Churn rate

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Churn rate is also sometimes called attrition rate. It is one of two primary factors that determine the steady-state level of customers a business will support.

In its broadest sense, churn rate is a measure of the number of individuals or items moving into or out of a collection over a specific period of time.

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 idiom "to churn up", meaning to agitate or produce violent motion.


[edit] Definition

[edit] Customer base

Churn rate, as 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 distinction is usually made between voluntary and involuntary churn. Involuntary churn occurs when the company terminates the customers' contract or account - usually on the basis of a poor payment history. Voluntary churn is when the customer decides to take their business elsewhere (Berry and Linoff, 2000).

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.

[edit] Peer-to-peer

Within a peer-to-peer network, the churn rate refers to the number of peers leaving the system during a given period—usually an hour—rather than a year. It is a significant problem for large-scale systems, as they must maintain consistent information about peers in the system in order to operate most effectively. For example, with a large churn rate it may be impossible to index file locations, making some files inaccessible even though peers have them available.

[edit] 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.

[edit] 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.

[edit] 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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