So many businesses spend most of their time understandably focusing on customer acquisition, trying to attract new clients and grow their overall monthly recurring revenue (MRR). And while acquiring new customers is valuable, you also want to make sure you’re retaining the ones that you already have.
Churn rate can show you how quickly you’re losing customers, and finding ways to reduce it can help you keep your retention rates (and MRR) high. So in this post, we’re going to go over everything you need to know about churn rate.
What is Churn Rate?
Churn rate is the rate at which customers stop purchasing from your business. For subscription businesses, your churn rate tells you what percentage of customers are unsubscribing from your product or services.
An example of revenue churn over a period of weeks
Many analytics programs can show you your churn rate and the specific number of customers who unsubscribed during a set time period.
This is a visualization of cancellation over a period of weeks
What Drives Customers to Churn
There are ultimately an endless number of reasons why customers churn, but these are some of the most common:
- They just don’t need the product anymore, or struggle to see the value of your product or service; successful onboarding and marketing may prevent this
- They found a competitor whose pricing is better
- They weren’t happy with the customer support they received from your team if they had an issue (this is actually one of the top reasons customers churn)
- There’s a competitor with a product or service that offers more features they need
- Customers are unsure how to get the most out of your product or service; help desk and support resources can help with this
- You’re shifting the audience you’re focusing on, and old customers leave if the tool no longer suits them
Why Churn Rate Matters
Churn rate is one of the most important growth metrics SaaS brands need to watch because it tells you a great deal about customer retention.
Ultimately, it matters very little how many new customers you’re acquiring if you’re struggling to keep them. High churn rates indicate that there’s either a misalignment with the clients you’re signing or a potential sticking point somewhere in your product, service, or processes that needs to be resolved.
It’s also worth noting that it’s much cheaper to retain an existing customer than it is to acquire a new one. According to Harvest Business Review, it may actually be up to 25x more expensive to acquire a new customer. The last thing businesses want to do is invest significant funds into attracting customers only to lose them, especially to something preventable.
And while all businesses have some churn, making sure it stays on the lower side is essential if you want to grow at scale.
Different Types of Churn Rates
There are a few different types of churn rates businesses can track, so let’s take a look at each.
Gross Churn vs. Net Churn
Gross churn vs. net churn is an important distinction that differentiates between whether or not you’re looking strictly at churn or also considering expansions in your calculations. .
Gross revenue churn, for example, is the overall percentage of revenue that your business lost in a set period from subscription cancellations or downgrades. This can include when subscriptions end due to failed payments.
Net revenue churn, however, is the percentage of revenue lost from existing customers during a set period while also factoring in upgrades and expansions. So while some customers may have cancelled or downgraded their subscriptions, others may have increased or expanded their monthly plan with you.
Net revenue churn over a period of weeks
It’s often a good idea to look at both metrics. Your gross revenue churn shows you exactly how much revenue you’re losing due to lost or downgraded customers, which is a vital metric to track. You don’t want to think fewer customers are churning than really are.
That said, net churn is also important to track so you can understand the big picture of how some customers leave and others enthusiastically stick around. If some customers leave but others are increasing their plans or purchase prices, there’s plenty to learn from there.
Customer Churn vs. Revenue Churn
Customer churn tells you the number of customers who have unsubscribed from your product or service, while revenue churn tells you how much revenue you lost during a set period.
Revenue churn is typically tied to customer churn, but it may also involve downgrades and subscription pauses in addition to outright cancelations.
When it comes to customer churn vs. revenue churn, again, you want to track both. Each provides valuable quantitative data and valuable insights into what’s happening with your customer base.
You may realize that you’re only losing your lowest value customers, for example, and that your highest value customers actually retain longest.
Churn MRR is the amount of monthly recurring revenue lost as a result of customer cancelations. This can be the sum of total lost revenue, but it can also be expressed as a percentage (this is your churn MRR rate).
Calculating exactly how much revenue you’re losing monthly due to churn— and not just seeing it as a percentage— is important for cash-flow and financial purposes.
How to Calculate Churn Rate
The basic churn rate formula divides the total number of lost customers or revenue (depending on what you’re calculating) by the total customers or revenue at the start of a time period and then multiplying that by 100.
In other words, customer churn is calculated with this formula:
(Lost customers during a set time period / Total customers at the start of time period) x 100 = Customer churn
So if you started the quarter with 6,500 customers and 213 churned during the quarter, your churn rate would be:
(213 / 6,500) x 100 = 3.2%
And this is the revenue churn formula:
(Lost revenue / Total revenue at the start of time period) x 100 = Revenue churn
If you started the quarter with a monthly recurring revenue of $60,000 and you lost $3,000 revenue monthly, your churn rate would be:
(3,000 / 60,000) x 100 = 5%
You can also calculate net revenue churn with this formula:
[(Churn MRR - Expansion MRR) / Total MRR at the start of the time period] x 100 = Net revenue churn
So if you lost $3,000 in MRR during a set time period from churn but also gained $2,000 in expansions and upgrades with a total MRR of $60,000 at the start of the period, your net revenue churn would be:
[(3,000-2,000) / 60,000] x 100 = 1.7%
What’s a Good Churn Rate?
A good churn rate depends largely on the industry in question, and for SaaS companies that magic number is ideally around 5-7%. Incredibly successful SaaS businesses may have churn rates at or under 2%.
When possible, you want to avoid churn rates of over 8%, especially when you’re actively focused on scaling your business.
New businesses may have higher churn, with up to 15% churn in their first twelve months, so startups will want to be ready for that.
What is a Churn Analysis?
A churn analysis uses customer data to gain insight into what’s happening with your churn rate, including determining why customers are churning at the rate they are.
If you have a churn rate you aren’t happy with, a churn analysis is the best solution to determine why your business is bleeding customers and what you can do to stop it (or at least reduce it).
A good churn analysis will involve churn prediction features (which we’ll talk about in the next section), and it relies on both qualitative analytics data and qualitative survey data. Getting responses directly from churned customers can be essential to helping you determine why customers are leaving and what can be done about it.
Can You Predict Churn?
While some customers churn quietly— with as many as 97% of customers churning “silently” and never getting in touch with your customer support team—, there are indicators of upcoming churn if you know where to look.
Churn prediction uses customers data or feedback to predict the likelihood that specific customers or groups of customers may discontinue their subscription moving forward. It also uses historical business trends.
Understanding why customers are churning is a crucial element here.
Baremetrics offers cancellation insight features so that you can get the answers you need. When customers initiate the cancellation process, we’ll ask them what drove them to churn. We’ll analyze the data to help you spot trends that need to be addressed promptly.
Final Thoughts: How to Reduce Churn Rate
There are plenty of strategies to reduce churn, including the following:
- Get customer feedback. You want to hear it directly from churned customers, because you otherwise may never actually be able to track the reasons down. This is why Baremetric’s cancellation insights are so valuable.
- Have account managers check in regularly. Make sure that they reach out after a support ticket is filed or when the customer reaches out to customer support, but regular check-ins and help you catch if customers aren’t getting the full value out of your product.
- Monitor for churn indicators. If there’s a decline in SaaS product usage, for example, or if customers consistently don’t use certain high-value features, that’s a churn risk. Try to engage them before that happens.
- Continually upsell and cross-sell. The more valuable your product is, the better— and cross-selling and upselling relevant plans or features can not only reduce revenue churn, but may also give customers the functionality they need to get the most out of your product.
- Keep an eye on the market. You don’t want someone to come in and undercut you on price alone or by offering new features that are nowhere on your radar. Keep an eye on what your direct and indirect competitors are up to.
- Provide outstanding customer service. Customer service is a major factor in brand loyalty, so offering excellent service is essential. One bad experience could cost you a great client.
- Offer support resources online. Product videos, walkthroughs, and tutorials can all help your customers get the most out of what you offer. Make it easy for them to find the information they need.
Ultimately, using a reliable and subscription-focused revenue analytics tool is the best way to monitor (and therefore reduce) churn rate. You always want to know exactly what’s happening with your clientbase and your growth.
Baremetrics can help. We help you monitor 26 subscription metrics, including MRR and churn rate, all while helping you forecast revenue and understand why customers are leaving. This data can help you capture churned customers before they leave, keeping that revenue and retaining the customers.
Ready to get started? Book a demo with Baremetrics here.
Why is churn so important?Churn is crucial because it directly impacts a company's revenue and growth. Churn refers to the percentage of subscribers or customers who cancel or don't renew their subscriptions during a given time period. High churn rates can be a sign of customer dissatisfaction and can decrease a company's revenue and its ability to grow.
From a financial perspective, acquiring a new customer is often more expensive than retaining an existing one. Therefore, understanding and reducing churn can significantly improve a company's profitability. Analyzing churn can provide insights into why customers are leaving, which can inform strategies to improve the product or service.
What is a good churn rate?A lower churn rate is preferred as it indicates higher customer retention and long-term sustainability. However, what constitutes a "good" churn rate depends on the specific goals and benchmarks of each company.
What is a negative churn rate?A negative churn rate occurs when the revenue generated from existing customers exceeds the revenue lost from churned customers.
Does churn rate affect retention?A high churn rate indicates a higher rate of customer attrition, which negatively affects customer retention. By reducing churn, businesses can improve customer retention rates and foster long-term customer relationships.
How can I track churn?Churn can be tracked by analyzing customer data such as customer cancellations, account closures, or lost subscriptions. Customer relationship management (CRM) systems, subscription management platforms, and analytics tools can help businesses track and monitor churn rate effectively.
What is considered an average SaaS churn rate?The average churn rate for SaaS companies is roughly 15%, though some experts recommend a churn rate of no greater than 8% if your company is serious about growth. You can determine this easily by dividing the number of customers canceling their SaaS subscription over a specific period by the number of subscribers at the beginning of that interval.