A question I've been getting a lot lately is, "Will a recession cause our churn rate to go up?"
The surprising answer is: Yes, but not because churn will get worse.
Let me explain...
Having been through a few of these major recessions I've had multiple chances to observe how they impact customer churn.
Overall, most companies will NOT experience significant increases in their real customer churn. (There are obviously exceptions to this, which I address below.)
But even if real churn does not increase at all, nearly every company's churn rate will go up sharply in a recession.
The Churn Rate Problem
The reason for the paradox is found in the way we calculate churn rates. The most common method is to use customers (or dollars) churned in the numerator, and total customers (or dollars) in the denominator.
Something like this...
But this formula has a serious flaw because it's sensitive to what is happening with sales.
The reason is that customer churn is delayed because customers churn after a period of time. So the denominator changes before the numerator.
When sales is increasing, the churn rate is distorted downward, making it look lower than it really is.
When sales are slowing down, the churn rate is distorted upward, meaning it appears to get much worse than it really is.
One way to visualize this effect is to simply plot growth over time as three lines: new sales, churn, and active customers like this...
The way to read this is to see that when the sales and churn lines are getting further apart, growth accelerates rapidly and the churn rate appears very low. And when the lines start to converge, growth decelerates and the churn rate will switch to appear very high.
This is true even if the real amount of churn is not getting worse! In the example chart above the real rate of churn is constant.
I strongly recommend using this simple method to visualize what is going on with your churn. For those interested, I provide a downloadable spreadsheet to make it easy to build your own growth chart in my Churn Whisperer's Guide to Churn.
The Recession-Churn Paradox
In a downturn or recession, slowing sales results in a spike in the nominal churn rate, even if churn has not actually gotten worse.
This is one big reason why relying only on the churn rate as your primary metric is so dangerous. You need to be watching your real churn. I explain this and show how to improve your churn rate metric as well as how to measure real churn in my Guide to Churn.
For Some, Churn Gets Worse In A Recession
The First Law of Customer Retention is: Customers stay to get results.
Most companies don't experience significant increases in their real churn during a recession because their customers are getting results that few customers would willingly walk away from during hard times.
But this also explains why real churn goes up for some companies. During a downturn, customers take a close look at all their expenditures with the intent to get rid of anything that isn't producing significant, measurable value.