Filling your sales funnel with qualified leads? Getting high engagement from sales and marketing? Closing deals left and right?
Great. But every SaaS company can do that.
If you’re closing the right customers, your product actually works for them, and they enjoy doing business with you, you’ll know by looking at your customer churn rate.
What is SaaS Churn Rate?
SaaS churn rate refers to the percentage rate at which customers discontinue their subscription to a SaaS product. It’s an important metric for SaaS companies because it measures customer satisfaction and loyalty, giving insight into how well your product fulfills its purpose.
Knowing the rate your customers churn helps you accurately forecast revenue, understand customer lifetime value (CLV), plan marketing campaigns, and improve your product.
Monthly Churn Rate vs. Annual Churn Rate
Monthly vs. annual churn is a critical distinction. If you calculate your average churn rate using both, you’ll almost certainly find they differ.
Your monthly churn rate is the number of customers who cancel their subscriptions each month as a percentage of the total customers you have at that moment. It’s best used to measure short-term trends and get a snapshot of your turnover.
Using your monthly churn rate, you can:
- Measure the effectiveness of a new feature you just released
- Track how a change in customer onboarding affects retention
- Compare customer churn between different product tiers
- Identify at-risk customers
- Monitor the success of customer support initiatives
When you calculate churn from month to month, you realize it’s highly variable. That’s where annual churn comes in handy.
Your annual churn rate is the percentage of customers that cancel their subscription over a 12-month period. This metric gives you an overall picture of customer loyalty and satisfaction for a given product or service.
With annual churn rates, SaaS businesses can:
- Understand the quality of their leads, products, and pricing
- Calculate CLV
- Identifying macro trends in the customer lifecycle (e.g., seasonality)
- See how their churn rate compares to industry averages
- Forecasting long-term revenue
- Communicate growth and financial health to investors
- Evaluate the success of a marketing campaign or sales strategy
In short: Use monthly churn when you’re dealing with short-term decisions like targeting an at-risk customer or refining customer success initiatives. Zoom out when you need to understand long-term trends and forecast revenue.
Customer Churn Rate vs. Revenue Churn Rate
While customer churn is a critical metric to understand, it doesn’t paint the entire picture in terms of bottom-line impact. SaaS businesses must also understand their revenue churn rate.
Revenue churn is the total amount of lost revenue due to customer churn, expressed as a percentage of total monthly recurring revenue (MRR).
Net revenue churn adds context to customer turnover — if you’re losing tons of customers at a lower product tier but retaining the few (yet valuable) enterprise customers, you’d be less worried about your churn rate than if it were the other way around.
Voluntary Churn vs. Involuntary Churn
The churn rate for SaaS companies involves two types of turnover: voluntary and involuntary churn.
- Voluntary churn happens when customers actively choose to cancel their subscriptions. This can happen for a variety of reasons — they don’t want the product anymore, they found a better alternative, or you raised your prices and it’s no longer affordable.
- Involuntary churn occurs when subscribers can’t renew their subscriptions due to expired credit cards, failure to pay invoices on time, or some other circumstance that prevents them from continuing.
Involuntary churn accounts for between 20% and 40% of all customer turnover, but it’s often preventable with subscription management and billing automation.
Voluntary churn is the more meaningful metric for understanding customer satisfaction. Pay attention to its trends over time — monthly, quarterly, and annually — and take proactive steps to reduce the rate as much as possible.
SaaS Churn Rate vs. Retention Rate
Customer retention and churn explain the same things… Sort of.
Your churn rate tells you how many customers are leaving in a specific time frame, while your retention rate tells you how many customers stayed in the same time frame.
Both metrics underscore customer loyalty and your SaaS product’s value, but from different angles. Your retention rate is the inverse of your churn rate — if you have a 20% churn rate, that means you have an 80% retention rate.
When one changes, the other reflects it equally and oppositely. Focusing on one over the other depends on the initiative you want to measure.
Suppose a company offers a subscription renewal incentive. They’d increase their customer retention rate (and thereby reduce churn), but they’d use retention as the key performance indicator (KPI) because:
- Plenty of other variables are still causing customers to leave.
- An incentive to stay is one specific action they can take to improve customer loyalty.
In the above example, retention is the key indicator, and churn reflects it afterward.
What’s the Average Churn Rate for a SaaS Company?
Like everything, average churn rates vary from company to company based on the product, vertical, and company growth stage.
In 2022, KBCM Technology Group surveyed 110 SaaS companies and uncovered the following YoY trends:
- The median net revenue churn rate is 14%.
- The median customer churn rate is 13%.
- The median non-renewal rate is 10%.
It’s important to remember these are annual churn rates. Your average monthly churn rate compounds, so a monthly churn of 10% would equate to losing (or replacing) your entire customer base every ten months.
What’s a Good Churn Rate for SaaS Companies?
“Good” is a relative term, and there isn’t a definitive rate you’d consider as such.
- The above survey shows us customer churn between 10% and 14% is typical.
- According to Zuora’s 2019 Subscription Economy Index, an average churn rate could be as low as 16.2% (for Business Services) or as high as 37.1% (in the Media category).
- Though it’s a bit older, Totango’s SaaS Metrics Report from 2016 shows median annual churn for SaaS companies to fall between 5% and 10%.
- Latka — a platform that posts interviews with SaaS founders and their respective company metrics — shows the average turnover across thousands of SaaS companies to be 16.8%.
- Churn benchmarks from Recurly find that the average overall churn rate is 5.57% (4.91% for B2B, 6.77% for B2C).
To understand what a good churn rate is for your SaaS business, you need to look at your churn versus expansion MRR, churned customers per segment (paid/free/trial), and other relevant figures.
How to Calculate SaaS Churn Rate
Monthly Churn Rate Formula
| Monthly Churn Rate = (Number of Customers at the Start of Month – Number of Customers at the End of Month) / Number of Customers at the Start of Month |
Annual Churn Rate Formula
| Annual Churn Rate = ((Number of Customers at the Start of Year – Number of Customers at the End of Year) / Number of Customers at the Start of Year) * 100 |
Net Negative Churn
Net negative churn (NNC) means the revenue gained from your existing customers is greater than the revenue lost from downgrades and cancellations. You can achieve this through upselling and cross-selling.
When you achieve net negative churn, it indicates your existing relationships are more profitable than the new ones you’re acquiring. This means your customer lifetime value (CLV) is increasing over time.
Regardless of the calculation you get from the above formulas, you can offset your losses with net negative churn. That way, you can focus on customer loyalty and retention instead of the continuous influx of new customers.
5 Factors Affecting Your Churn Rate
There are too many factors impacting your customer churn rate to count. Basically, customer loyalty boils down to your product, offer, internal processes, competitors, and overall experience your customers have.
1. Your Product
A bilateral relationship exists between a SaaS product and those who end up using it. To show favorable SaaS churn benchmarks, you need to meet the following criteria first:
- Your product is designed to meet your target customer’s needs.
- Potential buyers subscribe to, use, and tell others about the product.
- The rate they’re doing those three things is high enough to sustain business growth.
Roughly one-third of businesses fail because they can’t find their product-market fit — a feat easier said than done.
2. Your Offer
From a customer standpoint, your pricing model and value for money have a lot to do with whether or not it’s worth it to stick around.
Your offer — product, pricing, and features — should be well-defined just like your target market. It needs to match your buyers’ perceived value of your product and deliver a tangible benefit over other similar offerings.
3. Your Processes
Operational inefficiency kills long-term revenue growth, even if your go-to-market strategy and execution are flawless.
Internal issues like slow (or limited/nonexistent) onboarding, customer service, and support are huge factors in why customers may leave.
4. Your Competition
Somewhere in the world, a 20-year-old is sitting in their bedroom using Bubble to build a SaaS MVP for less than $500. Suffice it to say you’re not immune to competition.
Whether another company prices yours out, builds a better product for a similar market, or finds a way to make existing solutions obsolete, you’ll lose customers the minute someone else hears their needs better.
5. Your Customer Experience
Most B2B buyers (66%) say they expect an equal or higher degree of personalization in their professional lives compared to their personal ones, but they also want their experience to be frictionless.
A poor customer experience (i.e., one characterized by long response times, hoops to jump through, and a lack of product support) reflects negatively on SaaS company churn rates.
How to Reduce Churn Rate for Your SaaS Company
We have good news and bad news for SaaS companies that want lower churn rates.
- The good news: It isn’t that difficult in theory.
- The bad news: It is in practice (kind of).
All you really have to do to lower churn is listen to your customers. Find out what matters to them, then continually refine your product and experience to meet those needs.
Implementing and executing on that feedback company-wide is where most SaaS businesses fall short.
Here are the best ways to improve customer retention and reduce your average churn rate:
Prioritize annual contracts.
Annual recurring revenue (ARR) is miles better than its monthly counterpart because it guarantees revenue from each customer for at least one year.
That’s a lot of time to deliver huge value to your buyers (or fix potential issues).
Investors and stakeholders love ARR because it reflects long-term commitment and loyalty and produces more accurate financial forecasts.
Loyal customers love it because they don’t have to worry about monthly billing.
Most SaaS companies incentivize yearly contracts by offering one or two months off the total monthly cost of subscribing to their product. In the above example, Freshworks CRM gives users two months free when they pay annually.
Automate billing and subscription management.
You can eliminate a substantial proportion of your average annual churn rate just by using a billing platform that puts renewals and management on autopilot.
Reduce involuntary churn by using a billing system that automatically collects and records payments, emails customers that haven’t paid, identifies out-of-date information, and supports multiple payment schedules.
Make your onboarding process great.
User adoption is key when it comes to customer retention. After inking the deal, your job as a company isn’t done yet — you need to set up and deploy your platform across the organization, then help new users understand how it fits into their workflow.
There are several ways to encourage adoption and ensure your new customers get continued value from using your product:
- Blog posts, video demos, and product documentation on the company website
- Email-based onboarding and product updates
- Live demos with customer success reps
- Regular check-ins with new customers
Calendly’s onboarding email does a really good job of moving new users on to the next step. It’s simple, friendly, and gives new customers everything they need to get fully set up.
For organizations with complex products (e.g., enterprise software companies), it isn’t uncommon for the vendor to send in their own implementation team to train users and set up the system as an added service.
(Actually) make your users happy.
There’s a huge disconnect between how loyal you think your customers are and how loyal they actually are. 76% say they’d leave after just one bad experience.
Now… Considering the difficulty of researching, selecting, and implementing a new product, it’s unlikely for one unresolved issue to be enough to send a B2B SaaS buyer away.
Still, this stat underscores the importance of the customer experience and how it can make or break someone’s perception of your business.
Your customers primarily want two things:
- Personalization: Personalize your experience through tailored onboarding, a proactive customer success strategy, and showing your buyers how to do more using your platform.
- Frictionless processes: Don’t make it so your customers have to talk to someone whenever they need to fix something. Implement a self-service portal that enables them to make changes to their account, find answers to questions, and access the support they need without any extra hassle.
Encourage product usage.
Your content marketing strategy should include blog posts, emails, and videos highlighting new ways to use your product and solutions to your customers’ business problems.
Here’s an example of how Firstbase uses email to teach its buyers how to address common problems related to its customers:
ClickUp takes a similar approach — ClickUpdates shows users new features via email as soon as they’re released.
It’s also smart to offer free trials, consultations with a customer success rep, and other resources that help them further understand the value of your product.
Offer incentives for customer retention.
Retention incentives are just as valuable as ones that drive customer acquisition (if not more).
Encourage your SaaS customers to stick around by offering them upsells and cross-sells, discounts on renewals, or free upgrades and credits.
Collect (and use) feedback from your customers.
Customer feedback is crucial for reducing churn every step of the way.
- Product teams need it to spot usage patterns and opportunities to improve the product.
- Sales teams need it to refine their messaging and better understand customer needs.
- Marketing teams need it to effectively communicate the product’s value to prospects and existing customers.
- Customer success reps need it to personalize onboarding experiences, answer questions quickly, and standardize processes.
- Execs need it to refine the business model and forecast demand.
The best way to gather and analyze customer data is through a centralized data platform, which 83% of companies report as a significant cost-savings initiative in a new APMdigest survey.
Build communities around your product.
An established SaaS company might succeed more with this one than a startup, but building an online community around your product is a great way to retain and engage customers.
User groups, forums, podcasts, social media posts, and webinars to foster conversations and connections between users of the same product. Developer communities are another popular option for open-source SaaS platforms.
SEO helps you attract MQLs that actually stick around…
You know how 80% of life is showing up?
For SaaS businesses, that’s showing up on Google.
Almost everyone starts their product hunt on a search engine, and whether you show up or not depends entirely on whether or not the most sophisticated algorithm in the world knows to put you there..
You could do it all yourself, but most SaaS companies offload everything to a SaaS SEO agency because it’s easier than learning and way cheaper than building out the function in-house.
Work with us. Show up on Google. Improve your lead quality and refine your messaging. Reduce customer churn. It’s really that simple.
