Churn is a crucial metric to SaaS companies and any subscription-based business for that matter. For SaaS companies to grow and scale their business, they must retain a high percentage of their customer base. For most SaaS companies churn reduction is the biggest opportunity for growth.
SaaS churn rate is the rate at which customers stop doing business with a company over a given period of time. Churn may also apply to the number of subscribers who cancel or don’t renew a subscription. The higher your churn rate, the more customers stop buying from your business. The lower your churn rate, the more customers you retain. Typically, the lower your churn rate, the better.
How Do You Calculate Churn Rate?
There are two types of churn that are typically calculated when we talk about churn rate. They are customer and revenue churn rates. They both have tremendous value but tell you slightly different stories. Let’s look at how to calculate customer and revenue churn rates.
How Do You Calculate Customer Churn Rate?
Customer churn (or logo churn) treats all customers equally in terms of their churn impact on your business. The number of customers who cancel their contracts regardless of the amount they spend with you is referred to as the customer churn rate. Companies generally provide more services for customers that spend more vs. customers that spend less. Low-dollar churn can be easily justified and sometimes ignored as your focus remains on your highest-paying customers. However, low dollar churn adds up, contributes to negative word of mouth and can be the underlying source of the leaky bucket. Logo churn rate is a great way to ensure your blindspots don’t catch you off guard.
Here is the formula for customer churn rate or logo churn rate:
How Do You Calculate Revenue Churn Rate?
Revenue churn demonstrates a company’s ability to retain revenue, and as opposed to logo churn, revenue retention doesn’t treat all customers equally. Revenue churn rate helps you quantify the financial impact of churn over a specific time period. It can demonstrate your ability to retain key high-paying accounts and can quantify the impact of high levels of low-dollar churn.
Here is the formula for revenue churn rate, also called gross revenue retention:
Calculating Annual Churn vs. Monthly Rate
Whether you’re calculating annual or monthly churn, the formulas are the same. The difference lies in the time period and this is where you need to ensure you are consistent. For example, if you will calculate monthly customer churn rate then the following formulas would be used:
If would like to calculate annual customer and revenue churn the following formulas would be used:
The churn calculations above do not take into account growth or new customer acquisition. Sales that occur during the time period used (month or year) should not be included in the customer logo count or revenue totals.
How Do You Convert Annual Churn to Monthly?
Converting annual churn accurately takes a little more sophistication as it is not as easy as dividing an annual churn rate by 12 or multiplying a monthly churn rate by 12. In some instances, you will get close but unfortunately, it isn’t as clean as that.
To convert annual churn to a monthly churn rate:
MONTHLY CHURN RATE = 1 – (1 – ANNUAL CHURN RATE)^(1/12)
To convert monthly churn to an annual churn rate:
ANNUAL CHURN RATE = 1 – (1 – MONTHLY CHURN RATE)^12
The formulas above can be copied into Excel, replacing the annual churn rate or monthly rate with the appropriate percentage and it will do the conversion for you. The table below will give you an idea of where you may end up.
|Annual Churn||Monthly Churn|
What is a Good Churn Rate?
If you want to know whether your company has a good customer churn rate you’re not alone. However, there’s no simple answer to that question because the definition of “good customer churn rate” differs by industry and other factors like the profile of your customers.
For example, Product-Led Growth (PLG) models are designed for low prices and a higher number of customers. The nature of the business model means they can tolerate higher churn rates, which could be greater than 10% annually. Generally speaking, the average churn rate by industry for SaaS (software-as-a-Service) aims for less than 10% annually.
In contrast, offerings positioned for large, Enterprise-level sales generally provide fewer, higher-service deliverables. Companies with customers that spend more for white glove services should aim for a churn rate closer to 0%.
Design Your Company’s Path to Next-Level Growth with Alignmint Growth Strategies
Your company may have a great product-market fit, a well-designed product, and sales/marketing teams that bring in new customers. But when those wins are met with a churn problem, it becomes impossible to grow and meet revenue targets.
Successful churn reduction strategies align your company to boost customer lifetime value…aka retention.
At Alignmint Growth Strategies, we deploy churn reduction strategies so that you hit your revenue targets and maintain momentum.
Customers spend more, stay longer, and refer like crazy. Employees feel connected to your vision and confident they can be successful in their work. And leaders focus on progress and growth.
Discover the churn rate reduction strategies that work best for your company by making an appointment with Alignmint Growth Strategies. Connect with us today.