Churn rate measures how many customers or how much revenue a SaaS business loses over time. It’s critical for understanding growth, retention, and profitability. Here’s a quick overview:
-
Customer Churn Rate:
Tracks the percentage of customers lost in a given period.
Formula:
(Lost Customers ÷ Total Customers at Start) × 100
Example: Start with 100 customers, lose 10 → Churn = 10%. -
Revenue Churn Rate:
Tracks the percentage of revenue lost due to cancellations or downgrades.
Formula:
(Lost Revenue ÷ Starting Revenue) × 100
Example: Start with $100,000 MRR, lose $5,000 → Churn = 5%.
Why It Matters:
- A 1% increase in churn can reduce company valuation by 12% over 5 years.
- Retaining 5% more customers can boost profits by 25–95%.
- SaaS benchmarks: Monthly churn should be 1–3% for established companies, 3–7% for startups.
Quick Comparison
| Metric Type | Customer Churn | Revenue Churn |
|---|---|---|
| Focus | Customers lost | Revenue lost |
| Insight | Retention effectiveness | Revenue stability and growth |
| Use | Improve product/service | Guide financial planning |
| Impact | Reflects customer satisfaction | Indicates growth potential |
Tracking both metrics gives a full picture of your SaaS health. Lower churn = higher growth, better profitability, and stronger customer lifetime value (CLV).
Want to dive deeper? Learn how to calculate, compare, and act on churn data to improve retention and grow your SaaS business.
How to calculate churn rate properly for SaaS
2 Main Churn Rate Methods
Churn in SaaS businesses can be measured in two ways: by the number of customers lost or by the revenue lost. Each method provides insights into different aspects of business health and retention.
Customer Count Method
This approach, often referred to as "Logo Churn", focuses on how many customers leave over a specific period. For instance, if you begin January with 100 customers and end with 90, the churn rate is calculated as:
(100 - 90) / 100 × 100 = 10%
This method is particularly helpful for understanding customer satisfaction, how well your product fits the market, and the effectiveness of your onboarding process.
Revenue Loss Method
This method, known as MRR churn, measures the percentage of monthly recurring revenue lost due to cancellations or downgrades.
"Revenue churn is a huge indicator of growth potential. That's because, even when companies have significant customer churn, they can overcome it with expansion revenue." - Justin Talerico, co-founder of SaaS advisory Beacon9 [2]
For example, if your monthly recurring revenue starts at $100,000 and you lose $5,000 in September, the revenue churn rate is:
$5,000 / $100,000 × 100 = 5%
Comparing the Two Methods
Here’s a quick breakdown of how these methods differ:
| Aspect | Customer Churn | Revenue Churn |
|---|---|---|
| Focus | Tracks customer satisfaction and product fit | Evaluates financial health and revenue trends |
| Insight | Measures retention effectiveness | Highlights revenue stability and growth |
| Use | Helps improve product and service offerings | Guides financial planning and sustainability |
| Impact | Reflects customer satisfaction | Indicates potential for revenue growth |
Tracking both metrics provides a well-rounded perspective. Customer churn helps you understand retention trends, while revenue churn highlights financial stability. For context, private SaaS companies often report a median gross dollar churn of 14% [3], with monthly customer churn rates typically falling between 3% and 5% [4].
Choosing the right method depends on your business priorities. By understanding these approaches, you can better calculate churn and develop strategies to improve retention and revenue.
4 Steps to Calculate Churn Rate
1. Select Time Period
Decide on a specific time period for tracking churn. Monthly data is great for spotting short-term changes, while annual data gives insight into long-term customer retention. Stick to one timeframe for consistency. For reference, established SaaS companies often have an annual churn rate of 5–7% (equivalent to about 0.4–0.6% monthly), while startups usually experience rates of 10–15% [5].
2. Collect Key Numbers
You'll need to gather specific data points depending on whether you're calculating customer churn or revenue churn:
| Metric Type | Required Data |
|---|---|
| Customer Churn | • Number of customers at the start of the period • Number of customers lost • Start and end dates of the period |
| Revenue Churn | • Monthly Recurring Revenue (MRR) at the start • Revenue lost • Revenue gained through expansion • Start and end dates of the period |
3. Customer Churn Math
To calculate the customer churn rate, use this formula:
(Lost Customers ÷ Total Customers at Start) × 100
For example, if a company starts a quarter with 500 customers and loses 50, the calculation would be:
(50 ÷ 500) × 100 = 10% [1].
4. Revenue Churn Math
Revenue churn can be broken down into two types:
- Gross Revenue Churn: Measures revenue lost within the period. For instance, if your starting MRR is $50,000 and you lose $7,000, the formula is: ($7,000 ÷ $50,000) × 100 = 14%
- Net Revenue Churn: Accounts for both lost revenue and new revenue from expansions. For example, if you lose $7,000 but gain $5,000 in expansion revenue, the formula becomes: (($7,000 - $5,000) ÷ $50,000) × 100 = 4%
Net churn tends to be lower because it factors in growth from existing customers. Established companies (10+ years) should aim for 2–4% net revenue churn, while younger companies (under 3 years) might see rates between 4–24% [5].
These calculations set the stage for a deeper dive into churn analysis in the following section.
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Making Sense of Churn Numbers
Now that you know how to calculate churn, the next step is understanding what those numbers mean and how to act on them.
Industry Average Comparison
Once you've calculated your churn rate, compare it to industry benchmarks. Data from over 1,200 SaaS companies shows an average churn rate of 4.1%, with 3.0% from voluntary churn and 1.1% from involuntary churn [6].
Here’s a quick look at annual churn rates across industries:
| Industry | Annual Churn Rate |
|---|---|
| Financial/Credit Services | 25% |
| Online Retail | 22% |
| SaaS Companies | 13% |
| Big Box Electronics | 11% |
| Digital Media | 6% |
| Healthcare | 6% |
Company size also matters. For example, enterprise SaaS companies should aim for about 1% monthly churn, while SMB-focused companies often experience 3–7% monthly churn [7].
Finding Churn Patterns
Dive into your churn data to identify trends that reveal customer behaviors or product challenges. Two areas to focus on:
- Seasonal Changes: Look for monthly variations to see if churn correlates with specific times of the year.
- Product-Related Issues: Watch for churn spikes after events like price changes, feature rollouts, service interruptions, or competitor launches.
Recognizing these patterns can help you make more informed decisions.
Acting on Churn Data
Use your churn insights to build strategies that improve customer retention.
Key Focus Areas:
-
Payment Issues
Delinquent credit cards are responsible for 20–40% of overall churn [8]. Solutions include automated card updates, pre-expiration alerts, and retry systems for failed payments. -
Customer Engagement
Track usage patterns to flag at-risk accounts. Develop health scores based on how customers adopt your product, and intervene early to prevent churn. -
Product Development
Feedback from churned customers can highlight areas for improvement. Use this to prioritize features and address common frustrations. As Scott Huruff from Churnkey explains:
"Larger companies have lower churn rates since they've had time in the market to establish their clientele" [6].
Ways to Lower Churn Rate
Reducing churn means boosting retention - and that directly impacts profits. In fact, increasing customer retention by just 5% can lead to a profit increase of 25% to 95% [9].
Better Customer Setup
Onboarding plays a huge role in keeping customers around. Research shows that 44% of customers leave because their expectations aren’t met [4].
-
Personalized Welcome Experience
Tailor the onboarding process for different customer segments. Include targeted video tutorials - 90% of users engage with these [11]. -
Clear Milestones for Success
Help users achieve early wins by setting specific goals. For example, Salesforce reduced churn by introducing a dedicated Customer Success team [4].
But it doesn’t stop with onboarding. Ongoing product updates are just as important for keeping users engaged.
Product and UX Updates
Listening to users and improving your product based on their feedback is key to long-term retention. Here’s how different areas can make a difference:
| Focus Area | Why It Matters |
|---|---|
| Customer Support | 84% of B2B buyers prioritize strong support when deciding to renew [10]. |
| Pricing Model | Nearly 10% of customers leave due to pricing concerns [10]. |
| Customer Experience | 73% say customer experience heavily influences their decisions [11]. |
AppSignal is a great example - they added quick filters, trend graphs, and easier navigation based on user input, which boosted engagement.
Direct Customer Help
Proactive support is another effective way to prevent churn. Here are a few strategies:
-
Early Warning System
Use data tools to spot customers at risk. For example, set alerts when engagement drops or key features go unused. -
Voice of Customer Program
Collect feedback using surveys, in-app forms, interviews, and analytics to understand customer needs better.
"I believe Customer Success has evolved beyond solely reducing churn... And no-churn is just a consequence!"
- Vivian Toledo Augusto, Head of Customer Value and Success @ Construmarket [4]
- Accessible Support
Make sure your support team is available through multiple channels and easy to reach.
Conclusion
This section wraps up the key benchmarks and strategies for managing churn, based on the detailed calculations and insights provided earlier.
Quick Calculation Guide
To calculate churn rate effectively, consistency is key. Track both customer churn and revenue churn monthly for the clearest insights. For B2B SaaS companies, here are some targets to aim for:
| Company Size | Target Monthly Churn | Target Annual Churn |
|---|---|---|
| Enterprise | 1% | 5% |
| SMB | 3–5% | 10–15% |
| Startup | 5–7% | 15–20% |
These numbers align with earlier calculations and provide practical benchmarks for SaaS businesses of various sizes. Involuntary churn - often caused by failed payments - accounts for about 25% of total churn [12].
Regular Churn Tracking
Tracking churn regularly helps catch problems early, improving customer retention and cutting down operating costs. Fred Reichheld from Bain & Company explains it best:
"Return customers tend to buy more from a company over time. As they do, your operating costs to serve them decline. What is more, return customers refer others to your company. And they'll often pay a premium to continue to do business with you rather than switch to a competitor." [13]
Here are some strategies to make tracking more effective:
- Monitor both gross and net revenue churn to fully understand customer loss and gains.
- Keep an eye on customer engagement metrics to identify churn risks early.
- Use automated dunning systems to cut revenue churn by up to 10% [15].
Consistent tracking sets the stage for using growth tools to further reduce churn.
SaaS Growth Tools
Using the right tools can make a big difference in retention efforts. For instance:
- Kommunicate improved retention with in-app checklists and interactive walkthroughs, achieving 86% completion rates for their chat widget and a 3% increase in usage [16].
- ConvertKit slashed its churn rate by nearly 15% by sending personalized welcome videos to every new subscriber [15].
As Lincoln Murphy from Sixteen Ventures puts it:
"Customer Success is when your customers achieve their Desired Outcome through their interactions with your company." [15]
Check out the Top SaaS & AI Tools Directory to find solutions that can help automate customer success, predict churn risks, and refine retention strategies. After all, keeping existing customers is far more cost-effective - acquiring new ones costs 6–7 times more [14].
