What is Churn Rate?
Churn rate (also known as customer churn rate, attrition rate, or customer turnover) is the percentage of customers—or, in some cases, revenue—that a company loses during a defined period of time. It’s a fundamental metric in subscription-based and SaaS (Software as a Service) business models.
Types of Churn
- Customer Churn Rate: The proportion of customers who stop using a service or fail to renew their subscription within a given period.
- Revenue Churn Rate: The percentage of recurring revenue lost due to customer cancellations or downgrades.
Gross vs. Net Churn:
- Gross Churn: Total customers or revenue lost, without considering any upsells or expansions.
- Net Churn: Net loss considering both churn and additional revenue from up-sells or cross-sells.
Voluntary vs. Involuntary Churn:
- Voluntary churn happens when customers actively cancel due to dissatisfaction about product functionality, return on investment, the customer experience, or a change in business strategy.
- Involuntary churn occurs due to reasons like payment failures, financial distress, or corporate bankruptcy. Involuntary churn cannot be controlled by the subscription provider or SaaS company.
How to Calculate Churn Rate
A basic formula to determine Customer Churn Rate:
Churn Rate (%) = (Number of Customers Lost ÷ Total Customers at Start of Period) × 100
For example, if you start a month with 500 subscribers and lose 50, your churn rate is:
(50 ÷ 500) × 100 = 10%
Revenue Churn Rate follows a similar approach but focuses on monetary value instead of customer count.
Revenue Churn Rate (%) = (Revenue Lost ÷ Total Revenue at Start of Period) x 100
Note that the revenue used in the equation can be GAAP revenue or ARR (annual recurring revenue).
Why Churn Rate Matters
- Indicator of Business Health: A rising churn rate signals potential issues in product quality, pricing, customer satisfaction, or competition.
- Financial Impact
-High churn increases CAC (Customer Acquisition Cost) payback period and erodes revenue predictability and lifetime value.
-Churn directly affects metrics like Net Revenue Retention (NRR) and is a key impediment to sustainable growth.
Benchmarks & Industry Norms
- Mature SaaS Businesses:
-Annual customer churn: generally between 5%–7%.
-Monthly churn: ideally under 1%.
- Early-Stage Startups / SMBs:
-More volatile churn; monthly rates of 10%–15% are not uncommon.
- SMB-focused SaaS:
-Typical monthly churn ranges between 3%–7%.
- Enterprise SaaS:
-Better retention; churn rates may be as low as 1% monthly due to high switching costs and contract structures.
Why Users Should Care
- Simplicity & Relevance: Churn rate provides an immediate snapshot of retention dynamics—simple to calculate, powerful in insight.
- Strategic Leverage: Tracking different churn types (customer vs. revenue, gross vs. net) allows businesses to spot root causes and fine-tune pricing, product, and customer success strategies.
- Investor and Board Metrics: A healthy churn rate is a strong indicator of business resilience and customer satisfaction—vital for forecasting, investment, and performance evaluations.
How to Improve Churn
- Segment the Churn: Identify customer vs. revenue churn, gross vs. net, and voluntary vs. involuntary.
- Identify Triggers: Track early warning signals such as late payments, low user adoption, implementation delays, or support ticket volume.
- Customer Interventions: Have the customer success team engage accounts demonstrating early warning signs to address issues before churn.
- Address Root Causes: Identify trends in historical churn. Fix product functionality gaps. Improve customer experience.
- Measure by Cohort: Track churn rates and root causes monthly at an executive level to ensure patterns are improving.
Other Glossary Terms
Subscription Pause
Credit Memo vs Debit Memo
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