You know that churn rate is one of the most important metrics in measuring the success of your SaaS business. But I think you’ll agree when I say that it’s a complicated, confusing, and often misleading metric.
Many people don’t fully grasp the intricacies of churn rate, and that can create a lot of problems. You’ll often hear the question “What’s an acceptable churn rate?”, for example. It seems like a simple enough question, but it’s actually very complicated. How are you calculating churn? What time span are you taking into account? Which customers are you including?
That’s the problem with churn rate. It seems so simple, but there are a lot of underlying assumptions. And if you don’t understand those intricacies, you might be fooling yourself—or worse, fooling your stakeholders.
That’s why we’re going to talk about churn rate today. We’ll take a look at exactly what churn rate is, how to calculate it, and talk about acceptable churn rates (which may surprise you).
What Is Churn Rate?
The most basic definition of churn rate is simple: it’s the number of customers who stop paying for your services over a specified period of time. You might measure monthly or annual churn rate, for example.
Seems simple, right?
It does until you start looking at different ways of measuring churn. Let’s take a look at the simplest way first.
Calculating Customer Churn
Your most basic customer churn rate is calculated as follows:
Customer churn = churned customers / total customers
So if you have 200 customers at the beginning of the month, and 10 of them leave by the end of the month, your monthly churn rate is 5%. (Keep in mind that this is very different from the annual churn rate. A 5% monthly churn rate results in a 46% annual churn rate.)
This is a useful metric, and it’s good to measure as a baseline. But it also simplifies things a lot. What if, for example, you have different tiers of customers, some of which pay $5 per month and others that pay $500 per month? Losing one of the $500 customers is definitely worse than losing one of the $5 customers.
That’s where revenue churn comes in.
Calculating Revenue Churn
Instead of measuring customers, this formula measures revenue:
Revenue churn = churned revenue / total revenue
If $2,000 worth of paying customers dropped from your service, and you had $80,000 coming in at the beginning of the month, you’d have a revenue churn of 2.5%.
For many companies, this will be a more useful metric, as it gives you an idea of whether you’re losing high-paying customers or low-paying ones. That’s definitely an important factor to keep in mind.
Another factor you may want to keep in mind is how your company is growing. You’re always marketing and selling to bring in new customers, so you’re making up for some of your churn.
To measure that, we’ll need to talk about net revenue churn.
Calculating Net Revenue Churn
To include the growth your service is seeing, use this formula:
Net revenue churn = (churned revenue – new revenue) / total revenue
Let’s say our example company starts the month with $95,000 in revenue. They lose customers paying a total of $5,000, but gain customers worth $8,000. Here’s what the formula looks like for that:
(5,000 – 8,000) / 95,000 = -3.2%
A negative net revenue churn rate, of course, is a good sign. That means you’re gaining more than you’re losing.
And that’s great, right? Yes . . . but there are still a few other things you might want to factor in.
These factors depend largely on your company and its revenue model. One of the most common things that SaaS (and other subscription-based) companies do is to offer both annual and monthly subscription plans. And that’s something you absolutely need to take into account when you’re calculating your revenue churn.
Calculating Monthly-Only Net Revenue Churn
Let’s take our previous company as an example. They’re earning $95,000 per month, and they lost $5,000 but gained $8,000. That’s a negative churn, which is great.
But the reality is usually more complicated than that. Let’s say we looked a bit more closely at our numbers and we found this:
|Total monthly revenue||From annual customers||From month-to-month customers|
Now when we look at only the monthly customers, we get a churn rate of 6.7%. That’s no longer a negative revenue churn rate, and we now see that the company is losing monthly customers faster than they’re gaining them.
Of course, the net revenue churn rate is still negative, and that’s good. Especially because annual customers are almost always worth more in the long run than month-to-month customers. But that’s still an important fact to be aware of.
And with a 6.7% churn rate, your average customer lifetime will be somewhere around 15 months (just divide 1 by your churn rate to get a customer lifetime estimate). That might be good for your company or bad, depending on your revenue model and goals. But it’s definitely another great piece of information to have at your disposal.
Getting Even More Detailed Churn Rates
If you think the monthly-only net revenue churn rate is as complicated as we can get, you have another surprise coming. You can get even more detailed.
For example, you might divide your churned customers into two categories: those that actively canceled their subscriptions and those that simply let their subscriptions lapse by not updating their credit cards. You could think of these as “dissatisfied” and “disengaged” groups.
You might even have a group that cancels their subscription because they’ve finished using it—maybe their business model has changed or they’ve met their own goal. This is actually a positive cancellation.
You could separate people who unsubscribe in the first month because they aren’t seeing value in your product. Some people even advocate not counting your canceling customers as churn, because they can likely be won back.
As you can see, there are lots of different ways you can measure churn, and they’ll all give you different types of information.
It’s a lot to get your head around. Let’s try to simplify it a bit.
Which Churn Rate Should You Track?
This, of course, is the question. You can customize your churn rate to track anything you want, and you can get a huge amount of highly detailed information.
But which one should you use?
I’d recommend starting with customer churn and net revenue churn. Track those for a few months to get an idea of what you’re working with and see what level of churn your company has right now. Establish a baseline and keep tracking it to see how your marketing, sales, and product efforts change those numbers.
If your company has both annual and month-to-month subscribers, start tracking that a few months after you establish your baseline on the other metrics. It’s definitely an important metric, but before you get down to this level of granularity, it’s a good idea to get a handle on the others and start efforts to improve them.
How to Track Churn
Now that you know what you should be tracking, it’s time to figure out how to track it. You’ll need to have some specific tools in place, and the tools you use depend on how your company keeps track of its users.
For example, if you use a payment processor, you might be able to export data that includes payments and customer numbers to compare them month-to-month and determine the number of canceled subscriptions that way.
Product databases are also a good source of information; backend solutions for SaaS products should give you information on how many signups, cancellations, and lapsed credit cards you have each month, making it easy to pull this information for comparison.
Many analytics solutions (including our own) can also track churn and other related metrics.
If you’re just getting started, you might not be able to easily access these kinds of data sources, but I strongly suggest you find a way to get this information as soon as possible. Churn is a great metric of the health and success of your business, and it’s worth putting some effort to get that data.
What’s a Good Rate of Churn?
This question always comes up, and it’s always difficult to answer. A good rate of churn depends on your industry, type of product, marketing and sales strategies and goals, the type of subscriptions you offer, and a wide range of other data.
That’s why, instead of looking at benchmarks, I suggest you simply always aim for improvement. No matter what your churn rate is, you should be trying to lower it.
But I know that’s not going to satisfy you, so I’ll include a few measurements of good churn here.
One of the common benchmarks you’ll see is an annual customer churn rate of 5% (which equates to a 0.4% monthly churn rate). That’s often listed as a good goal for SaaS companies to aim for. And that’s definitely a good place to start. If you’re getting under 0.4% monthly churn, you’re doing very well.
Recurly surveyed over 1,200 companies in 2016 and found that SaaS businesses had an average monthly churn of 6.19%. Yes, you read that correctly. That’s 150 times more than the stated “good goal.”
Cobloom set out to determine the average churn rate among SaaS companies and to find out if that 5% goal is realistic. They conducted a meta-analysis of studies and found a number of really interesting facts. For example, company size makes a big difference in churn; big, established companies were much more likely to hit that 5% (annual) mark.
Smaller businesses were more likely to see 5% monthly churn. Even Buffer, a very successful online SaaS provider, had around 5% monthly churn. This is a drastic difference. In the end, they concluded what I suggested above: make sure you’re moving in the right direction, and don’t worry about the 5% annual mark unless you’re a big company moving toward an IPO.
Recurly also discovered that a number of factors can also affect your expected churn rate. They found, for example, that B2B companies had a lower churn rate (6.22%) than B2C companies (8.11%), and that B2Cs had a higher variance in churn rates.
Industries varied as well, with box-of-the-month and streaming video services having notably higher rates than SaaS and media companies.
All of this goes to say one thing: benchmarking churn rates is really hard. There are different reporting methods, different standards, different ways of categorizing churn, and so on. Which is why it’s so important to not set your goals based on industry standards. You can use the 5% (annual for big companies, monthly for small) mark as a vague goal to work toward, but don’t treat it as the end-all, be-all goal.
Find your own churn rates, work to lower them, and you’ll be good. And make sure to remember that your company size makes a big difference in the churn rates you can expect.
Taking Steps to Decrease Your Churn Rate
Lowering your churn rate could be an entire post on its own—in fact, it could probably be an entire book. But based on the information above, we can extrapolate some useful general strategies.
For example, it’s crucial that you start tracking your churn rate right away. Whether you choose to measure customer churn, revenue churn, net revenue churn, or something else is up to you. Different companies will want to focus in different places.
But you need to start tracking, and you need to start tracking soon. Don’t be one of the SaaS CEOs that ignore churn.
Beyond that, it’s a matter of providing a better product or service to your customers. Find out why they’re dropping their subscriptions. Survey, email, call or find another way to get in touch with your churned customers and find out what you could have done better.
After that, it’s just a matter of making changes and watching your churn rate fall!
I find most companies are stuck with high-level metrics and they aren't able to properly understand what actually drives user growth for their web and mobile products. To do that, you need the right data and the right tools.
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