No matter how hard you work, not all of your customers are going to stick around forever.
Consider that the average company switches up to 30% of its apps per year. Although lost customers are nothing to celebrate, they’re also inevitable.
Why? Because budgets dry up. Competitors come and go.
Heck, some customers just miss a payment and are never heard from again.
Either way, keeping an eye on your lost customers is crucial for the long-term growth of your business.
Enter your churn rate.
Churn is easily one of the most important SaaS metrics to monitor. In this guide, we’ll highlight how to calculate churn and what it means for the bigger picture of your business.
Table of contents
- What is churn?
- How to calculate your churn rate
- How to calculate churn rate for annual plans
- How often should I calculate my churn rate?
- What’s a good churn rate?
- How does churn impact other SaaS metrics?
- What can churn teach you about your business?
- How to figure out why customers churn
What is churn?
“Churn” refers to the number of customers or subscribers who stop using your service during a given time period.
For example, your annual churn rate is the percentage at which you’re losing users per year.
And when we talk about “churned” users, we’re talking about customers who are no longer active.
Churn allows you to keep a pulse on your company’s growth (or decline). Even a relatively small churn rate can have a major impact on your revenue over time.
Let’s say you’re a company with a steady $20,000+ MRR. If you’re experiencing a 5% churn rate, you’re losing at least $1,000/mo (and at least $10,000+ annually).
Now, imagine you’re dealing with a churn rate approaching 10% or 15%. Not good, right?
Churned users are particularly painful for up-and-coming companies struggling to scale their user-base. If you only have a handful of customers, any sort of churn seems devastating.
But keep in mind that churn is integral to the SaaS business model. Again, you can’t avoid churn outright. That said, you can (and absolutely should) actively work towards reducing it.
How to calculate your churn rate
Before you can worry about bringing down your churn rate, you need to know where you stand.
There are multiple ways to measure churn, which is typically presented either as a percentage of revenue or customers lost during a time frame.
Perhaps the easiest way to calculate churn is to divide the number of users you lost with during a time period (say, 30 days) with the number of customers you started with for that time period.
The resulting percentage would be your churn, allowing you to more accurately project how many customers you might lose on a longer-term basis (think: quarterly or annually).
Customer Churn Rate Formula
(Cancelled Customers in the last 30 days ÷ Active Customers 30 days ago) x 100
Ex: A 5% User Churn Rate means that 5% of the total customers you had 30 days ago have canceled within the last 30 days.
You can also calculate churn based on revenue lost as opposed to users lost (this is known as revenue churn, shocker). Revenue churn is arguably more important than user churn as it more accurately highlights your business’ financial health.
The formula for revenue churn is pretty much the same as the one above, except you’re calculating lost and downgraded revenue instead of customers.
Revenue Churn Rate Formula
(MRR Lost to Downgrades & Cancellations in the last 30 days ÷ MRR 30 days ago) x 100
Ex: A 5% Revenue Churn Rate means that you lost 5% of your MRR as it stood 30 days ago to churn in the past 30 days.
Specifically, revenue churn is significant if you offer a variety or pricing tiers. For example, there are much bigger implications to losing 5% of your $100/mo subscribers versus freemium users.
How to calculate churn for annual plans
Absolutely! That said, annual plans work a bit differently.
In the case of an annual plan (or any plan that is not monthly), you use the same formula(s) as above but with a different date interval.
Annual Customer Churn Formula
(Cancelled customers in the last 365 days ÷ Active Customers 365 days ago) x 100
Annual Revenue Churn Formula
(MRR Lost to Downgrades & Cancellations in the last 365 days ÷ MRR 365 days ago)
How often should I calculate my churn rate?
Once you calculate your churn rate, you may be inclined to start obsessing over it.
However, consider that day-to-day or even week-to-week changes in churn isn’t going to teach you much.
If you’re already reporting on the rest of your business’ metrics on a month-to-month basis, churn should be on your radar.
Generally speaking, though, it’s better to look at a longer time frame. Quarterly churn can help clue you in on overarching customer trends, while annual churn can help you better assess your YoY performance.
Quarterly and annual changes in churn can likewise help you understand if your long-term customer retention efforts are actually working.
The good news is that it’s possible to have a constant pulse on your churn rate (minus any complicated calculations or spreadsheets) with the help of Baremetrics.
In short, our dashboard allows you to see and understand the specifics of your churn rate alongside the rest of your SaaS metrics.
For example, you can clearly see where your churn is coming from…
...and how that churn impacts your revenue.
What’s considered a “good” (or acceptable) churn rate?
The short answer? It depends.
Generally speaking, a churn rate between 4% and 7% annually is considered both acceptable and recoverable. However, these “ideal” numbers aren’t necessarily the norm for startups who face higher, more turbulent churn rates as they start to scale.
There are also factors to consider such as your pricing, ARPU and even your industry which impact your numbers.
Also, take any numbers you hear about churn rate on Twitter or LinkedIn with a grain of salt (hint: founders can exaggerate one way or the other).
Based on real-world data from Baremetrics’ Open Benchmarks, here are some working averages at the time of this writing:
- User churn rate: 5.5% - 8.0%
- Revenue churn rate: 6.3% - 9.4%
How does churn impact other SaaS metrics?
Simply put, your churn rate is going to tie into any other revenue-related metric such as MRR.
For example, higher churn is (generally) going to have a negative impact on your revenue. The severity of this impact again depends on which users you’re losing (free versus paid) and how much those users were spending. Increased churn likewise makes it more costly to acquire new customers and reduces their lifetime value (LTV).
What can churn teach you about your business?
Your churn rate can be a treasure trove of insight, granted you know what to do with it once it’s calculated.
Chances are you’ve heard that it costs five or six times as much to acquire a new customer than it does to retain the ones you have. With this is mind, there’s obviously a direct correlation between reducing churn (or keeping it static) and increasing revenue.
Consider that if you’ve gained someone’s trust to the point where they’ve become a subscriber, you’ve already done the hard part. Conventional wisdom says that customers should then become more dependent on your product over time and therefore more likely to be a loyal subscriber for the long-term.
So when a customer churns, this signals that something went wrong. Although some factors might be out of your control (such as your customer's company going belly-up or an economic recession), churn rate can clue you in on a variety of important action items, including:
Opportunities to increase customer service and satisfaction
As buyers are spoiled for choice when it comes to the products they support, customer support and satisfaction are arguably more important than ever.
Providing more personal, attentive service could ultimately be the difference between a loyal and churned customer.
The rise of competing products and services
A rise in cancellations can also be attributed to new products showing up in your market.
Watching churn can help you better monitor the activity of your competitors, including emerging products and solutions that might take customers away from your own.
Resolving problems with your pricing strategy
Your product’s price tag obviously matters. All too often, churn occurs when someone deems your service too expensive based on its features (or lack thereof).
Churn can also be attributed to first-year discounted rates or promotions that don’t end up re-upping after the promo is over. This speaks to why your pricing structure is so important.
How do I figure out why customers churn?
If you want to know why someone decided to cancel their subscription, just ask.
Because unless your customers are prompted to provide an explanation, the answer will likely remain a mystery until you get a bad review on G2 or Capterra.
This is yet again where a tool like Baremetrics comes in handy. Our Cancellation Insights tool essentially turns your reasons for churn into data points, highlighting the most common factors behind churn so you can prioritize your business’ action items accordingly.
And the sooner you hone in on the reasons why people are churning, the quicker you can take action.
We’ve actually put together an in-depth guide on how to reduce your churn rate if you suspect you’re having issues with customer retention. Familiarizing yourself with customer retention strategies and understanding how often customers churn is a solid starting point toward building a more sustainable SaaS business.
Are you watching your churn rate?
As a SaaS company, retaining and growing your customer base is clearly a must-do.
And keeping an eye on churn can help you assess your performance each step of the way. To ensure that you always have a handle on your company’s crucial metrics, a tool like Baremetrics can be a game-changer.
Written by: Brent Barnhart