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The Ultimate Guide to Churn Rate

Hyper-growth SaaS startups think they have understood everything in and out. Business is booming, they are getting new customers and have a great sales team but suddenly churn hits them. Early-stage startups do not realize what churn looks like. You are busy acquiring new customers but you don’t see the customers slipping away due to manageable causes. 

Churn rate has a simple definition but is a complex subject that has a major impact on your business. As a part of your business, you are probably already monitoring your churn rate and are well aware of the huge impact it can have on a business, especially subscription businesses.

The churn rate can be calculated and managed in multiple ways. After all, your churn rate determines the potential growth of your business.

What is the churn rate?

Before getting at the churn rate, it’s critical to understand how a subscription economy works. 

Why? Because the concept of ‘Churn’ is specific to the subscription economy. We live in a ‘subscription’ era. This means your customers are merely subscribing to your product/service. Since they’re not purchasing, it gives customers leeway to jump to a more suitable product at any time. 

For your business, it translates to losing both customers and revenue.  

The “churn” rate is the rate at which your subscribers aka customers of your SaaS product stop renewing your services. The churn rate is crucial for subscription businesses because it is an indicator of long-term success.

Reducing customer churn is one of the most important steps you can take to boost the performance of your subscription business.

Types of Churn

It’s important to know the different types when you think about churn. There are mainly 3 types that need to be understood. 

  • MRR (Monthly Recurring Revenue) churn- The recurring revenue lost from customers who churned in the month. 
  • Logo or Account churn- The number of accounts or the customers that churned over a given time period. 
  • User churn- Lost users or licenses within product instances in the month. This churn helps you in evaluating which accounts may be more likely to churn in the future. 

Suggested Read: 7 types of SaaS Customer Churn you may not be aware of!

MRR churn

It is the percentage of monthly revenue loss that you’ve incurred from your churned customers. This can happen if your clients downgrade to an inexpensive product or a lower subscription pack. While they’re still doing business with you, it may not necessarily be at the same scale as before. This is a criterion that your customer success team will want to tread cautiously on especially as they keenly observe your most loyal customers. 

MRR churn =  Lost MRR / MRR over the previous period

 

Logo (Account) churn

It is a vital metric used by SaaS or subscription businesses as input to the holistic health of the business. SaaS investors are more concerned with logo(customer) churn and they rely upon the measure to analyze LTV (customer lifetime value) calculation. 

This churn is also sometimes referred to as subscriber churn as well. The calculation of the logo/account/subscriber churn is as follows:

Logo churn = Number of logos (customers) lost during the period / Number of logos (customers) at the beginning of the period.

 

How does churn rate impact other SaaS metrics

Understanding the relationship between churn and other SaaS metrics is important. It helps to know one metric is affected by the other. 

Retention (Renewal) Rate

Customer churn is the main antagonist of another marketing metric – Retention Rate (RR). It determines the number of loyal customers who continue to use your company’s product. RR has its own formulas for calculating, but the easiest way to calculate it is as follows:

Customer Renewal rate = Number of customers who renewed their contract / Total number of contracts up for renewal

 

Check out The Ultimate Cheat Sheet to Customer Success to know more about the metrics.

If you are evaluating indicators as a percentage, in this formula, you must take one for 100%. The closer the retention rate is to 100%, and the churn rate to 0%, the better you manage to maintain your positions with clients.

Average customer lifetime

Another important metric related to customer churn is the Average Customer Lifetime (ACL). This value is inversely proportional to the churn rate – if the churn rate is low, it means that customers stay with you for a long time:

Please note that if you are calculating the churn rate as a percentage, then one must be taken as 100%. ACL is calculated for the same period as CR: for example, the monthly churn rate of 5%, then on average a client will use your services 100 ÷ 5 = 20 months.

Customer Lifetime Value

LTV (or CLTV) is the measure of how much revenue a user generates during their life cycle. LTV measures the amount you’ll be receiving from an individual customer. It is the customer’s lifetime value or, simply put, a measure of how much revenue a customer would spend throughout his/her tenure with the company.

There are different approaches to calculating LTV. To calculate the LifeTime Value through the ACL, you need Average Revenue Per User (ARPU). 

LTV = Average revenue per user (ARPU) / MRR churn (or customer churn)

 

The ‘average income’ from each customer for the period is also required for the calculation. It is calculated as the ratio of total income for a period to the number of active users for the same period.

NRR (Net Retention Rate)

Net Retention Revenue (NRR) takes into account the total revenue earned minus any revenue churn (caused due to departing customers or customers who have downgraded) plus any revenue gained through upsells or cross-sells. NRR is an all-embracing measurement that looks at the wider facets of your revenue retention. It helps you focus on how fast your revenue is growing from upgrades.

NRR= Revenue from renewals – downgrade/churn + upgrades/upsells

 

For example, if your MRR at the start of the month was $10,000, your MRR from renewals at the end of the month was $9500, you lost $250 from the churn and lost another $250 from the month downgrades. With an additional $1000 from upgrades, the NRR would come out to be:

NRR = [($9500 + $1000– $250 – $250) / $10,000] * 100 = 100%

GRR (Gross Retention Rate)

GRR is the same as NRR except that its calculation doesn’t take into account the ‘upgrade/upsells’. It measures your business’s ability to retain customers with itself for as long as possible. 

GRR= Revenue from renewals – downgrade/churn

 

Going by the same example, the GRR would come out to be:

GRR = [($9500 – $250 – $250) / $10,000] * 100 = 90%

Check out the difference between Gross Retention Rate and Net Retention Rate to understand them in detail. 

Red flags for Churn

Customers don’t churn overnight. It’s a decision that they make long before they actually churn. You’ll find those signs and signals if you pay close attention to their behavior. Yet, many businesses fail miserably at this.

The following are some of the signs which your customers start exhibiting before churning out.

Types of Customer Advocacy

  • Downloading/Exporting Data
  • Fall in Product Adoption
  • Negligible or no communication
  • Expired credit card
  • Change of account owner

 

This list is not exhaustive. Yet, these are some major causes why your customers might think of leaving. They’ll like to stay with you if customers get desired value from your brand. Switching from your platform to the other is costly for them. So, if you can see those signs of discomfort, act on them at the earliest opportunity. 

Suggested Read: Three Kinds Of Early Warning System To Drive B2B SaaS Customer Retention.

How to Calculate Churn

You can calculate your churn rate (i.e. the number of customers you lose per month) using the formula below:

Churn rate = no. of customers you had at the start of the period – no. of customers you had at the end of a period / no. of customers you had at the start of that period.

To put this in real terms, let’s go over a simple example. Let’s say you had 100 members on July 1 and 93 on July 31. Subtract 93 from 100, which gives you seven. Then divide seven by 100. This brings your monthly churn rate to 7%.

If you’re wondering how this compares to other businesses, subscription businesses see an average 5.6% churn rate once they “mature” their early stages of growth. That said, it’s worth mentioning that churn rates vary widely from company to company. Plus, it’s okay to have an above-average churn rate, especially if you run a small business with limited resources to reduce churn.

Source: Statista 2021

 

The important point to remember here is that by simply calculating your churn rate, you have a metric to better understand the health of your business, and you can take steps in the right direction. But contrary to what you might think, the customer churn in itself is not a problem – no company can satisfy all its customers all the time. The real problem lies in the reasons for your churn rate. So, before choosing a Churn reduction strategy, it is worth considering the main reasons for churn to identify the right course of action.

This is the simplest way. Its advantage is its simplicity. You do not need to crunch big numbers and you will get a metric that you can work with. But its simplicity does not capture growth properly. If your company is taking in new customers every day, this method can show your churn rate going down but you would be losing more customers than last month.

Adjusting the simple method

Making a simple adjustment in the above formula can account for monthly growth. In this formula, we use the customer count in the middle of the month rather than the start. This gets us an average of customers coming in for a window. Dividing that by churned customers gives you a SaaS churn rate that involves your growth.

 

For example- if you had 10 customers in the middle of the month and 2 churned, then the growth rate would be 10/2= 5%.

Pros & cons

This method falls short because its variability for different periods is confusing. If you use this method to calculate monthly, quarterly customer churn, the results will be very different. But it does take into account the growth issue. 

This formula assumes that the customer churn has no fluctuating values and is spread out evenly. But that is rarely the case with churn rates. This formula thus does not incorporate multiple time windows. The ideal formula should be able to adjust itself with the duration of input time.

Churn Prediction

Companies look at churn analysis because they are looking for actionable insights. This can be achieved through the predictive churn rate. We get the weighted average churn rate, so it also predicts the churn rate for any given day.

Here InactiveCustomers is an array of the number of active customers on the day i become inactive by day i+n.

 

If you have 200 customers on July 1, you assume how many have churned on August 1. You use that number and divide it by the total customers in July. This will give you a churn prediction that can be used to calculate churn on any given day.

Pros & Cons

Churn prediction sounds awesome in theory. You can set up parameters, work on the finances and be proactive. But it is still a prediction and with it comes uncertainty.

The predictive way takes two months of data to give a general churn rate. This rate can be used to predict future customer churn but is essentially an unactionable metric for the first two months.

 

The Better Average

We adjusted the second formula but it is still incapable of showing the whole story. So rather than taking an average of the first and last day of the month, we can take the average of each day in a month. This makes the numbers more precise and gets you a more accurate churn rate.

 

Pros & Cons

This formula solves all the problems we have encountered yet. It is a stable platform during high growth and shifts accordingly with time windows too. 

There is no one stable way to calculate SaaS churn. Because a formula cannot include all the variables that churn fundamentally has. Thus using multiple methods for different use cases is the ideal solution.

The Simple Way is the better way

All the other methods might seem useful but churn rate calculation is more about the number. With reduced complexity you achieve:

  • A clear understanding of what you are calculating. This means it is easily shareable across teams.
  • With other churn rate calculations, you add too much variability. This makes comparing them difficult. When using the simple way, you get clear-cut growth and decline for your calculations.
  • Churn is all about getting to the whys of it. Complex calculations can skew the problems due to which your attrition is high. The simple way acts as a standard benchmark.

How to reduce Churn?

To reduce your Churn Rate, you first need to understand why your customers are leaving.

 

1. Optimize your targeting

If you are acquiring new customers at a rapid rate but not keeping them long-term, your offering may not be the right solution for the people you are targeting. Focus most of your marketing campaigns on your ideal customers.

Who is using your software? The type of business?  What are your offerings for different use cases? Where to find them?

2. Create long term relationships

Offer a good bargain for annual subscriptions instead of monthly plans. Longer contracts mean ample time to build trust and retain them for years. This will also allow you to upsell more easily.  

3. Personalize your onboarding emails

Every client wants to know that you are their priority. Segmenting users and sending them personalized emails & notifications is a great practice. Use email campaigns where you can show them actionable insights, their usage, and where they might be lacking in usage.

 

4. Optimize your customer service

Multiple studies indicate that poor customer service is the leading cause of customer churn. For reference: An Oracle survey explained that poor customer service experience is 80% of the causes of your customer going to a competitor. Customer service is your bread & butter for retention.

Use a good all-in-one customer service tool to manage all customer interactions in one place

 

5. Create useful resources for your clients

For making customers use the product regularly, make detailed playbooks, guides, and teaching materials. Regular users won’t leave you.

  • Knowledge base for paid users
  • How-to videos and tutorials, webinars, e-books, white papers, case studies, etc.
  • Blog
  • Emails for Tips to paid customers
  • High-risk clients can be roped in by help with where they are struggling
  • Youtube
  • For bigger companies, make personalized material about their specific use cases
  • Gamification of your product is also a very cool strategy. Salesforce is a great example.

 

6. Identify users at risk

Prevention is better than cure. Be wary of the signs of an agitated customer. Some of the red flags that are commonly seen are:

  • low activity
  • incomplete feature implementation
  • poor customer results
  • complaints
  • irregular payments
  • a low response rate

 

7. Retain clients during cancellation.

Your ability to retain customers when they are about to cancel is essential. Firstly, it is great for confidence in your team. Secondly, if you retain a leaving customer, he is more likely to ask for solutions next time than think about leaving.

The key to retaining is to let them cancel themselves. Don’t be incessant. Just let them know what they will be missing out on, point out some key features up for adoption. If they have hit a financial bump then help them through downgrading to a basic plan. Or even delay their dues by a couple of months.

 

Churn FAQs

 

What is a good churn rate?

Older SaaS companies with high MRR generally have a 2-4% churn rate. The low-end 2%-5% are good churn rates. Younger companies’ churn rates are spread out more, they can range from 4%-20%. So if you are a younger company, it is acceptable to have high churn until you are working on reducing it.

 

Is a Negative churn rate possible?

Yes, a Negative churn rate happens when revenue lost from churned customers is overshadowed by revenue made from new customers. Your upsells, renewals and retention plays an important role here.

 

Tools to Predict Churn

We, at CustomerSuccessBox, provide you with an all-in-one product that can help you manage SaaS churn, help you with retaining, and more.

 

Final Thoughts

Churn is an inevitable part of the SaaS business. No matter, how much you try, some churn is bound to occur. However, following the strategies mentioned above, you can control the extent of churn. Calculating churn the right way is essential in understanding the exact cause. 

Important metrics should be mapped and measured carefully. It is important to understand that there’s no such thing as a good churn rate. You should ramp up your efforts to improve retention. This will help in reducing churn for your business.

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