Understanding & Reducing SaaS Churn (2023)
Denis Shatalin
Founder of SaaS Camp
It costs you between five to 25 times more to acquire a new customer than to keep an existing one. On top of that, reducing churn by 5% can increase profits by more than 25%. When you’re pushing to succeed, these are the kind of ratios you want working for you.
Churn is the opposite of a vanity metric - a metric that looks good, like your number of social media followers, but has little correlation to business results. Keeping churn low should be one of your key concerns if you want to create a successful SaaS company..
I’ve launched many successful SaaS companies and learned a lot along the way. Now I put my energy into sharing the shortcut to SaaS success with SaaS founders like you. Check out our SaaS Accelerator for one-to-one help finding your audience, positioning your SaaS, and building your SaaS startup into a global brand.
Right now, I want to show you how to understand churn rate and what to do with it. Let’s dive into exactly what churn rate is, how you can calculate it, and other key metrics for your SaaS success story.
Churn is the opposite of a vanity metric - a metric that looks good, like your number of social media followers, but has little correlation to business results. Keeping churn low should be one of your key concerns if you want to create a successful SaaS company..
I’ve launched many successful SaaS companies and learned a lot along the way. Now I put my energy into sharing the shortcut to SaaS success with SaaS founders like you. Check out our SaaS Accelerator for one-to-one help finding your audience, positioning your SaaS, and building your SaaS startup into a global brand.
Right now, I want to show you how to understand churn rate and what to do with it. Let’s dive into exactly what churn rate is, how you can calculate it, and other key metrics for your SaaS success story.
What is your churn rate?
Churn rate refers to the rate at which customers are leaving, canceling, or unsubscribing from your SaaS offering. It's a key metric for understanding how well your SaaS is performing as a whole. If your churn rate is high, you must find out why and address the issues with urgency!
There are three ways of calculating churn rate: customer churn, revenue churn, and net churn. We’ll examine each of them shortly. First, let’s look at churn relates to time.
There are three ways of calculating churn rate: customer churn, revenue churn, and net churn. We’ll examine each of them shortly. First, let’s look at churn relates to time.
Choosing your timeframe
When you calculate any churn metric it’s important to pick the most relevant time period. The time period you use to calculate your churn will typically fall in line with your subscription model (monthly or annual). Monthly subscriptions suggest choosing monthly churn rates and yearly subscriptions suggest yearly churn rates.
How do you calculate customer churn?
Customer churn is the percentage of customers who leave your company or service within a certain time period. It’s easy to focus on acquiring new customers for your SaaS brand, but it’s critical you understand how many of those customers stay for the long haul.
Customer churn = customers who canceled during time period/customers at start of time period.
Let’s take a look at an example:
Customer churn is a helpful metric. However, if different customers pay different amounts of money (i.e. you don’t have a flat rate pricing structure), it does hide the value of each customer you’ve lost. To really take into account how much revenue you’ll lose you need to use a calculation called revenue churn.
Last but not least, you need to benchmark your customer churn rate based on your own historical data and industry churn rates provided in many different studies or even SaaS businesses publicly showing their churn rate date. For instance, ConvertKit, an email marketing software, is part of the Open Startup movement that publicly shares their revenue and growth metrics, and they have a monthly churn rate of around 3.6%:
Customer churn = customers who canceled during time period/customers at start of time period.
Let’s take a look at an example:
- Your SaaS start-up has a total of 1000 customers at the beginning of the month
- Throughout the month 100 of those customers cancel their monthly payments and unsubscribe from your SaaS
- The customer churn rate for that month is 100 (customers that left) divided by 1000 (customers at the start of the month)
- So your customer churn rate is 100/1000 = 0.1 converted to a percentage this is a 10% customer churn
Customer churn is a helpful metric. However, if different customers pay different amounts of money (i.e. you don’t have a flat rate pricing structure), it does hide the value of each customer you’ve lost. To really take into account how much revenue you’ll lose you need to use a calculation called revenue churn.
Last but not least, you need to benchmark your customer churn rate based on your own historical data and industry churn rates provided in many different studies or even SaaS businesses publicly showing their churn rate date. For instance, ConvertKit, an email marketing software, is part of the Open Startup movement that publicly shares their revenue and growth metrics, and they have a monthly churn rate of around 3.6%:
How do you calculate revenue churn?
Revenue churn is a metric that measures the amount of recurring revenue lost each month due to your customers canceling.
Here’s how it works:
A single customer leaving your top-tier plan will have a much bigger effect on your monthly revenue than several customers leaving a lower-paid plan.
Revenue churn is arguably a much clearer reflection of how your SaaS brand is performing than customer churn. When you offer different pricing tiers or pricing models customer churn becomes a much less effective metric because it doesn’t highlight the value of each customer to your business.
Here’s how it works:
- Your SaaS start-up has a total of £100,000 in recurring monthly revenue
- Two of your largest customers cancel their monthly payments worth £10,000
- They account for 10% of your monthly revenue
- So your revenue churn rate is 10%
A single customer leaving your top-tier plan will have a much bigger effect on your monthly revenue than several customers leaving a lower-paid plan.
Revenue churn is arguably a much clearer reflection of how your SaaS brand is performing than customer churn. When you offer different pricing tiers or pricing models customer churn becomes a much less effective metric because it doesn’t highlight the value of each customer to your business.
What is a net churn rate?
Net churn focuses on how you can grow MRR (monthly recurring revenue). It is more dynamic than revenue churn in that it takes into account the amount of revenue added as well as taken away during the period..
Let's look at how it works in practice:
So to calculate the net churn rate we take (churned MMR - expansion MMR)/total MMR.
Using the example above:
(£10,000 - £20,000)/£50,000 = -0.2 this converts to a percentage at a -20% net churn rate.
As you can see your SaaS should be aiming for a negative net churn rate to effectively grow your business.
Better yet if you are able to grow your revenue from current customers by inciting them to move up to higher tiers in your pricing model, you can drastically improve your profitability while avoiding high new customer acquisition costs. This will be reflected in your net churn rate..
Let's look at how it works in practice:
- Your MRR at the start of the month is £50,000
- Two of your larger customers cancel their £5000 plans reducing your MMR to £40,000
- This equates to a £10,000 loss and a 20% revenue churn rate
- At the same time, you open up a new enterprise plan worth £10,000
- Four customers upgrade their plan leading to a £20,000 increase in MRR
- The following month your MMR grows to £60,000
So to calculate the net churn rate we take (churned MMR - expansion MMR)/total MMR.
Using the example above:
(£10,000 - £20,000)/£50,000 = -0.2 this converts to a percentage at a -20% net churn rate.
As you can see your SaaS should be aiming for a negative net churn rate to effectively grow your business.
Better yet if you are able to grow your revenue from current customers by inciting them to move up to higher tiers in your pricing model, you can drastically improve your profitability while avoiding high new customer acquisition costs. This will be reflected in your net churn rate..
SaaS churn rate vs SaaS retention rate
Customer churn rate and customer retention rate (sometimes referred to as renewal rate) are the yin and yang of SaaS metrics. While churn rate focuses on the customers that leave, retention rate is all about the customers who stayed.
Retention rate is a very simple metric to calculate. Simply calculate the percentage of the number of customers who stayed subscribed during either a monthly or yearly period.
Here’s a quick look at a monthly retention rate:
In this instance, you can simply take the remaining customers as a percentage of the customers at the start of the month. In the example above 90 out of 100 is a 90% retention rate.
As the founder of numerous SaaS companies, I can testify that monitoring and trying to improve churn and/or retention rate are high retention rates and low churn rates that indicate your customers love your product and are here to stay.
Retention rate is a very simple metric to calculate. Simply calculate the percentage of the number of customers who stayed subscribed during either a monthly or yearly period.
Here’s a quick look at a monthly retention rate:
- You have 100 customers who pay monthly for your SaaS
- During that month 10 customers leave
- This leaves 90 remaining (retained) customers
In this instance, you can simply take the remaining customers as a percentage of the customers at the start of the month. In the example above 90 out of 100 is a 90% retention rate.
As the founder of numerous SaaS companies, I can testify that monitoring and trying to improve churn and/or retention rate are high retention rates and low churn rates that indicate your customers love your product and are here to stay.
How to effectively reduce your software churn rate
SaaS software churn is unavoidable unless you’re first to market and chances are you’ll have competitors chomping at the bit to steal your customers away.
Unavoidable doesn’t mean you can’t take steps to reduce your churn. It’s easy to write off churn as something you can’t control but that simply isn’t true. Here are some ways you can avoid unnecessary exits from your SaaS plans.
Companies going out of business or no longer being able to pay for their plan
You can’t control how successful your customers are, but you can control who your customers are.
If your software churn rate increases due to your customers’ businesses failing you need to look at your acquisition strategy. Look at how you qualify your leads and set some simple requirements that indicate success in a business.
This could be as simple as being in operation for over two years or a brief look at last year's filed accounts to ensure the business is profitable.
Attractive opening deals that hide true costs
Introductory offers are a powerful tool you can use to market your SaaS to new audiences. These typically consist of massive savings of 50% or more and give you a warm fuzzy feeling because you’ve just saved yourself a fortune.
When it comes to renewing at the end of the introductory offer exactly the same feeling occurs, but it’s the complete opposite. You’ve had a tool for 6 months but now you have to pay double for the next six!
I’m not going to tell you not to run introductory offers because let's be honest here, they work incredibly well. Solving this problem requires action from your end in the form of a personal email, phone call, or drip campaign BEFORE your customer renews.
This gives you or your sales team an opportunity to discuss the previous period of use, gauge customer feedback and act accordingly. This could be continuing the discount for another period or offering a discount on a plan upgrade to help with your net churn rate.
Annual vs monthly pricing
Your pricing structure plays a major role in your churn rates. Let's look at the pros and cons of each method.
Which method you opt for will be specific to your SaaS offering but if you are unsure look at what other successful direct and indirect competitors have implemented for their pricing models and check our guide on how to price your SaaS product. Ultimately, many SaaS businesses provide customers with the option to opt for a yearly or monthly subscription. You just need to make sure that the options are easy to understand.
For instance, Flick, a social media scheduling and analytics tool, provides a 20% discount with their yearly plan. If you’re opting for the Solo plan, you’ll need to pay £10 per month with the monthly rates. With their yearly rates, this goes down to £7, but you’ll need to pay a yearly one-time upfront fee of £84.
Unavoidable doesn’t mean you can’t take steps to reduce your churn. It’s easy to write off churn as something you can’t control but that simply isn’t true. Here are some ways you can avoid unnecessary exits from your SaaS plans.
Companies going out of business or no longer being able to pay for their plan
You can’t control how successful your customers are, but you can control who your customers are.
If your software churn rate increases due to your customers’ businesses failing you need to look at your acquisition strategy. Look at how you qualify your leads and set some simple requirements that indicate success in a business.
This could be as simple as being in operation for over two years or a brief look at last year's filed accounts to ensure the business is profitable.
Attractive opening deals that hide true costs
Introductory offers are a powerful tool you can use to market your SaaS to new audiences. These typically consist of massive savings of 50% or more and give you a warm fuzzy feeling because you’ve just saved yourself a fortune.
When it comes to renewing at the end of the introductory offer exactly the same feeling occurs, but it’s the complete opposite. You’ve had a tool for 6 months but now you have to pay double for the next six!
I’m not going to tell you not to run introductory offers because let's be honest here, they work incredibly well. Solving this problem requires action from your end in the form of a personal email, phone call, or drip campaign BEFORE your customer renews.
This gives you or your sales team an opportunity to discuss the previous period of use, gauge customer feedback and act accordingly. This could be continuing the discount for another period or offering a discount on a plan upgrade to help with your net churn rate.
Annual vs monthly pricing
Your pricing structure plays a major role in your churn rates. Let's look at the pros and cons of each method.
- Monthly subscriptions typically see a higher uptake due to lower costs but churn rates are considerably higher and it can make forecasting revenue for the year a considerable challenge.
- Annual subscriptions on the other hand considerably reduce churn rate and make annual forecasting a breeze. However, the initial upfront price tag is going to deter potential customers and typically requires higher marketing and onboarding costs.
Which method you opt for will be specific to your SaaS offering but if you are unsure look at what other successful direct and indirect competitors have implemented for their pricing models and check our guide on how to price your SaaS product. Ultimately, many SaaS businesses provide customers with the option to opt for a yearly or monthly subscription. You just need to make sure that the options are easy to understand.
For instance, Flick, a social media scheduling and analytics tool, provides a 20% discount with their yearly plan. If you’re opting for the Solo plan, you’ll need to pay £10 per month with the monthly rates. With their yearly rates, this goes down to £7, but you’ll need to pay a yearly one-time upfront fee of £84.
Conclusion
Your churn rate is your canary in the coal mine. Embrace this metric to understand the health of your business. It will determine the success of your SaaS whether you like it or not. Use all of the things you’ve learned above to calculate the churn rate for your SaaS product. The results might surprise you.
Now you’re a churn rate pro, why not head over to the blog for other great tips on how to grow your SaaS brand from 0 to global.
Now you’re a churn rate pro, why not head over to the blog for other great tips on how to grow your SaaS brand from 0 to global.
+240K ARR Playbook
How you can add $240K ARR to your B2B SaaS in less than 6 months using a Hybrid Customer Acquisition System (without increasing your marketing budget)
*Currently still available for download; file access may be restricted at any time
