In sales, the word churn means losing a client. Your churn rate is the percentage of revenue you lost due to clients leaving.
In sales, churn is the devil. It can wreck your sales goals and prevent revenue and sales volume from increasing. Most of the time, a client leaves because the salesperson's company has failed them. Sometimes a salesperson causes churn by acquiring a client that isn't a fit. Still other times, it happens because you fire a client that is more trouble than they are worth.
How to Calculate Your Churn Rate
The math you need to calculate your churn rate is simple. You take your total revenue and divide it by the lost revenue. If your company does $20 million dollars a year and loses $3 million dollars of revenue due to lost clients, you have a 15 percent churn rate.
Different industries and companies can have wildly different churn rates, but you want the lowest possible churn. The lower the percentage of lost revenue, the less you need to make up before your new clients create sales growth. In the churn rate calculation above, your first $3 million gets you back to the starting line.
My experience in sales is in an industry with a high churn rate. We’ve had clients who needed our services for a period or for a project. When the client's project ended, they stopped using our service. The reason I suggest you focus on opportunity creation is because you can't make up lost time when the Gods of Sales punish you with high churn.
In a normal year, I would start the year down around 7 percent. That wasn't a problem because new clients would replace those whose projects had ended. But two years in a row, I started the year down 23 percent. To get back to even, I needed $9 million—only after that could I grow revenue. The loss of two large clients caused the high churn rate.
What Is Your Churn Rate Goal?
Churn is inevitable. No B2B sales organization has a zero percent churn rate. One reason sales leaders miss their goals is because they don't include churn in their plans. While it's important to include churn in your growth plan, you should also have a goal for your churn rate. You want the number to be realistic so you can address it in your plan.
Too few sales leaders and their peers in operations don't talk about the company's churn rate and how it stunts the company's growth. While the numbers change every so often, it is expensive to lose clients. The reason companies have a role called customer success is because keeping your existing clients enables faster growth.
By starting with a churn rate goal for your company, you can use your churn rate to inform your revenue growth blueprint. You also align the rest of the organization with your growth plan.
How to Reduce Your Churn Rate
Before you address your organization and ask for help with churn, start with your team. The first thing you can do to lower your churn rate is to prevent your sales force from taking clients that are not right for your company.
The nightmare clients with unrealistic expectations or unattainable service-level agreements are likely to churn, as are the companies that would be better served by a provider with a model that suits them more. The prospect who has a low-price model may defect because, even though they want better results, they want a lower price even more. By not taking these clients, you reduce the chances a client churns.
If a high churn rate is caused by clients not making the change they need to realize better results, a quarterly business review can help them do what they need to do.
How to Help Operations Lower Churn
There are, however, difficult and important conversations about operations and their responsibility to reduce churn. Those with sales goals will need a conversation about executing to ensure the client gets the results they need.
People who work in operational roles rarely recognize that their competitors are calling on their clients every day, waiting for the client to become frustrated enough to explore changing partners. One way to help your operations team to understand why clients defect is by having salespeople share what caused your client to move their business to you.
These conversations belong to leaders on both sides. Growth isn't something that sales does alone. Growth belongs to the entire organization. The more the company focuses on growth, the more important it will be to reduce churn. This strategy is how managers help their teams reach sales quotas.
What Is Churn Rate?
There is more than one way to answer the question "What is churn rate?" First, it is a calculation of lost revenue that needs to be replaced for a company to grow. Your churn rate is also a way to measure the quality of the clients the sales force wins. Low churn offers evidence the sales force is winning the right clients. A high level of churn may indicate the sales force is bringing in poorly qualified clients.
Your churn rate might also result from inefficiencies and poor execution. When a company struggles to produce the outcomes their clients need, they contribute to high churn rates. Whether it is poor leadership, being understaffed, or the systemic problems like supply-chain issues or other challenges outside of their control, it can still end with a churn rate that makes it difficult to grow revenue.
The first thing you should do after reading this post is to calculate your churn rate and ensure your plan to grow revenue includes making up anything lost to churn. This will allow you to produce the lift you need. Once you have calculated your churn rate, list clients you believe are at risk and help build a plan to keep them. By saving those clients from defecting, you will have fewer lost clients to replace.