T-Mobile (TMUS -0.06%) isn't just attracting hundreds of thousands of customers each quarter -- it's making sure they stick around, too.

The wireless carrier saw a record-low postpaid subscriber churn rate in the second quarter. In fact, its churn of 0.77% last quarter was better than both AT&T's and Verizon's for the first time in history.

That's a major milestone for the UnCarrier and speaks to the competitive advantages it's built over the last few years.

The importance of churn

Churn is a metric that can impact a lot of numbers in an earnings report.

First and foremost, it has a direct impact on net additions. T-Mobile added 760,000 postpaid subscribers last quarter, its highest second quarter in eight years. While gross additions (the number of new customers coming in) played a big role in that achievement, the low churn was just as important. With fewer people going out the door, T-Mobile saw its net new customers increase substantially.

Over the long term, though, churn manifests itself in higher customer lifetime value. If a customer is less likely to cancel their service in any given month, that means they have a higher expected value for T-Mobile when they initially sign up for service. That can support higher marketing expenses and push the flywheel of growth faster, as the company can afford to spend more to bring people in the door.

That said, T-Mobile's selling, general, and administrative (SG&A) expenses are still far lower than AT&T or Verizon's, although CFO Peter Osvaldik noted, "We have more S in SG&A than the competition does," during the company's second-quarter earnings call. That's largely in part because of the higher gross customer additions for T-Mobile relative to AT&T or Verizon.

Keeping churn low will ultimately lead to higher service revenue and better free cash flow generation.

Can T-Mobile continue to lead the competition?

T-Mobile has steadily made progress to reduce its churn rate over the last three years.

Since merging with Sprint, T-Mobile has worked to move customers' service to the T-Mobile network and bring them fully under the T-Mobile brand. Since Sprint had a relatively high churn rate, that work has led to consistently lower and lower churn for T-Mobile.

But T-Mobile has finished the network migration, and the negative impact of Sprint is gone. T-Mobile now sits in an advantageous position with its 5G network, and it has a lot of bandwidth to continue building out the service and improving coverage and speed for its customers. That network advantage should put it on a long-term path toward best-in-class churn rates.

But the competition will continue to challenge T-Mobile.

"I'm sure there's still going to be some back and forth between us and the other guys before we consistently put them in the rearview mirror for good on churn," CEO Mike Sievert said on the company's second-quarter earnings call.

Churn remains low across the industry, and AT&T in particular has been aggressive in its efforts to keep customers from leaving with device promotions.

Nonetheless, more and more consumers are seeing the appeal of T-Mobile's value proposition -- a leading network at a fair price -- and finding themselves satisfied when they switch carriers. Despite revenue per user remaining flat (while competitors raised prices), the growing subscriber base should help service revenue keep growing.

What's more, T-Mobile isn't using heavy device promotions to keep subscribers -- it's simply leveraging its fixed assets, i.e., its network. That means more and more of its service revenue is translating into free cash flow, which is the biggest focus for Osvaldik, the company's CFO. As T-Mobile shows strong free cash flow growth, it's worth paying the premium price for the stock relative to its peers.