Churn Rate

Churn rate is the percentage of customers who leave a service during a given time period.

Churn is a killer of software-as-a-service (SaaS) businesses. They derive their value from their customers over long periods of time, as they renew their subscription month after month and year after year.

When customers churn too soon, they often do not payback the original marketing investment required to acquire them.

Customers leave for a variety of reasons. When they churn, they're choosing to spend their money elsewhere. Sometimes the alternative is a competitor and sometimes it’s doing nothing.

Either way, it means less revenue for you.

In this article, I will focus on answering the following questions about churn rate:

What is churn rate?
How do you calculate churn rate?
What is a good churn rate?
How to improve churn rate

How do you calculate churn rate?

Customer churn rate can be calculated by dividing the number of customers who canceled their subscription or account within a certain time frame by the total number of customers at the start of the period. Then multiplying that result by 100. This will give you a % churn rate.

Churn Rate = (Total Number of Customers Lost) / (Total Number of Customers at the Start of the Period) x 100

… in more detail, it can be stated as:

Churn Rate = (Total Number of Customers at the Start of the Period - Number of Customers at the End of the Period) / (Total Number of Customers at the Start of the Period) x 100

You can use this formula to calculate your company's churn rate by hand or with an Excel spreadsheet.

For example, if you have 100 customers and 10 of them cancel their subscriptions within the first month, your churn rate is 10%.

The Customer Churn Rate Formula above is also referred to as logo churn or account churn. It looks at the specific number of customers who cancel their subscription. This is different than looking at the actual dollars that churn.

The Dollar Churn Rate is a measurement of how many recurring revenue dollars you start with at the beginning of the period versus how much you lose over that period of time.

Here is the formula for Dollar Churn Rate below:

Dollar Churn Rate = (Total Recurring Revenue at the Start of the Period - Recurring Revenue at the End of the Period) / (Total Recurring Revenue at the Start of the Period) x 100

For example, if we have $100,000 of Monthly Recurring Revenue (MRR) at the start of the month and $90,000 MRR at the end of the month, then our churn rate would be 10%.

What is a good churn rate?

A good churn rate differs by industry and customer segment.

For example, if you have a subscription business model, like Netflix or Spotify, your churn rate will likely be higher than that of an enterprise software company whose customers have higher switching costs and buying habits.

Here is what you’ll see for B2B SaaS monthly churn rate benchmarks:

World-class: <1%
Good: 1-2%
Average: 3-5%
Bad: >5%

Regardless of where you stack up, there are many ways to improve your churn rate.

How to improve churn rate

Since churn rate is an indicator of customer loyalty, use it to identify customers to survey about how your product and engineering teams can improve the product before more customers start leaving.

Here are a few tips to improve churn rates:

Build a great product. The best way to reduce churn is by staying close to your customers, understand their problems and build great solutions for them.
Provide great customer service. A bad experience will leave customers feeling frustrated and unhappy, which makes them more likely to churn out of your business or system entirely. Treat customers well.
Develop product integrations. The more integrated your product becomes into the customer’s tech stack, that harder your solution is to rip out.
Offer customers a good deal. Everyone loves a good deal. Make sure the cost of your product is a magnitude greater than the perceived value of it.
Make your product reliable. Make sure there aren't any technical glitches. Most people have a low tolerance for products not working.

Before you try to diagnose your churn rate problems, start by revisiting your Ideal Customer Profile (ICP) Template. Then when you conduct your churn analysis, segment your customers by ICP versus everyone else.

It’s possible you are sourcing poor fit customers from certain marketing channels. This may make your retention look poor when analyzing your entire customer base, but when you isolate your ICP, you may be best-in-class.

Doing this analysis will help you target the right customers going forward and develop the right Demand Generation Strategy to grow your revenue.