SaaS Churn: What it is, How to Calculate, and Industry Benchmarks
Acquiring new business is important, but retaining the clients you have is even more important to your SaaS company’s success. If you are reading this article, you are already taking a positive step toward helping your SaaS company provide better service to clients, so bravo!
The SaaS industry requires a unique approach to business and marketing. To provide great service in this industry, one must be able to see how they are helping their clients succeed and where they can improve. In this article, we will review:
- What is churn?
- The different types of churn
- Why is churn such an important SaaS metric?
- How to calculate churn rates?
- What are SaaS churn rate benchmarks?
- Why churn happens
Are you interested in calculating your churn rate and improving that rate? Augurian is a great resource to help your SaaS company retain clients by improving your churn rate.
Churn is the rate of cancellations of service measured in a specific time period, which could be monthly, quarterly, or yearly. Basically, it is the amount of business leaving a SaaS company’s service, whether that be choosing not to renew, a lapse in payment, or ending a contract. It is important to have exact measurements and definitions of churn for a SaaS company’s service so that you can address issues effectively. An important distinction when looking at this metric is between the churn rate and renewal rate.
The renewal rate is a percentage that measures the retention of customers that are using a SaaS company’s service. One factor a SaaS company could look at would be how many customers renewed their monthly or yearly service compared to those who canceled. Another way to look at the renewal rate would be through the revenue rate or difference in revenue between the past contract and the new contract for your service.
Renewal rates are not always straightforward due to different sizes in contracts, so this can affect the churn rate. An example of this would be if a customer with a $10,000 contract cancels their service, but another customer renews their $100,000 contract and the price increases by 10%, there would be a loss of a client, but no loss in renewal rate.
Understanding Churn Types
There are multiple SaaS churn types that a SaaS company needs to be aware of in order to understand best where their company’s success stands. A SaaS company can lose customers but still not lose money due to the size of contract their current customers have. We will look at the four different types and compare them below.
- Customer Churn
- Revenue Churn
- Gross Churn
- Net Churn
Customer Churn vs. Revenue Churn
Customer churn is also referred to as attrition and is the rate at which customers stop spending with your SaaS company. Revenue churn is the loss in revenue. This could be because a customer canceled a contract or spent less with your SaaS company in a given amount of time. The main difference between these two types are:
- Customer churn shows how effective your SaaS company is at keeping customers.
- Revenue churn shows the rate at which your SaaS company is retaining the revenue of its customers.
Gross Churn vs Net Churn
Gross churn is the rate of total monthly revenue that is lost due to customers canceling your service. Net churn is the revenue a SaaS company loses due to current customers downgrading or paying less for services.
Many believe net churn gives your SaaS company a better picture of the success of your service. A SaaS company could lose ten customers but renew one customer and make up that revenue loss. Gross churn would simply look at the number of customers, where net tells more of a story about money coming in.
The reason why this metric is so important in the SaaS industry is that it is a way to gauge how successful your company or, more importantly, your company’s service is. If customers are canceling your service or downgrading, it is essential to know the percentage to figure out how to fix the issue.
A SaaS company needs to look at what is working, but it is even more important to know the issues it is having as well. Ahead, we will review some of the crucial measurements a SaaS company needs to consider when looking at the health of their SaaS company and service.
Churn is a critical metric to consider when evaluating a company’s growth in a given amount of time. We stated earlier in this article that it is not always bad. A SaaS company can lose customers and still gain money. To have a full view of growth, a SaaS company needs to view different types of churn to forecast the health of their service.
When a SaaS company is able to see why it is growing or why it is failing, they have a chance to make the right choice to lead to a positive future. Whether the churn indicates the positives or negatives of the service, it is vital to have this information so that the company can act accordingly.
One of the most critical profitability indicators in a SaaS company would be the MRR or Monthly Recurring Revenue, which is generally the key factor in making profits. Just because you lose clients in a month or given time period, your company could still be making profits. Certain subscriptions or contracts could bring in more money than others, so when calculating churn, a SaaS company must know the value of the customers leaving and staying with a service.
Another reason monitoring churn can help improve your SaaS company’s business is that you are able to see why users are leaving your service. A user could leave your service due to price, poor fit, switching to a competitor, service did not help them achieve their goals and many more reasons. If you can learn why users are leaving your service, you can learn how to improve your product.
When a SaaS company can accurately evaluate churn, they are able to set goals and take the best actions to improve their service. With an accurate churn rate report, a SaaS company can see the cash flow, how they compare to others in their industry, earning prospects, and the value of the business. If the SaaS company needs to change its subscription model, service levels, or other features to keep customers or gain new ones, a report can help guide you to make educated choices moving forward.
A SaaS company should look at the customer churn rate vs. the revenue churn rate, as these stats can indicate where the business stands. If you are gaining new customers but losing revenue, a SaaS company should figure out why bigger customers are leaving their service and how to keep them from leaving. It costs more to bring in new customers than retaining existing ones. A successful SaaS company pivots its strategies to keep their high-value customers over bringing in new ones.
At this point, you should have a basic understanding of what churn is and why it is important to track to act upon, but how do you make a churn rate calculation? At a fundamental level, this rate is the calculation of customers that leave your service during a specific time. Knowing how to make this SaaS churn calculation is essential.
When one dives deeper into making this calculating, it can get more complicated with different types of customers, services, and service rates. Let’s not get ahead of ourselves though, let’s examine the basic SaaS churn formula first.
Churn Rate Formula:
(# of Customers Leaving Your Service During a Period / Total # of Customers at the Start of This Period) X 100 = Churn Rate
For example, if your SaaS company started with 1,000 customers subscribing to your service and 100 of those customers left during the first quarter of the year, your churn rate for the quarter would be 10%.
(100 / 1000 ) X 100 = 10%
There are different types of churn rates that we will go over in this article that can help show you the health of your SaaS company and service.
- Monthly Churn Rate
- Annual Churn Rate
- Net Churn Rate
How To Calculate Monthly Churn Rate
Now that you know the basic calculation, let’s move on to the monthly churn rate. To calculate this rate, use the following formula:
(# of Customers Who Churned in the Month / Total # of Customers at the Start of the Month) X 100 = Customer Monthly Churn Rate
For example, a SaaS company lost ten customers in the month, and the company has 100 total customers. To find out the customer monthly churn rate, you would divide the ten customers lost by the 100 total customers, which ends up being a 10% for the month.
(10 / 100) X 100 = 10%
How To Calculate Annual Churn Rate
Now let’s explore how to calculate the annual churn rate. To make this calculation for your SaaS company, you need to divide the number of customers lost by the total number of customers times 100. The formula looks like this:
(# of canceled contracts in the year / # of contracts at the beginning of the year) X 100 = annual churn rate
For example, a SaaS company has $500,000 at the beginning of the year and lost $50,000 worth of contracts throughout the year. Using the SaaS churn rate formula, we find that the annual rate in this example is 10%. The calculation would look like this:
(50,000/500,000) X 100 = 10%
How To Calculate Net Churn Rate
Finally, let’s find out how to calculate the net churn rate. This is calculated by measuring the lost revenue month over month (which could be from cancelations of services or account downgrades) minus the revenue that comes from existing customers expanding their services (upgrades, additional feature purchases, etc.), then dividing it by the total revenue from the beginning of the month This rate shows the revenue lost without the expansion of your customer revenue.
Monthly Recurring Revenue Rate
(# of canceled contracts in a month / sum of company contracts at the beginning of the month) X 100 = MRR
For example, if a SaaS company begins the month at $100,000 in MRR and its customers cancel $10,000 worth of services, so the MRR would be 10%. The calculation would look like this:
(10,000 / 100,000) x 100 = 10%
(MRR Churn – Expansion MRR) / Total MRR at the Start of the Month X 100 = Net Churn Rate Percentage
For example, a SaaS company starts with $50,000 at the start of the month and has $5,000 worth of contract downgrades and cancellations. The company also had $1,000 worth of upgrades in contracts in the month. The net churn rate would be -8% due to more money leaving the SaaS company than coming in.
(5,000 – 1,000) / 50,000 X 100 = -8%
What benchmarks should a successful SaaS company set for its churn rate? What is a reasonable customer rate? Now that you know how to calculate the basic rate, we will take the calculations one step further by finding out how your rate compares to the average.
- Average SaaS Retention Rate: According to a study on retention rates by UplandSoftware, 21% of users abandon saas applications after one use — making the average retention rate around 20%.
- Average SaaS Churn Rate: A rate of 5-7% is average in the SaaS industry.
What Is an Acceptable SaaS Churn Rate?
After reading this article and looking into your numbers, you may be asking, what is a good churn rate? For a SaaS company, this would be between 5-7% annually. This could vary depending on what industry you are in, how long your company has been operating, and how much money your company brings in. To understand what a good churn rate is for a SaaS company, let’s look at low, acceptable, and great rates in the SaaS industry.
- Low SaaS Churn Rate: According to the Baremetrics Academy, a low rate for SaaS companies is 3-5%.
- Acceptable SaaS Churn Rate: The acceptable rate for a SaaS company is 5-7%
- Great SaaS Churn Rate: A good rate would be below 3% for a SaaS company.
Hopefully, you now have more insights on how to calculate churn, the different types, its importance, and its benchmarks, but why does it happen? There are many other reasons why this happens and why a customer would leave your SaaS service. It is essential to know why your customer base is leaving your service so you can figure out how to serve your clients better and how to keep your churn low.
Like everything in life, there are things you can control and others that are out of your control. We will look at multiple causes of churn that are out of your hands and some that deal with your service. Remember, even if the reason for a shrinking customer base is out of your control, you must do your best to react swiftly and effectively to keep your clients. Many companies build the most loyalty by how they responded to and fixed issues for their clients.
Unavoidable Reasons for SaaS Churn
No matter how excellent your service is, churn will happen. The key action to take with this metric is knowing why it happens and working towards fixing issues that caused it. Sometimes there are certain factors that your company cannot control, which makes customers leave your service. Here are three different unavoidable reasons for SaaS churn:
- The customer is not achieving their goals with your service – Your SaaS service will not be a great fit for all customers and might not be able to help achieve their goals. The SaaS service you have could be able to help the customer, but if they do not already have a well-functioning product or company, it still can fall short. There also could be other situations outside of your control that attribute to the client leaving.
- A cash flow issue with the customer – Another issue out of your control would be your customer not being able to afford your service. You could work with your clients on payment plans or other levels of service, but if your clients cannot pay you, they will leave your service.
- Issues with your service – No SaaS company is perfect, and errors can happen, which disrupt service. There could be hardware or system upgrade issues that delay client results, which could have them look to spend elsewhere for your service. Communication or short-term discounts during this time are key to keeping churn low.
Avoidable Reasons for SaaS Churn
There are some issues that will come up with your service or your clients that are out of your control, but how you react is in your control. Also, there are reasons for churn that you can control on the front end, and if you act on them before there is an issue, you can save yourself from it.
- Bad customer support – If you are able to provide your clients with excellent customer service, this will help keep customers from leaving your SaaS product for another. Have tools like live chat, have a dedicated customer support representative or team, and offer training to help proactively answer questions.
- Bad onboarding – When a customer does not feel confident using your SaaS product, or it is not implemented correctly, they will leave. The best way to help your customer use your product, and use it the right way, is by having a great onboarding system. If you can help your customer feel like your service is already up and running right away, they will feel much more confident in utilizing the service to its full potential.
- Not having a relationship with the customer – If you do not have a relationship with your customer, it will be much easier for them to leave your service. When you are able to foster a positive relationship with your customer, they will feel more comfortable asking for help, indicating issues, and sharing successes. It is much easier for a customer to try a new service if they don’t have any emotional connection with your SaaS business.
Listen to what our friend Nate Grahek thinks the key to solving churn is.
Grow Your SaaS Business With Data-Driven Marketing
While churn is just one of many important ROI metrics, knowing what it is and how to act on the information it provides is key to having a successful business. Being able to accurately track this metric allows your SaaS business to act on the information to save money and relationships.
Now you should feel more confident in knowing not only how to identify churn but also take action to improve your SaaS business’s services and profits. For more great SaaS marketing content, join our growing community of SaaS marketing professionals at SaaS Scoop.
If you want help lowering your churn numbers and identifying how to improve, look no further. From helping your business hit SaaS valuation variables to navigating the unique aspects of SaaS marketing, Augurian does it all. We’re an award-winning digital agency. Contact an Augur today to start growing your SaaS business.