Churn Rate and Retention Rate

The main way churn rate and retention rate are related is that they both indicate customer satisfaction. Moreover, they are directly related to each other. For example, a company with a high churn rate will, by default, have a low retention rate, and visa versa.

Determining your churn rate will give you a better understanding of how your customers are unhappy with your services, while determining your retention rate will show you what you're doing right.

Can't find what you're looking for?