Churn rate


Churn rate

Churn rate (sometimes called attrition rate), in its broadest sense, is a measure of the number of individuals or items moving into or out of a collective over a specific period of time. It is one of two primary factors that determine the steady-state level of customers a business will support. The term is used in many contexts, but is most widely applied in business with respect to a contractual customer base. For instance, it is an important factor for any business with a subscriber-based service model, including mobile telephone networks and pay TV operators. The term is also used to refer to participant turnover in peer-to-peer networks.

The phrase is based on the English verb “churn”, meaning 'to agitate or produce violent motion'.

Contents

Definition

Customer base

Churn rate, when applied to a customer base, refers to the proportion of contractual customers or subscribers who leave a supplier during a given time period. It is a possible indicator of customer dissatisfaction, cheaper and/or better offers from the competition, more successful sales and/or marketing by the competition, or reasons having to do with the customer life cycle. The churn rate can be minimized by creating barriers which discourage customers to change suppliers (contractual binding periods, use of proprietary technology, unique business models, etc.), or through retention activities such as loyalty programs. It is possible to overstate the churn rate, as when a consumer drops the service but then restarts it within the same year. Thus, a clear distinction needs to be made between 'gross churn', the total number of absolute disconnections, and 'net churn', the overall loss of subscribers or members. The difference between the two measures is the number of new subscribers or members that have joined during the same period. Suppliers may find that if they offer a loss-leader “introductory special”, it can lead to a higher churn rate and subscriber abuse, as some subscribers will sign on, let the service lapse, then sign on again to take continuous advantage of current specials.

Employee turnover

In some business contexts, churn rate could also refer to high employee turnover within a company. For instance, most fast food restaurants have a routinely high churn rate among employees. For larger companies, such as Fortune 500 companies, the attrition rate tends to be much lower compared to a Fast Food franchise. The company size and industry also play a key role in attrition rate. An “acceptable” attrition rate for a given company is relative to its industry. It would not likely be useful to compare the attrition of Fast Food employees with a Fortune 500 company in a corporate setting. Regardless of industry or company size, attrition rate tends to be highest among the lowest paying jobs, and lowest for the highest paying jobs.

Attrition Rate has always played a role in how cash flow is affected for employee payroll. For example, if a company has 10,000 employees, and needs to save money on payroll, it may be wise to simply institute a temporary “hiring freeze” knowing that some people will leave the company through natural attrition, thus saving employee payroll by not replacing or hiring new employees. It could be expected that if the average employee makes $40,000 per year, and the company has 10,000 employees, a natural attrition rate could be between 1% and 5% depending on the size and industry of the company. A rate of 5% or more for a larger company most often indicates layoffs in addition to natural attrition, early retirement, and firing.[citation needed]

Employee moves

Churn rate can also describe the number of employees that move within a certain period. For example, the annual churn rate would be the total number of moves completed in a 12-month period divided by the average number of occupants during the same 12-month period.

Monthly and quarterly churn rates can also be calculated.

See also

References

  • Berry and Linoff, Michael J.A. and Gordon S. (2000). Mastering Data Mining: The Art and Science of Customer Relationship Management. John Wiley & Sons. ISBN 0471331236. 

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Look at other dictionaries:

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  • churn rate — UK US noun [countable] [singular churn rate plural churn rates] business a measurement of how often new customers try a product or service and then stop using it Thesaurus: activity of selling …   Useful english dictionary

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  • churn rate — UK / US noun [countable] Word forms churn rate : singular churn rate plural churn rates business a measurement of how often new customers try a product or service and then stop using it …   English dictionary

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