Customers are the lifeblood of any company and keeping them around is essential to ensure that you’re building a sustainable, long-term business.
When it comes to customer churn and SaaS businesses, it’s even more important to keep customers coming back for more since your bread-and-butter is recurring revenue.
But what exactly do we mean when we talk about customer churn? And how are you supposed to determine what your churn rate is?
In this post, we’ll talk you through all that and more.
What is churn?
To put it simply, churn is lost revenue or a shrinking user base.
Churn typically refers to a percentage of either users who have canceled their subscriptions within some given timeframe or the revenue you’ve lost out on as a result of those cancellations.
What contributes to churn?
There are several factors that contribute to churn, including:
- Signing the wrong customers in the first place: you need to make sure you understand your target market and ICP. And then only sign those customers.
- A poor product experience: if your product doesn’t deliver on its promises or is exceedingly buggy, you risk customers churning.
- Your pricing strategy: SaaS tends to be quite a saturated market, so you’re probably competing with other companies for the same customers. You need to get pricing right or they’ll defect to a competitor.
- Bad CX: Customer support and CX are more important than ever before. 92% of customers will completely abandon a company after 2 or 3 bad experiences and 13% will share that experience with 15 or more people. The stakes — and expectations — are higher than ever before.
This isn’t an exhaustive list and it is always worth it to do some digging to figure out what is causing churn at your company and then put in the work to fix it.
How to calculate churn?
There are a few different methods you can use to calculate churn, and you can do it in terms of customers or revenue. We’ll break down each one in as straightforward a way as possible.
Basic customer churn rate formula
If you discount new customers who signed up for your platform during some particular time period, the basic formula for churn is:
Churn rate = (Number of churned customers / Total number of customers) x 100
For example: Let’s say you’re calculating churn for Q1 in 2023. You started the year with 100 customers and 10 churned during Q1. Your churn rate is (10/100) x 100 = 10%
Net customer churn rate formula
This formula offsets the customers you’ve lost during some particular period with the customers you’ve gained during that same period.
Net customer churn rate = (Number of churned customers - Number of gained customer)/Total number of customers x 100
So, sticking with the example above, if you added 5 new customers during that time period, this is what the formula will look like once the numbers have been plugged in:
((10-5/100) x 100 = 5%
Basic revenue churn rate formula
Another way to calculate churn is to do it in terms of the revenue you’ve lost as a result of canceled subscriptions.
The formula looks similar to the ones we’ve written about above, except you switch out the number of customers with the amount of revenue.
If you are calculating it monthly, the MRR (monthly recurring revenue) churn rate formula is this:
MRR churn rate = (Amount of revenue lost / Total MRR at the beginning of the period) x 100
So, if you lose $1000 in revenue during some particular month and you started with an MRR of $10000, your MRR churn is:
(1000 - 10000) x 100 = 10%
Just a note: you don’t have to calculate this monthly. You can calculate it for any time period, just adjust your revenue figures accordingly.
Net revenue churn rate formula
Similar to net customer churn, this formula offsets the amount of revenue you’ve lost during some particular time period by the amount of new revenue you gained during that same time period.
In other words:
Net MRR churn = ((Amount of revenue lost - New Revenue added)/ Total MRR at the beginning of the period) x 100
So, sticking with the example above, if you’ve lost $1000 but gained $3000 in new revenue this month, your calculations will look like this:
((1000 - 3000/10000) x 100 = -20%
…which brings us to
Can churn rate be negative?
Why yes, net churn rate can in fact be negative! If you add more revenue or customers than you lost that period, you're going to make some folks in upper management very happy.
In the example right above this one, you actually added 20% more revenue than you lost that month, so your MRR was -20%
Can churn rate be greater than 100%?
No, churn rate cannot be greater than 100% because that would imply you lost customers that never actually signed up for your product or revenue that you were never going to make in the first place. The worst you can do is a churn rate of 100%, which admittedly is small consolation.
However, while your churn rate cannot be over 100%, your retention rate sure can! In fact, some of the biggest and best SaaS companies have retention rates well over 120%, which means they would grow even if they added no new customers!
We’ve done an extensive breakdown of retention rates before, so make sure you check that out for more information.
Why is churn rate so crucial to monitor – especially in SaaS?
MRR or NRR (net recurring revenue) is a crucial metric that can tell you a whole lot about the health of your SaaS business; keeping churn as low as possible is one important way to keep that metric healthy.
But companies cannot afford to get complacent. Think of it this way: if your company’s monthly customer churn rate is 10%, you’re replacing the equivalent of your entire user base every ten months! And those new customers are expensive to acquire — from 5 to 25 times (!) more expensive than retaining existing users, to be exact.
That’s why it’s so important to measure this metric over time to see how it’s evolving, identify issues and fix them ASAP.
Who owns churn?
Churn is sort of an equal-opportunity metric in that it can conceivably be placed at the feet of many departments. It’s impossible to say, unless you do a little more digging, exactly what’s causing churn and who owns it:
- Maybe your sales team is signing up the wrong prospects
- Maybe marketing is bringing in the wrong leads
- Maybe your product team isn’t implementing the right features
- Maybe your support team isn’t providing quality assistance
- Maybe your customer success team isn’t doing enough to immediately demonstrate value and help your key accounts meet whatever success criteria they’ve decided justifies the cost.
Or maybe it’s a combination of two or more factors at play.
However, despite the fact that churn can be attributed to many different causes and many different teams can ‘own’ this metric, it may be wise for customer success teams to take charge here to get a seat at the table since this is such an important metric.
Wrapping things up
Churn is something that SaaS companies need to keep a watchful eye on to make sure it remains within acceptable bounds (we’ve gone into more details about industry standards for customer churn before, so read that post if you want specifics).
We hope we’ve made it slightly easier for you to calculate and keep track of it over time.