Churn is a fact of doing business as a SaaS. Even if you do absolutely everything right, you are still guaranteed to experience churn.
Understanding your average churn rates can help you assess your business’s financial health, identify problematic trends, and ultimately grow your business.
In this post, we’ll discuss what churn is and how much churn is acceptable. We’ll then use this information to see if your company is on the right track. Let’s get started.
What is Churn?
Here’s a quick and easy definition of churn: Churn is the number of customers that stop using your service in a specific period of time, such as by month or year.
Churn is a key performance indicator and one of the most important metrics to track when analyzing the health of your business and predicting your future growth. By knowing how many of your customers leave during a period of time, you can understand if you’re going in the right direction or if you need to reassess.
In addition to customer churn, there is also revenue churn. While knowing your customer churn rates will help you evaluate how your customers think about and interact with your SaaS product, your revenue churn rates will give you a different perspective. With revenue churn, you can evaluate how much of your monthly recurring revenue (MRR) is lost each month because of leaving or downgrading customers. This will help you more accurately predict future revenue, especially if you notice a trend.
Why Should You Track Churn?
If your goal is to grow your business, managing churn is a must. And you can’t manage what you don’t monitor. It’s important for you to know your churn rate at all times so that you know if you’re going in the right direction or if you’re going out of control.
Ideally, to grow your business, you must keep more than you lose. And you will never be able to scale up your customer base if you don’t track and manage churn.
It’s also important to note that churn is individual to every business and your churn rate will change over time. Make sure that those changes are moving in a positive direction.
How Do You Calculate Churn?
There are many ways to calculate your churn rate, but here’s the easiest way that we’ve found:
Divide the number of customers you’ve lost in a specific period of time by the number of customers you had at the beginning of that specific period. To get the percentage, multiply that total by 100.
Note that it’s often easier to measure churn in smaller increments, such as by a 30 day time period.
Another option is to calculate how much revenue you’ve lost in a specific time period, which may be more accurate, especially if you offer a lot of free trials. To calculate your revenue churn:
Subtract the revenue you’ve earned during this specific time period (i.e. quarter) from the revenue you earned in the last quarter. Then divide that number by the revenue you earned last quarter. Finally, multiply the total to see your revenue churn rate.
How Often Should You Measure Churn?
You can measure churn in multiple ways. The most common ways to measure churn are by month and by year. It may be tempting to measure churn on a weekly or even daily basis, but that’s not really as insightful as you may believe. Measuring churn too often can create confusion because it’s hard to see trends when taking such a granular approach. Some days you may lose more than others, but within a month’s time, it all balances out. Especially when compared to other months.
You can better identify trends and understand your churn rate when looking at one month at a time. And then, as your business ages, one year compared to the last. This helps you see if you’re following the right path. Another popular option is to measure churn quarterly, i.e. four times a year. Seeing how many customers you both retain and lose over the course of three months can be an eye-opener. You can use this information to identify whether or not your customer retention campaign is working.
What is a Good Churn Rate?
So now that you know how to calculate your churn rate and how often to do so, let’s discuss what’s a good churn rate to look for.
Across all businesses, a good churn rate is between 5% to 7% annual. However, use that as a loose idea, but understand that your individual churn rate may be lower or even higher than that number and still be okay.
Your churn rate may be higher because:
- You’re a newer business. You can expect higher churn rates during your first two years in business as you’re tweaking and perfecting your marketing and your processes. You won’t be able to hold on to all of your customers simply because they may not be the right ones.
- Your business model anticipates a higher level of churn. Not every SaaS anticipates long-term customers. For example, a dating app is likely to experience higher levels of churn than a cloud storage service.
A higher level of churn usually indicates a greater loss of revenue, but not always. And your business model may expect higher churn rates. For example, if you’re losing a lot of free users, that doesn’t directly impact your current revenue. However, it does impact your ability to grow your business, so it is a warning sign to pay attention to.
When you lose a lot of your free users, that indicates a breakdown in your conversion tactics. You definitely want to figure out what’s wrong so that you can improve your conversion rate. Free user churn isn’t exactly free because you’ve invested money to market to those users. And so, when they leave and don’t convert, that’s a loss in future revenue.
It’s also important to note that churn weighs differently.
It’s better to retain more of your customers annually than on a monthly basis. This indicates that you’re gaining more revenue from your customers and they have a higher lifetime value. And because you’re retaining more of your customers for longer, you won’t need to spend quite as much to attract new customers.
This is one of the top reasons to reduce churn, by the way. It costs five times more money to acquire a new customer than to keep and build a relationship with a current customer. So, it’s important to know your annual churn rates as well as your monthly churn rates.
The smaller your SaaS, the harder it will be to come back from a high churn rate. If you have 5% churn, but only 100 customers, that’s a huge amount of revenue lost.
The bottom line is that every business will experience some churn. You can use 5% to 7% as a baseline, but remember that your ideal rate may not be the same. But your churn rate should get lower over time as you establish your business and eventually settle into a predictable rate.
Why Do SaaS Customers Churn?
Customers churn for a variety of reasons. Some customers churn because they realize your service isn’t a good fit for the problem. But for others, the answer isn’t so clear-cut.
Let’s take a look at the top reasons why SaaS customers churn:
- They’ve decided to go with a shiny, new competitor.
- They can’t justify the price of the product.
- They no longer have the budget to spend on your product.
- They don’t know how to use your product.
- They are frustrated when using your product.
- Their credit card payment failed.
All of the above factors can lead to customer churn. It’s key to understand what’s going wrong so that you can create an action plan to solve it. (We’ve created a quick and easy guide to reducing SaaS churn that you can check out below.)
Final Thoughts
Measuring churn is one of the best things you can do for the health of your business. And it’s easy to do. Use the above formulas to find your individual churn rate.
