If you’re running a SaaS business, you understand the thrill that comes with acquiring new customers. However, while it’s crucial to track customer acquisition, it’s just as important (if not more) to pay attention to the number of customers who leave your product or service.
According to Upland Software, 21% of users abandon an app after one use. If such attrition isn’t probed, it may be difficult for you to understand why customers are leaving your SaaS product. Hence, it gets harder to optimize your marketing activities and customer retention structure in the long run.
In this guide, I’m going to tell you everything you need to know about SaaS customer churn, including how to calculate and reduce it. I’ll also discuss the various types of churn and why it’s crucial to analyze churn rates.
What is Churn in SaaS?
SaaS customer churn is the rate at which customers leave your SaaS platform or unsubscribe from your services over a given period of time. These could be voluntary churn from customers who cancel monthly subscriptions or fail to renew after it expires. Or an involuntary churn caused by subscription challenges. Either way, churn is one of the biggest SaaS marketing challenges that needs to be addressed swiftly.
Churn rate also helps you identify how to improve your overall user experience and keep customers. If your customer churn rate is high, it means your business is losing customers at an unsustainable rate, and you need to address it. This could mean adjusting your SaaS marketing strategies or customer retention efforts.
Taking active steps to reduce your customer churn will eventually set you up for better business outcomes. That said, let me show you how to determine your SaaS churn rate.
How To Calculate Churn in SaaS
There are different types of churn, and each requires a unique calculation. Let’s take a closer look at each.
1. Customer Churn
Also known as customer attrition, customer churn is the percentage of customers that cancel their subscriptions over a period.
To calculate customer churn, divide the total number of customers who left within a specific period by the total number of customers at the beginning of that period.
For instance, let’s assume that you had a total of 1000 customers at the beginning of January 2023. If you later have 950 customers at the end of the month, it would mean that 50 customers (1000 – 950) canceled within the month. Your churn rate for January 2023 will be calculated as; (50/1000) x 100 = 5%.
2. Net Revenue Churn Rate
Net revenue churn rate is a metric that accounts for the percentage of revenue lost as a result of downgrades from existing customers. It also considers the additional revenue from upgrades within a specific period.
To calculate your net revenue churn rate, subtract the new revenue generated from existing customers (who upgraded their plans or added new features) from the revenue lost from customers (who canceled, downgraded, or did not renew their plans). Then, divide this number by the total revenue generated from existing customers at the beginning of the period.
Note: revenue generated is also called Expansion MRR (Monthly Recurring Revenue), and revenue lost is churned MRR.
For example, company “X” had $100,000 in revenue from existing customers at the beginning of the month. If $10,000 of that revenue was lost due to downgrades, but $15,000 was gained from upgrades and new features, the net churn rate would be -5%
Revenue difference: $10,000 – $15,000 = – $5,000
Net Churn: (- $5,000/100,000) x 100 = -5%
A negative net revenue churn rate indicates that your SaaS company is growing its revenue, even if some of the customers are leaving or downgrading their plans. This is a good sign for your business.
On the other hand, a positive net churn rate means that you’re losing more revenue from existing customers than you are gaining from new ones. This can be a warning sign that you need to improve your customer retention strategies through, e.g., adjusting its pricing and product offerings.
3. Gross Churn Rate
The gross churn rate measures the percentage of total monthly recurring revenue (MRR) lost when users cancel their subscriptions or downgrade to a lower plan.
To calculate the gross churn, determine the total MRR churn in a given month (revenue at the beginning of the month – revenue at the end of the month). Then divide the result by the total MRR at the beginning of the month and multiply by 100.
So, if your MRR for December 2022 is $150,000 and your MRR at the end of the same month is $100,000. This will be the calculation of your gross churn rate:
MRR Churn: $150,000 – $100,000 = $50,000
Gross Churn rate: ($50,000/$150,000) X100 = 33.3%
The gross churn rate is an important metric that can help you determine your revenue stability.
4. Revenue Churn
Revenue churn is a measure of how much monthly recurring revenue (MRR) your SaaS business loses from existing customers in a specific period. The revenue churn rate can be calculated by dividing the revenue lost during a given time by the revenue present at the start of the period.
For instance, if a SaaS product loses $2,000 in March due to downgrades and cancellations while the MRR is $80,000, the revenue churn rate is:
($2,000/$80,000) x 100 = 2.5%
Revenue churn helps SaaS businesses understand how much revenue they are losing from existing customers and take necessary steps to reduce it.
What’s an Acceptable Customer Churn Rate in SaaS
Now that you know how to calculate the different types of churn, another important consideration would be how to benchmark your customer churn rate. What’s ideal and what’s not? Typically, this varies depending on what industry you are in, how long your company has been running, and how much revenue you realize.
According to Baremetrics, a churn rate of 3-5% is acceptable if you target small businesses. That’s because SMBs tend to go out of business more frequently than enterprise clients. There’s nothing you can do to retain such customers.
On the other hand, you’ll need to be concerned if your customer base is made of enterprise saas customers and your churn rates are anything above 1.5%.
Tomasz Tunguz explored the various churn rates for different segments of SaaS businesses. Here’s what he found:
SMB SaaS companies had a monthly churn rate of 3-7% and 31%-58% annual churn rates. Mid-market SaaS companies recorded 1-2% monthly and 11%-22% yearly. Enterprise SaaS businesses had 0.5-1% monthly and 6%-10% annual customer churn.
This agrees with Baremetric’s suggestion that the churn rate reduces as you move upmarket from SMBs to enterprise clients. Check out our guide on how to get enterprise SaaS customers if this is something you’re interested in.
Bearing in mind that there’s no standard benchmark for what’s an acceptable churn rate, you should always aim to reduce SaaS customer churn rate as much as possible. Make it a priority to compare your customer churn rate for different periods—and ensure that each new period is lesser than the former.
You also want to ensure that the amount of revenue you generate from new subscribers or product upgrades is higher than the amount you lose from cancellations or downgrades.
Why You Should Do Customer Churn Analysis
Even though SaaS marketing is different from selling physical products, customer churn is still a major problem for all.
Ultimately, retaining 100% of your customers is not realistic. Some customers will inevitably leave, regardless of how awesome your product is. But you can take steps to minimize churn and maximize customer retention— or, at least, cushion the effect of losing customers.
Typically, when you notice a decline in customer retention or in the revenue you generate, you’d want to probe deeper. In so doing, you’d discover insights that reveal loopholes in your customer journey and uncover possible solutions to these problems.
Hence, customer churn analysis is an effective way to make data-backed decisions. It’s also quite helpful when it comes to other aspects of your business, like planning your SaaS marketing budget, introducing new pricing plans, or upselling products.
6 Common Reasons Customers Churn
Customer churn is a major concern for SaaS businesses of all sizes. It can start with a slow increase in the churn rate but gradually become a significant loss of loyal customers and revenue. To keep your churn rate low, it’s important to tackle the root causes.
Let’s see some of these causes:
1. Poor Onboarding
While you may adopt strategies to supercharge your marketing automation in SaaS, a poor onboarding process may just be the reason you’re losing customers.
According to Wyowl, 8 out of 10 customers will delete an app if they do not know how to use it. Also, more than 90% of customers believe that companies can do better with onboarding users, and that’s agreeable.
To improve your customer retention rate, you need to provide resources and guides that show customers how to use your product. Consider adding in-app guides like the example below to your onboarding flow:
You also want to ensure that these guides are easy to understand.
Combine different content formats like videos or FAQ pages. Also, make sure to provide an easy way for users to contact your support team in case they need additional assistance.
2. Poor Customer Service
Lack of good customer support is also a major reason for customer churn. During the customer life cycle, you should ensure that all their questions and grievances are resolved in the best possible way.
If subscribers don’t get their issues addressed to their satisfaction, disappointment builds up. So you should focus on building strong customer service and ensuring that your team is readily available.
That also means providing multiple channels of communication. You’ll need email, chat, direct line, and social media for this.
3. Bad customer experience
Another major cause of SaaS customer churn is a bad customer experience. If the customer experience is bad at any touchpoint, it may potentially alienate them.
According to Hotjar, the secret to delighting customers and ensuring that they come back is by creating an effortless end-to-end experience. Simply put, ensure that every interaction in your overall customer lifetime experience is painless.
So, from customer acquisition and lead nurturing to onboarding and beyond, provide a seamless experience to delight your customers. That means ensuring your SaaS product functions as it should, having a responsive customer support team, creating a knowledge base where customers can learn how to get the most out of your product, etc.
4. High Pricing
Your pricing strategy can either retain or repel customers. When prospects see your product as expensive for the benefits or value it is providing, it gives them a strong reason to find other businesses.
So, you should create an effective pricing strategy that completely justifies the value your product provides. This includes adopting pricing models which the maximum number of customers are willing to pay for.
5. Low-quality product
If your product quality is poor, it’s only a matter of time before customers leave you for the competition.
It’s, therefore, important to prioritize product performance and overall quality. Make sure there are no frequent glitches, bugs, or downtime, as these could negatively affect the customer experience and cause churn.
6. Wrong Product-Market Fit
Finally, customers are more likely to abandon your platform if it doesn’t directly address their needs. So, you want to avoid using high-pressure marketing tactics to grow your customer base.
Instead, identify your ideal customers who need what you offer. You may also want to go further than that by doing SaaS customer segmentation to place your customer base into different segments. Then, target them with specific product offerings they’re interested in. This increases your chances of retaining current customers.
SaaS Customer Churn FAQs
The average churn rate for SaaS varies widely depending on the industry and business model. A 3-5% monthly churn rate is reasonable if you’re targeting SMB customers, while a good churn rate for enterprise customers is 0.5-1%.
The top reasons SaaS customers churn include poor onboarding, poor customer support, bad customer experience, high pricing, low-quality product, and wrong product-market fit.
Customer churn is a crucial metric for any SaaS company. You can identify trends and patterns to improve your product, marketing strategies, and overall growth rates by analyzing customer churn.
To effectively deal with customer churn, first, you need to understand the causes explored in this post.
Finally, continuously improving your product and customer experience will ensure you retain high-value customers in the long run.
Nico is the founder of Crunch Marketing, a SaaS marketing agency. He works with enterprise SaaS clients like Writer, Right Inbox, and Surfer SEO, helping them scale lead generation globally across EMEA, APAC, and other regions.