What Is A Good SaaS Churn Rate

How Does Your Business Churn Rate Compare

Churn rate is a measure of the proportion of individuals or items moving out of a group over a specific period. It is one of two primary factors that determine the steady-state level of customers a business will support.

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Why You Need To Monitor Your SaaS Churn Rate

SaaS churn is probably one of the most important indicators to determine if you are building a successful SaaS brand. Your ability to target the right people to onboard onto your platform and then drive successful results for them to want to stay, is the picture of success.

Monitoring SaaS churn is crucial for several important reasons including:

• Customer Retention: A high churn rate indicates you're losing customers faster than acquiring new ones, which can significantly impact growth. Tracking churn helps you focus on retaining existing customers, which is often more cost-effective than acquiring new ones
• Revenue Stability: Churn directly affects a SaaS company's recurring revenue, which is vital for establishing a sustainable growth model. High churn rates can lead to unstable revenue and long-term financial difficulties
• Customer Satisfaction: Churn rate is an indicator of customer satisfaction. By monitoring and understanding the factors contributing to churn, companies can improve their products, services, and overall customer experience
• Business Insights: Analyzing churn provides valuable insights into product performance, competitive positioning, and customer behavior. These insights can help businesses improve their offerings, pricing strategies, and customer support
• Investor Confidence: A low churn rate is viewed positively by investors, as it suggests the company can retain customers and generate consistent revenue. High churn rates can deter potential investors
• Growth Prospects: High churn rates can severely hinder a SaaS company's growth. It becomes increasingly challenging to achieve sustainable growth with a shrinking customer base
• Financial Impact: Churn directly impacts revenue and financial performance. When customers leave, they stop paying for the software, reducing recurring revenue
• Customer Lifetime Value: Understanding churn helps in estimating the total revenue expected from customers over their lifetime, which informs decisions about acquisition costs, pricing, and retention strategies

By monitoring churn, SaaS brands can proactively address issues, improve their platform and services, and ultimately drive sustainable growth and profitability.

What Causes SaaS Customer Churn

Although every SaaS brand is unique and comes with its specific surprises, most times customer churn is caused by the following reasons:

• Poor Onboarding Process: An ineffective or non-personalized onboarding that fails to help users quickly experience product value and reach activation
• Bad Product-Customer Fit: When the product's features don't align with the customer's needs or expectations
• Poor Customer Service: Inadequate support or unresolved issues leading to customer dissatisfaction
• Dwindling Product Usage: Customers not engaging with or using the product regularly
• Budget Constraints: Customers facing financial pressures or budget cuts
• Weak Relationship Building: Failure to establish strong connections with customers
• High Pricing: When customers perceive the product as too expensive for the value provided
• Low-Quality Platform: Frequent glitches, bugs, or downtime affecting the customer experience
• Wrong Product-Market Fit: Attracting customers who don't need the product's core offerings
• Lack Of Ongoing Customer Success Efforts: Not providing continuous support and guidance throughout the customer lifecycle

Common Types Of SaaS Churn

There are a few types of churn that you should be monitoring as a SaaS founder including:

• Customer Churn: Percentage of customers who cancel subscriptions
• Revenue Churn: Percentage of recurring revenue lost
• Gross MRR Churn: Total revenue lost from cancellations and downgrades
• Net MRR Churn: Revenue lost after accounting for expansions and upgrades

How To Calculate Your SaaS Churn Rate

To calculate the SaaS churn rate, you can use the following methods:

Customer Churn Rate

This measures the percentage of customers lost over a specific period.

Customer Churn Rate Formula

Churn Rate = (Number of Churned Customers / Total Customers at Start of Period) x 100 Example: If you started with 900 customers and lost 30 in a month, your monthly churn rate would be:

(30 / 900) x 100 = 3.33%

Revenue Churn Rate

This measures the percentage of recurring revenue lost over a period.

Revenue Churn Rate Formula

Revenue Churn Rate = (Recurring Revenue Lost / Total Recurring Revenue at Start of Period) x 100 Example: If you started with $27,000 MRR and lost $1,200 MRR, your monthly revenue churn rate would be:

($1,200 / $27,000) x 100 = 4.44%

Gross MRR Churn Rate

This measures the percentage of monthly recurring revenue (MRR) lost due to downgrades and cancellations during a specific period, typically a month.

Gross MRR Churn Rate Formula

Gross MRR Churn Rate = (Downgrade MRR + Cancellation MRR / Total MRR at the beginning of the period) x 100 Example: Suppose your total MRR at the start of the month is $100,000. During the month, you lose $5,000 in MRR due to downgrades and $10,000 in MRR due to cancellations.

(5,000 + 10,000 / 100,000) x 100 = 15%

Net MRR Churn

This measure accounts for both the revenue lost from cancellations and downgrades (churn) and the revenue gained from expansions and upgrades.

Net MRR Churn Formula

Net MRR Churn Rate = (Churned MRR ? Expansion MRR / Beginning MRR) x 100 Example: Suppose your total MRR at the start of the month is $100,000. During the month, you lose $4,000 in MRR due to cancellations and downgrades, but you gain $1,600 in MRR from expansions and upgrades.

Net MRR Churn Rate = (4,000?1,600 /100,000) x 100 = 2.4%

Key Points To Remember When Calculating Churn Rates

• Choose a consistent time (e.g., monthly or annual) for your calculations
• Exclude new customers or revenue gained during the period from your calculations
• Revenue churn can differ from customer churn if lost customers have higher or lower than average revenue
• You can calculate gross churn (only losses) or net churn (losses offset by expansions/upgrades from remaining customers)

For a more accurate analysis, consider:

• Calculating both customer and revenue churn rates
• Comparing monthly and annual churn rates
• Analyzing trends over time
• Segmenting churn by customer types or product lines

Acceptable Churn Rates In SaaS

An acceptable churn rate for SaaS companies varies depending on several factors, including the company's size, market, and growth stage. However, general benchmarks can provide guidance:

Annual Churn Rate

• Ideal Target: SaaS companies should aim for an annual churn rate of no more than 8% to ensure sustainable growth
• Good Range: An annual churn rate between 5% and 7% is considered good
• Average: The average annual churn rate for SaaS companies is around 10-14%, depending on the type of churn measured

Monthly Churn Rate

• Ideal Target: A good monthly churn rate should be under 1%
• Acceptable Range: For startups and small to medium-sized businesses, keeping the monthly churn rate below 5% is advisable

By regularly calculating and analyzing your churn rates, you can better understand your business health and take steps to improve customer retention.

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