If you’re in the SaaS business, you’ve likely heard the word churn—it’s a key indicator of customer satisfaction and retention. But what is the churn rate? Do you know the difference between the monthly and annual churn rate?

Here we’ll explore the definition of each and understand why a churn rate is an important measure of your SaaS business growth.

What Is Churn in SaaS?

SaaS churn is the percentage of customers who sign up for your paid services and opt-out within a time interval. Having a SaaS churn means losing your paid customers, which is bad.

Churn exists in all SaaS companies. Even billion-dollar SaaS companies like Slack.

It indicates an underlying customer issue that needs to be fixed. If you can provide a solution, you will reduce your churn rate. In contrast, if your service does not provide a solution to the customer’s issue, the customer churn increases.

When a user adopts your product, be sure to adhere to the 30-60-90 day engagement plan to earn their ongoing business. If you can’t demonstrate your value, your customers will churn.

A low percentage of churn does not cause a significant loss to your SaaS business. But, having too many customers opting out of your services is a bad sign for your product.

  • First, the customer acquisition cost (CAC) of initially acquiring these lost customers goes to waste.
  • Second, you have to invest five times as much to acquire a new customer than to retain an existing customer.
  • Third, it lowers your monthly recurring revenue (MRR) and indicates that your customers do not trust your product.

The likelihood that a current customer will invest in your services (through up-sell, cross-sell, or down-sell) is 60–70%. In contrast, the possibility that you can sell to new customers is only 5–20%.

Customer retention is much more cost effective for your business than new customer acquisitions.

Simply losing customers and replacing them with new customers will not result in significant improvements in the growth graph of your SaaS business.

Consider that you’ve spent $150 on your marketing ads to acquire a single customer. This customer invests in your monthly subscription plan of $25. You must keep this customer for at least six months to recoup your CAC cost, and longer to earn profits from that customer.

Grow your SaaS business by understanding at the root level why customers churn out of your services.

Voluntary Churn

Voluntary churn happens when your customers actively cancel your paid subscriptions. They don’t want to use your product anymore.

Some reasons behind voluntary churn are:

  • The customer is not happy with your product’s value.
  • You have unrealistic pricing models. Perhaps, your competitor is providing the same value as yours at a lower price.
  • Your product is too complex to use.
  • There are too many advertisements or notifications on the user interface.

Involuntary Churn

Involuntary churn happens due to external reasons such as payment failure or credit card expiration. Your customer might want to use your product but got canceled from your paid subscription plan.

Some other reasons behind involuntary churn are:

  • The customer did not update their billing information after their card expiration.
  • The customer’s credit card has exceeded its limit.
  • The customer’s card is declined due to incorrect payment details or other reasons.
  • Network error or other technological errors.

What Is a SaaS Churn Rate?

The SaaS churn rate is the percentage of customers who canceled their paid subscriptions in a time period.

In simple terms, the churn rate tells you what percentage of your customers you are losing in a time interval.

While you are looking at your customer churn rate, you should also analyze your revenue churn. Revenue churn is the percentage of dollars you lose in a time period when you lose your paid customers. You can assess the loss in your monthly recurring revenue (MRR) and annual recurring revenue (ARR).

With both customer churn and revenue churn, you understand the number of customers you lose and the cost of losing these customers. Both are essential metrics and tell you how well your SaaS business is performing in the market.

For a better understanding of the metric, you can calculate the churn rate over a month, quarter, or year.

To calculate the churn rate, first, calculate the number of customers you lost within a period of time by using the formula below:

Number of customers lost in a time period = (Number of customers at the start of the time period) – (Number of customers at the end of the time period) + (Number of new customers acquired in the time period)

 Say, you have 50 customers at the start of January, and 47 customers by the end of January. How many customers did you lose in January?

Your first guess would be 3. What if we say, that’s not the right number? Allow us to explain.

You lost some customers from your initial 50 customers, but you also happened to acquire additional 2 customers in January. These new customers are included in your number at the end of the time period and they hide the true number lost.

So, you can use our formula to accurately calculate the number of customers you’ve lost in January:

Number of customers lost in January = (50 – 47) + 2 = 3 +2 =5

Final result – You lost 5 customers in January, and not 3.

To calculate the churn rate, use the formula:

Churn rate = [(Number of customers lost in a time period/Number of customers at the start of the time period)*100]%

Say, you have 2000 customers at the start of a quarter, and you have lost 200 customers by the end of the quarter.

Churn rate = (200/2000)*100 = 10%

If these calculations overwhelm you, use this effective churn rate calculator provided by Hubspot.

Knowing your churn rate will help you:

  • Predict your SaaS business performance over time
  • Understand your customer’s lifetime value (LTV)
  • Identify your product shortcomings that led to customer churn
  • Gain clarity on how successfully you’re retaining your current customers
  • Assess the value of your service to your target audience
  • Project your company’s profitability in the coming years

Though a churn rate helps you assess these indicators, it’s not the only metric that addresses them. Calculations like product churn, MRR or ARR churn, and different types of customer renewals give you a full picture of your performance.

What your churn rate doesn’t tell you is what kind of customers you’re losing—new or old.

New customers might sign up for your paid services to see what you offer. But, they might immediately cancel their recurring payments if they find that your services are not the right fit for their needs.

Old customers are more loyal to your services, and the reasons for their departure may tell a different story. Unless you understand the reasons behind customer churn, you won’t be able to fix or reduce it.

What are other names for churn rate?

The churn rate is also called the attrition rate or customer churn.

How to calculate your monthly churn rate?

The monthly churn rate measures the number of customers who cancel their service in a given month.

To calculate a monthly churn rate, use the following formula:

Monthly Churn rate = (Number of customers lost in a month/Number of customers at the start of the month)*100

How to calculate your annual churn rate?

The annual churn rate measures the number of customers who cancel their service in a given year.

To calculate a monthly churn rate, use the following formula:

Annual Churn rate = (Number of customers lost in a year/Number of customers at the start of the year)*100

What is the formula to convert annual churn rates to monthly churn rates?

To convert your annual churn rate to a monthly churn rate, or vice versa, use these formulas:

Annual churn = Monthly churn * 12

Monthly churn = Annual churn/12

Monthly churn rate vs Annual Churn rate

Now that we have all the formulas in place, let’s look at how a monthly churn rate and an annual churn rate differ from each other. The annual churn rate is the percentage of customers lost in a year, while the monthly churn rate is the percentage of customers lost in a month.

How can you use your annual churn rate to determine how many individual customers you lost in a year?

As an example, your SaaS brand has 1000 customers at the start of the year and a 5% annual churn rate.

Using the formula to calculate the annual churn rate:

Annual Churn rate = (Number of customers lost in a year/Number of customers at the start of the year)*100

5 = (Number of customers lost in a year/1000)*100

5 = Number of customers lost in a year/10

5*10 = Number of customers lost in a year

Number of customers lost in a year = 50

This means for a 5% annual churn rate, you lost 50 customers that year.

You can also use the annual churn rate to determine your monthly churn rate.

Using this formula to calculate the monthly churn rate:

Monthly churn = Annual churn/12

Monthly churn = 5/12 = .416%

That means, for an annual churn rate of 5%, you are losing .416%, or almost a half percent, of your customers every month.

Exercise

Pick out any one annual churn rate value from the table given below and calculate the monthly churn rate using the convert annual churn to monthly churn formula. Then compare your monthly churn rate with the value mentioned in the table.

You can also calculate the annual churn rate from the corresponding monthly churn rate using the convert monthly churn to annual churn formula.

Churn rate benchmarks for B2B and B2C SaaS brands

The churn rate benchmark varies according to your industry and how mature your business is.

In the SaaS industry, nearly 70% of B2B brands have an annual churn rate of less than 10%.

For white-glove service businesses, the ideal churn rate benchmark should be closer to 0%. This is because these businesses cater to every customer on a personal level, so there are fewer chances that a customer will be dissatisfied with your services.

Churn rates differ in B2B and B2C markets. Also, depending on your product, a high churn rate can be good or bad.

For example, a dating app like Match with a 30% (high) churn rate indicates that its customers are getting value. They found a suitable date and no longer need the app to make new connections.

For a social media SaaS website like Facebook, which has around 2.9 billion active users every month, a high churn rate is a negative indicator. This suggests that people don’t want to use Facebook for socializing.

Startups and SMBs might not achieve these churn rate benchmarks within their first year. They should aim for an annual churn rate of 10 to 15% as a generous benchmark. That said, they should aim to improve these rates with time.

Generally, B2C SaaS brands have a churn rate higher than the churn rate for B2B SaaS brands. Spotify has a monthly churn rate of 3.9% (B2C), while Wix has a monthly churn rate of 2% to 3% (B2B).

Can a churn rate be zero?

A 0% customer churn rate probably sounds great, as it means you didn’t lose any customers. But this is practically impossible. Remember, as we said at the start, even billion-dollar SaaS companies like Slack lose customers.

Churn rate vs Customer Lifetime value (LTV)

The customer lifetime value is the total revenue you’ve earned from that single customer.

The customer lifetime value is inversely proportional to the churn rate. The fewer customers you lose, the more profit you earn from your customers.

What should you do after a customer churns?

Whenever you lose a customer, it’s essential for you to understand their underlying concern. Ask them straightforwardly. Either you re-engage these customers by offering them a solution, or you learn about the reasons they churn.

Don’t disappoint them or wait for them to post a negative review about your product on the internet. This harms your brand’s reputation.

Final Thoughts

If your business is booming with new customers but you don’t have revenue growth, it means you have constant churn happening in the background.

Only when you have a low churn rate and high customer retention do you know your product is providing value for your customers.

At Glance, we understand the importance of churn, and we don’t want to see you lose your hard-earned dollars through customer churn. We implement churn prevention strategies for your SaaS company. They help you gain momentum in your net revenue and reach your financial targets.

Feel free to connect with us or sign up for a free trial and reduce your SaaS business churn rate.

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