What is Churn?
As much as we hate to lose customers, it is part and parcel of a SaaS business for customers to leave you. This is called churn. Tracking churn is super important for obvious reasons as that’s how you measure your leaky bucket. If you are adding customers from one end but losing customers on the other, the business is in trouble. To prevent or reduce churn, it is important to calculate and track it. But, how do we calculate it? Enter churn rate.
What is Churn rate?
The Churn rate is the percentage of customers who leave your business during a given period. For example, if a business is doing an MRR of 50,000 USD and the churn rate is 10%, that is a loss of revenue of 5,000 USD per month.
Churn rate is an important factor for SaaS businesses to track. All SaaS businesses will have churn but if you don’t track your churn rate, you won’t be able to fix it.
5 steps to calculate Churn rate:
- Identify the period you want to calculate for – monthly, quarterly, or annual.
- Identify the number of customers you had at the beginning of the period.
- Identify the number of customers you lost by the end of the period and subtract that from the number of customers you had at the beginning.
- Divide the number of lost customers by the total number of customers you had at the beginning at the month.
- Multiply by 100 to get the churn rate %.
Churn Rate Formula
Churn rate can be calculated for a month, quarter or annually. The simple formula to calculate customer churn rate for a month is to take the customers count at the beginning of month and subtracting it from the customers at the end of the month and dividing it by the number of customers at the beginning of the month. Convert this number into a percentage and you will have the customer churn rate.
Revenue churn rate can be calculated by taking the monthly recurring revenue lost in the month and dividing it by the total revenue for the month. (You should not include up sales or new customers as you are trying to work out what revenue you lost that month from existing customers).
Difference between Customer Churn rate and Revenue Churn rate
Customer churn and revenue churn are not always the same and have to be tracked separately. Customer Churn helps you with managing your customers better, assigning Customer Success Managers (CSMs) etc whereas revenue churn helps to understand the financial health of your customer base.
Here is an example, let’s say a company Acme has 2 product lines:
- 1. Sprout:2500 customers paying $250/month per customer
- 2. Blossom:250 customers paying $750/month per customer
This shows that the company has 2750 customers but paying different amounts based on their product lines. The total MRR for the 2750 customers is 812,500 USD. Let’s say 75 sprout customers and 10 blossom customers leave, here is how the customer churn rate and revenue churn rate will differ:
Customer Churn Calculation:
Revenue Churn Calculation:
As you could see there is a difference between Customer Churn Rate and Revenue Churn Rate and this gap will keep getting wider based on the product lines or pricing. Hence both should be taken into account while tracking churn rates.
This is assuming that customers don’t churn during the period and the payments are taken upfront of the whole period.
What is a good Churn rate?
Recurly, the subscription platform ran a survey with their customers to understand the average churn rate by industry and their SaaS customers said their average churn was 4.7%. For established big SaaS companies, the average churn rate is between 4.5 – 7%. Based on the performance of several established SaaS companies, this would be a good number to aim for.
For early-stage SaaS companies, the number could be all over the place and it’s difficult to identify a good number. Until the product-market fit is obtained, the churn is going to be high. But, once that is achieved, the number should stabilize around 4.5% to 5% and that’s the number that you should aim for.
Pricing also has a big impact on churn rate. Companies with a higher ARPU (average revenue per user) see lower churn compared to companies who have a lower ARPU.
Whatever said and done, if you are not sure about churn rate, the best way is to keep improving. Whatever were the previous rates, you improve on it week-on-week and month-on-month.
Churn rate is high, what can I do about it?
Reducing churn can be achieved by means of customer success. Here are some things you can start doing to reduce your churn rate:
1. Segment Customers and understand them
Not all customers are the same. Each customer buys your product for different reasons and gets different value out of your product. Segment customers based on few parameters like:
- Revenue (Most valuable customers)
- Company size
- Churn risk customers (non-usage, low licence utilisation, nonresponsive customers)
Once you segment your customers initially, understand your high value customers in detail – what makes them stick, what features do they use, how they got their users engaged on your product and understand the value that they get from your product in detail. Once you have done that, work out a strategy on how you can explain the same value to other customers.
2. Focus on onboarding
Once you have understood your customers and know what they did right, hand hold new customers to start off well. Understand why they bought your product and what value they want from your product. Bucket them along with customers who get similar value and nurture them the same way until they get the value from your product.
3. Get constant feedback
Whenever a customer tries a new feature or does something important on your product, get feedback. Probably they might have not liked somethings in that feature. Use the feedback to improve the product and communicate with that customer until the feature is fixed. Customers love the personal touch and they want to know that your company is listening to them and value their relationship. If you make the product better by listening to their feedback, they will feel great and would want to stick around. More importantly, they would also become an advocate for your business.
4. Convert customers to Annual billing
The churn rate reduces tremendously when a customer is on an annual contract for obvious reasons. Not all customers would commit to this initially until they get value from your product but keep working towards it. If a customer is on a monthly billing and you are getting good feedback from them, reach out to them and offer them to upgrade to an annual contract at a special price. Encourage them to convert to an annual contract.
There is a lot more you can do to reduce churn and this is what customer success is all about. Check out our other blogs on customer success and how to ensure your customers get value from your product. The above steps are things you can start doing immediately to keep working but it all starts with tracking your churn rate. So, start calculating churn rate and start working towards a healthy churn rate slowly and steadily. Keep improving month on month and eventually, you would be there.