Churn is one of the most important metrics for companies to track. It's a measure of how many customers leave your brand within a certain time period.
High churn can be disastrous for a company, while low churn indicates that customers are happy with their product and/or service.
Only 1 out of 26 unhappy customers complain; the rest simply churn. That's why paying attention to this metric is so important — it can tell you important things about shortcomings in your customer support setup.
There are many factors that contribute to churn, and it's important to understand them all — including the average churn rate for your industry — if you want to keep customers and grow your business. In this article, we'll cover what a good churn rate is for SaaS companies to aim for and what typical churn rates look like across industries.
Why is churn an important metric for companies to track?
Churn is an important metric for companies to track as it provides a snapshot of customer loyalty and reveals how satisfied customers are with their service.
Many businesses rely on customer retention as a source of revenue, and tracking churn allows them to identify trends within the customer base so they can take proactive measures to address any issues that may be reducing satisfaction.
Knowing the rate of churn helps companies spot problems in the user experience or areas where there is a lack of engagement, ultimately allowing them to both retain existing customers and attract new ones.
It is essential for businesses to stay informed about their churn rate and regularly assess how their performance could be improved, especially in an economic recession where retaining your customers is more important than ever.
What causes customer churn?
There are many reasons why customers may leave a business, including poor customer experience, lack of product innovation, or high prices. Understanding the underlying causes of churn can help companies take steps to address these issues and keep their customers happy.
Poor Service Experience
Customer service is an integral part of any successful business, and poor service experiences can be one of the main reasons for customer churn. If your customers feel like their concerns are not being addressed in a timely manner, they may eventually decide to take their business elsewhere.
To prevent this from happening, it's important to ensure that your customer service team is well-trained and equipped with all the necessary tools to provide excellent customer service.
Actionable tip: examine your entire support workflow and plug any gaps you find. Keeping track of these important metrics can pin-point where you're going wrong and what needs fixing.
Lack of Engagement
Your customers need to feel like they're an important part of your brand in order to stay loyal — and this means actively engaging with them on a regular basis. Whether it's through email newsletters or social media posts, make sure you're providing valuable content that will keep them interested in your brand, provide real value and encourage them to stick around longer.
Actionable tip: remember to work closely with your marketing team to create content your customers are asking for. Whether that's white papers, FAQs or blog posts, taking an active involvement even if you aren't a marketer yourself can really up engagement.
The cost of your product or service can also be a major factor in customer churn. If customers find that the price is too high compared to what they're getting from your competitors, they may decide to switch over.
To prevent this, it's important to assess the market and ensure that you're offering competitive pricing. Additionally, consider implementing tiered pricing to give customers more options and promote loyalty.
Actionable tip: do your homework on the state of your industry — especially in terms of pricing. Frequently check your competitors' pricing pages to see how the needle is moving and adjust accordingly.
Competition is always tough in any industry, especially in today's digital age, where there are countless businesses competing for attention online. Make sure you know what offers your competitors are offering so that you can stay ahead of them by constantly innovating and improving upon what already exists — whether it's new products or services, better pricing models, or improved customer service processes.
Actionable tip: monitor your competitors' social media pages to see if they're offering discounts or other incentives to sign up. Then do that, but better.
Customer needs are unmet
Finally, customers may also leave if their needs are not being met by your product or service. If your product fails to deliver the features they need or isn't meeting their expectations, they may decide that it's time to move on and find another solution.
To prevent this, make sure you're regularly taking feedback from your customers and making improvements to your product based on their suggestions. This will help ensure that you're always meeting their needs, which in turn can help reduce churn rates.
Actionable tip: Send out CSAT, CES and NPS survey to gauge the mood. Solicit and then listen to customer feedback and make sure you communicate this feedback company-wide.
What churn rate should companies typically aim for?
Ideally, SaaS companies should aim for annual churn rates (either dollar churn or customer churn) of no more than 8% if they want to grow sustainably. In KBCM Technology Group Private Company SaaS Survey in 2023, 150 private SaaS companies were surveyed about a number of important SaaS metics.
With respect to churn, they found that:
- The median gross dollar churn (which describes how much revenue is lost YoY) for SaaS companies is 12%
- The annual median logo churn (which describes how many customers are lost YoY) is 13% and
- The median annual gross dollar churn is 12%.
These numbers are for end-year 2022, which are the latest numbers available. Once 2023 figures are available, we'll update this post.
It's crucial for companies to note that what we're discussed here are annual churn rates, not monthly churn rates. Monthly churn rates compound, so while a monthly churn rate of 10% may not appear all too bad at first glance, it actually means that you're replacing what equates to your customer base every ten months!
In the chart above, we'll done the math so you can see how monthly churn rates and annual churn rates are correlated. As you can see, an average monthly churn rate of 10% means that annual yearly churn is closer to 72%! So if the goal is to maintain your annual churn rate at 5%, your monthly churn should only be around 0.5%.
The other thing to keep in mind is that there are other factors that contribute to a business's average churn rate, including the industry it operates in and the quality of its customer experience. So, what may be a high churn rate for one business may be average for another.
It's important to track your average churn rate over time and make adjustments as needed to ensure customer satisfaction and loyalty.
How to calculate churn
So, how can you calculate the churn rate at your company?
To calculate churn, you'll need to use this formula:
(Lost Customers/Total Customers during the start of a specific time period) X 100
Take the number of lost customers you have had during a specific time period and divide it by the total customers at the start of the time period and times that number by 100.
For example, if you have 1000 customers and 10 of them left in a month, then your average monthly churn rate is 1%. That would translate to an average annual churn rate of about 12%, which is close to the annual median logo churn rate for SaaS companies according to KBMC.
You can also calculate churn in terms of:
- Net customer churn
- Net revenue churn
If you want a detailed breakdown of how to calculate churn and the pros and cons of different methods, check out Customer Churn In SaaS: What It Is And All The Different Ways To Calculate It.
Average churn rate by industry: SaaS, retail, healthcare & more.
As we mentioned before, average churn rates vary across industries, so it's important to understand the average churn rate for your particular industry when evaluating the success of your customer experience.
Here's an average breakdown of churn rates by industry (these figures span 2020 -2023 depending on when the latest research was conducted):
- Financial/credit - 25%
- Online retail - 22%
- Big box electronics - 11%
- SaaS companies - 13%
- Digital media and entertainment - 6%
- Healthcare - 6%
How can companies reduce customer churn?
We've already covered 10 ways to reduce customer churn in a previous article.
The main strategies to focus on are providing excellent customer service, incentivizing customers to stay, and creating comprehensive customer experiences.
It's also important to ensure that your business is listening to feedback from existing customers. This allows you to identify unspoken complaints or issues with the product before they escalate into customers churning.
Proactive support can be particularly helpful in this regard because it allows you to identify and address customer issues before they even realize there's a problem. This means that customers can be reassured that their concerns are being heard and addressed, reducing the likelihood of them churning.
Wrapping It Up
Churn rate is an important metric that businesses must pay attention to in order to ensure customer satisfaction and loyalty. The average churn rate for SaaS companies is around 10 - 14% annually, depending on what kind of churn you're measuring. However, this can vary depending on a variety of factors.
Companies should strive to reduce their average churn rate by investing in customer service, incentivizing customers to stay, and creating comprehensive and cohesive customer experiences. Taking feedback from existing customers can also help identify potential issues before they escalate into major problems and cause customers to churn.