Churn rate: definition, calculation, and application

The cancellation rate (or churn rate) is a well-known indicator in subscription or service industries. But in retail, it can also reveal valuable trends, especially when evaluating the attrition of a loyalty program, a subscription, or even a product listing.

In this article, we explain how to define, calculate, and use the cancellation rate in retail, with concrete cases and practical advice.

Cancellation rate: definition

In retail, the cancellation rate corresponds to the percentage of customers or contracts that stop buying or subscribing to a given service over a given period. It is used when there is an engagement, whether in the form of a subscription or a loyalty card.

This is a customer attrition or churn indicator, vocabulary more commonly used in B2B.

How to calculate a cancellation rate?

The cancellation rate is always calculated over a given period (month, quarter, year) and measures the proportion of customers or contracts that have been lost compared to the starting base.

Here is the cancellation rate formula:

(Number of canceled customers over the period / Total number of customers at the beginning of the period) x 100

For example, if you had 1,000 subscribers to your service at the beginning of the year, and you only have 950 at the end of the year, your cancellation rate is: 50 / 1000 = 5%

How to calculate a cancellation rate in retail?

In retail, the cancellation rate can be calculated on loyalty cards or subscriptions. For example, if a retailer offers a discount card to 4,000 customers at the beginning of the year, and 700 cancel during the year, this gives a cancellation rate of (700 / 4000) x 100 = 17.5%.

This can also be calculated by region, by store size... to understand the reasons for customer attrition.

What is the place of cancellation rates in supermarkets/FMCG?

In supermarkets, cancellation can be likened to product delisting (number of stores that stopped carrying the product ÷ number of stores that distributed it at the beginning). This is then referred to as ND (numeric distribution), shelf share, or out-of-stock.

The term cancellation rate applies mainly when there is a contractual relationship with the end customer.

That being said, if you are ever asked for a cancellation rate, we can assume that when the retailer stops distributing it (delisting), it is the equivalent of a cancellation. You can calculate it as follows:

Cancellation rate = (Number of points of sale that stop selling your brand or product / Number of points that distributed it at the beginning of the period) x 100

For example, if in January your product is present in 200 stores and in June, 30 stores have delisted it (no longer have it on the shelves), you have a cancellation rate of: 30 ÷ 200 = 15%.

How to leverage the cancellation rate of retailers?

As we have just seen, the cancellation rate is not a KPI for you as a manufacturer. Numeric distribution is the indicator to follow in this case. Nevertheless, you can indirectly exploit the retailers' rate.

Indeed, even if as a brand you do not have access to the cancellation rate of the loyalty card (which is internal retailer data), you can leverage:

• data from retailer panels: through the loyalty card, retailers measure purchase frequency, average basket size, changes in behavior...

• customer segments: regular buyers of premium beer, families consuming sodas, young urbanites buying in specialty stores...

• marketing targeting: some retailers offer brands the opportunity to sponsor campaigns using their loyalty database. For example, an emailing to cardholders who already buy orange juice, to promote a new clementine juice to them.

The cancellation rate of a loyalty card does not directly impact the brand, but it influences the quality and size of the database it can benefit from through the retailer.

The stronger the loyalty program and the more customers are retained, the more the brand can precisely target its end consumers.