SaaS Churn Rate (Metric Deep Dive)
If you work in the ever-evolving SaaS space, you know how important data collection is to your company’s success. How else are you supposed to know how you’re doing and where you can improve?
Of all the SaaS performance metrics you and your team should be measuring, your company’s churn rate is one of the most crucial.
Learn more about the SaaS churn rate, factors that affect it, how to calculate it, and more below.
What Does Churn Rate Mean?
The term “churn rate” refers to the rate at which customers are canceling their recurring subscriptions to a particular service — in this case, it’s your company’s software solution.
A business’s churn rate is expressed as a percentage. For example, say you had a 10 percent churn rate. That would mean that 10 percent of your customers will cancel their software subscriptions in a specific period.
Top 5 Factors That Affect SaaS Churn Rate
Several factors can influence a business’s churn rate, positively or negatively. The following are five of the most noteworthy ones to be aware of:
1. Customer Experience
A poor customer experience will contribute to customers jumping ship. If your software doesn’t work as it’s supposed to, or if people don’t get the level of service they expected, they will be more likely to cancel their subscription and look for a different solution.
2. Customer Onboarding
Similarly, customers may also be more likely to cancel their subscriptions if they don’t receive sufficient support during the onboarding period. If customers are left to figure things out for themselves, especially if your software is particularly complex, they’re unlikely to have a positive experience or want to continue using your product.
3. Customer Engagement
Ideally, your company will engage with customers frequently across a variety of channels. Doing so keeps your business at the forefront of their minds and encourages them to continue using your software and making the most of their subscription.
Poor engagement can lead to reduced usage, which, over time, may cause the customer to cancel their subscription altogether.
4. Subscription Type
Companies that offer month-to-month subscriptions often see higher churn rates than those that offer longer subscription periods (especially if they also offer a discount to customers who sign up for longer subscriptions).
5. Access to Additional Services
When customers’ subscription gives them access to additional services, such as webinars, eBooks, or other resources that can help them grow their business or get more out of their software subscription, they’ll be more inclined to stay subscribed because the value they receive outweighs the price they pay.
How to Calculate Churn Rate
If you haven’t been measuring your company’s SaaS churn rate, don’t panic. It’s not too difficult to start. Just follow these simple steps:
- Determine a time period, such as monthly, quarterly, or annually.
- Figure out how many customers you had at the beginning of that period.
- Figure out how many customers churned by the end of that period.
- Divide the number of lost customers by the number of customers you had at the beginning of the period.
- Multiply that number by 100.
Say you started a month with 500 customers. Then, by the end of the period, 25 people had unsubscribed. You would divide 25 by 500, resulting in 0.05. That number, multiplied by 100, equals 5, meaning you have a churn rate of 5 percent.
SaaS Churn Rate Benchmarks
You know your company’s SaaS churn rate, but do you know what it means in the grand scheme of things? How do you know if you have a reasonable churn rate?
Generally, an annual churn rate of 5 percent and a monthly churn rate of about 0.04 percent are considered normal in the SaaS sector. Anything below those numbers would typically indicate that your company is on the right track.
Customer Churn vs. Revenue Churn
Say your company has an annual churn rate of 3 percent (a healthy number by most standards), but the customers you lost accounted for 20 percent of your revenue. If that were the case, your company wouldn’t be in very good shape despite having a low churn rate.
That’s why calculating revenue churn is just as important as customer churn.
To calculate revenue churn, you’ll follow the same steps shared above, but you’ll use the revenue from a given period.
- Figure out your monthly recurring revenue (MRR) at the beginning of a period.
- Subtract your MRR at the end of the period
- Divide that number by the MRR at the beginning of the period
Say your company’s MRR at the beginning of the month was $50,000, and your MRR at the end was $45,000. That would result in a revenue churn rate of 10 percent.
The average annual revenue churn rate for smaller businesses is around 10-15 percent. For larger companies, it’s between 5 and 7 percent.
How to Improve Your SaaS Churn Rate
Gathering data and carefully tracking your churn rate, along with other SaaS performance metrics, is the first step toward making improvements. Don’t stop there, though. If you want to lower your churn rate, try these techniques:
Track Consistently
Remember that you’ll get the most valuable insights from tracking your company’s churn rate consistently over an extended period.
Monitoring it for one month won’t tell you much. However, if you notice over a period of three or six months that your churn rate is consistently rising, that’s a sign that you need to make some changes.
Improve Your Customer Service
Superior customer service will naturally encourage people to stick with their subscriptions. If people know that they can reach a real person and receive timely feedback when they’re dealing with a problem, they’ll have a more positive customer experience and be less likely to churn.
Refresh Your Onboarding Strategy
If you aren’t currently doing much to support your customers during the onboarding process, it’s time to make that a priority.
Offer step-by-step instructions on setting up accounts, using different features of the software, troubleshooting common problems, etc. The more resources you provide at the beginning, the more likely your customers are to continue using your software consistently.
Provide More Training
Make sure your sales reps and customer service reps receive ongoing and thorough training. They need to know how to support customers and guide them through various scenarios efficiently and effectively. If they don’t know the answers, how can they share them with customers?
Harnessing Data to Understand Churn Rate
To gain a comprehensive understanding of your Churn Rate, it’s pivotal to tap into various data reserves at your disposal. This involves delving into a range of systems, from billing and customer relationships to product analytics and customer feedback.
By analyzing these diverse pools of information, you will unveil intricate patterns and valuable insights, allowing you to pinpoint the key drivers behind customer churn. Here is a list of potential data sources that can be instrumental in your churn rate analysis journey:
Of course, here is a list of potential data sources to help you gather the necessary data to calculate Churn Rate:
- Billing System: Your billing system will typically have the most accurate information about who is currently paying for your product or service, who has stopped, and when.
- Customer Relationship Management (CRM) Systems: Salesforce, HubSpot, or similar CRM tools can provide valuable data around customer behavior and interactions.
- Customer Support Systems: Tools like Zendesk or Intercom can give insights into customer’s issues and reasons for churning.
- Product Analytics Tools: Tools like Mixpanel, Amplitude, or Pendo can help you track user engagement and activity, providing valuable context about customer usage patterns before they churn.
- Customer Feedback: Surveys, Net Promoter Score (NPS), and customer interviews can provide valuable qualitative data about why customers might be leaving.
- Subscription Management Platforms: Tools like Chargebee, Stripe, Paypal, or Zuora can provide direct data about subscription changes that indicate churn.
Remember, it’s important to integrate and analyze data from multiple sources for a comprehensive view of your Churn Rate.
Want More Examples of SaaS Churn KPIs
If you’re hungry for more knowledge about Churn Rate KPIs in SaaS and other sectors, our KPI Directory is a treasure trove of information at your fingertips. Here we’ve listed some of the Churn Rate articles we currently feature:
- SaaS Annual Churn Rate
- SaaS Gross MRR Churn
- SaaS Monthly Churn Rate
- SaaS Net Churn Rate
- Customer Service Churn Rate
Dive in and empower yourself with key insights on Churn Rate across different categories.
Join Our Journey
At InsightWorthy, we’re on a mission to simplify the complex world of data for small businesses, consultancies, and agencies. We’re developing a unique platform that will enable you to easily connect your data sources, thereby creating interactive reports and actionable dashboards for critical business metrics, including Churn Rate.
While we’re fine-tuning the process, we want to invite you to be part of our journey. Subscribe to our newsletter and be the first to know when we launch.
Furthermore, your voice matters to us. Please help us prioritize our integrations by submitting the main SaaS tools you’d like to see us integrate with first in our short poll.
Together, let’s turn data into insight, and insight into growth. Be part of the InsightWorthy journey today.