Churn rates. It’s a tricky subject with tons of nuance. But if you’re in the SaaS business, it’s one that you need to understand backward and forwards. A low customer churn rate means great things — but a high churn rate can spell disaster if left unchecked. 

That’s why we’ve created this guide. Use it to understand how churn works, learn a few different ways to calculate churn, and answer many of the questions you likely have when running a subscription business.

What Is Churn Rate?

In the simplest of terms, churn rate is an annual measurement that compares two things: your attrition rate, which is the rate at which your customers downgrade or stop subscribing to your services, and the rate at which you’re onboarding customers. Low churn means your subscription-based business is relatively stable, while higher churn hints at higher customer turnover.

That’s the simplified definition, but there is so much more to know. We’ll dig into the details below.

Why Is Churn Rate Important?

There are lots of reasons why you should pay close attention to your churn rate, but the bottom line is that it all comes down to profitability, customer retention, and customer acquisition.

Here’s a statistic to keep in mind: Increasing your customer retention rate by as little as 5% can increase your profits anywhere between 25% and 95%.

Now, put that into perspective alongside churn rate measurements. Your churn rate reflects your overall customer retention. The higher the churn, the more customers are leaving, and the more customers you’ll need to acquire to replace them — which is costly. On the flip side, when churn is lower in a specific period, that means you’re retaining more customers. While it varies by industry, retaining customers is nearly always less costly than acquiring new ones.

While this is a high-level view of churn, there’s a lot more you can learn from your churn rate.

  • Use your churn rate to measure your company’s health and long-term prospects. Is the rate on the rise? That’s a sign you need to do something because it could get worse over the long term.
  • Monitoring churn rates month-to-month gives you a granular look at consumer behavior. This lets you understand how your company’s customer retention efforts work from one month to the next.
  • Identify changes that had an adverse effect on customer retention. Changes that can affect this could be anything from product and service changes to a social media marketing campaign that either just isn’t resonating or is putting customers off.
  • Optimize products, services, customer support strategies, marketing campaigns, and more. Do you have add-ons that people try, then abandon? Or do people upgrade to a premium package and quickly downgrade? Are they more likely to unsubscribe after contacting customer support about an issue? Understanding your churn reveals these kinds of patterns. Use that information to tweak products, services, and strategies so that people are less likely to cancel or downgrade.
  • Calculating churn rates means you’ll need to go in-depth, creating a detailed churn analysis. Through that analysis, you’ll be able to calculate customer lifetime value and customer acquisition costs. That will give you a clear picture of how much new customers are costing you — and how profitable existing customers will be.
  • Through segment and cohort analysis, you’ll be able to learn which customers are most successful with your product. Is it the premium subscribers, those on the basic plan, or the people who use the most add-ons? Are there certain demographics that perform better than others? Your churn rate will tell you.
  • Calculating churn—especially on a month-to-month basis—lets you forecast your company’s performance. Over time, the data you gather will provide you with averages to work with. These averages can tell you lots of things: how many new subscribers to expect in a given time period, how many cancellations, which products people are most likely to subscribe to, and so on.
  • Understanding churn also helps you improve the customer’s experience. If you notice churn rises along with support requests, for example, then you know that there is an issue causing frustration and cancellations. From there, it’s a matter of tracking down and resolving that issue.

And those are just some of the reasons why churn rates number among the most important SaaS metrics out there. When you dig deeper, you’ll find many more.

Common Challenges When Calculating Churn Rate

Calculating your company’s churn rate isn’t a simple matter of comparing subscribers to cancellations. It’s a number that is constantly in flux, changing from month to month, year to year, or even seasonally. There are also different types of churn to consider. Keep all of this in mind to create the most accurate picture possible.

Changes in Your Customer Base MoM or YoY

In some respects, companies who sell a physical product — like food — have an easier time because people need to buy it, and they need to buy it in consistent amounts. Once they have bought it, they can’t unsubscribe or downgrade what they’ve purchased. Returns generally only happen when the product received is faulty.

This is not the case when you sell a subscription-based product. When you’re selling a subscription, it can be difficult to establish an exact sales count or customer count because the numbers are always changing. Subscriptions and cancellations will change from month to month or year to year as your service trends, or as people decide they’ve gotten all from it that they can. 

Depending on your business model, seasonality, and a variety of other factors, your customer base can look a little bit different between the beginning of the month and the end of the month.

Differentiating Between Multiple Types of Churn

To make matters even more difficult, there are lots of different types of churn. There are upgrades, downgrades, accidental cancellations — and even good types of churn.

Here are a few types of churn you probably encounter:

  • Voluntary Active Churn: This is the easiest type to understand because voluntary active churn is a measurement of customers who purposefully unsubscribe. It’ll be up to you to learn why they’re unsubscribing, but when this type of churn is present, it’s an indicator that you need to look at things like pricing, package offerings, onboarding methods, customer success strategies, and other areas that may need improvement so that you can keep subscribers.
  • Involuntary Passive Churn: As the name implies, this type boils down to accidental cancellations. One example would be people who have forgotten to update payment information when their address changes, or if they have received new debit or credit cards. Their monthly payment fails because their information is no longer valid. Usually, these accidentally churned customers don’t even realize there is a problem until they receive a cancellation notice.
  • “Good” Churn: Good churn can be difficult to track, but it often correlates to your current customers who are taking advantage of package add-ons. Within a churn analysis, you’ll notice that the revenue coming from this group of people outweighs any revenue lost from those who are downgrading or unsubscribing.
  • Downgrade Churn: These are the customers who aren’t necessarily canceling outright, but they are removing add-ons from their subscriptions, or they’re rolling their package back to your basic tier rather than sticking with premium services. This type of churn can represent a lot of lost revenue, even though your overall customer count may remain consistent over a given period of time. It can also shed light on where you may need to improve upgrade options to entice more people to buy them.

These are just four of the most common types of churn. As you dive deeper into analyzing your organization’s churn rate, you’ll discover many more.

Misleading Sample Sizes

Have you just recently launched your business, or recently launched a new service offering? Beware — these are the times when your sample sizes can be misleading. 

This is because oftentimes when a new service launches, it typically undergoes a period of hyper-growth. Because of your well-executed marketing strategy, people are jumping on board as a result of the novelty. 

While this is a great thing, depending on the churn rate formula you’re using, it can throw your calculations off. In particular, those numbers by themselves can paint a very inaccurate picture of what the future holds. Usually, after the buzz around a new launch dies down, the number of new subscriptions declines while the number of cancellations rises. All of that put together can lead to a churn rate that fluctuates wildly in early months.

Have patience. With time, subscription numbers should settle down into something more predictable, which means you’ll be able to more accurately gauge present and future churn rates.

Time Frames Tell Different Stories

Have you looked at stock charts recently and noticed a downtrend over the past few days, or the past few months? For new investors, that’s always a discouraging sign. But seasoned investors know to look at the bigger picture, because in the grand scheme of things the stock market has been doing very little but trending upward for the past century or so.

Churn rate time frames work similarly. Short timeframes might tell you one thing, but if you zoom out to look at the big picture, you might see something entirely different. 

For example, many businesses rely on the yearly holiday shopping rush to make the bulk of their revenue. During the rest of the year, things are relatively stable. 

This is why it’s important to always be looking at different time frames — monthly, quarterly, yearly, and beyond. Each reveals something different.

Customer Segments Churn in Unique Ways

Different demographics have different needs — and for that reason, different customer segments will have different churn rates

Here’s a hypothetical example: Imagine a company offering productivity software as a service. Now imagine two different customer segments who are subscribing to that software. You may have the retail subscribers, who pick up the basic plan because they need a word processor and spreadsheet program. Then you may have the pros, who subscribe to the enterprise service because they need not only word processing and spreadsheets, but also databases, cloud services, collaboration tools, and whatever else this package offers.

Those hypothetical enterprise customers are likely to stick around for a while because their businesses are relying on your SaaS product. The retail customers? Not so much. They might be canceling at much higher rates simply because they only needed your SaaS offerings temporarily.

While this is a hypothetical example, it’s a good demonstration of how different segments can have entirely different churn rates based on differing sets of wants and needs.

Seasonality

Seasons also play a part in churn, although this will depend in large part on what you offer. For some businesses, especially in the realm of B2B SaaS, seasonal fluctuations can be relatively minor. For others, the holiday season brings a huge influx of subscribers. Then churn rates rise in January as that holiday influx starts to drop off.

Other businesses — for example, a kid-friendly subscription — might see peak subscriptions in late spring when kids begin summer vacation from school. But as soon as fall rolls around, those subscriptions drop as kids go back to school.

Keep in mind that your churn rate could change throughout the year based on seasonal changes like this — and that can be hard to gauge accurately until after you’ve been through several cycles.

An Inconsistent Churn Rate Methodology

Another issue that can give you inaccurate numbers is inconsistency. This is a tough problem to fight, because you always want to make improvements to the way that you analyze churn. Yet, if you make too many changes to your analysis, it becomes much more difficult to compare numbers from one month to the next.

For this reason, it’s a good idea to nail down your methodology as best you can before you get too deep into churn analysis. Create benchmarks in the form of calculations that you will do each month (or each period) to build up a store of reliable averages. Consistent calculations month after month and year after year will give you the best overall picture of how your business is performing.

How To Do a Churn Rate Calculation

There are several ways to calculate your churn rate. While it’s tempting to start with the simplest method, it may not be the ideal method for your business. 

In fact, many different churn rate formulas are designed to account for specific things, like seasonal growth, or growth during new product launches. For most businesses, the best thing you can do is calculate churn using a variety of formulas, since each will provide its own unique insights. At the very least, rely on a blend of both the classic method and a formula that can factor for growth during seasonal influxes or during new product launches.

Below, we’ll cover a few different calculation methods and the advantages of each.

The Classic Method

With this method, start by establishing the time period you want to track churn over — month to month, for example. Then, take the total number of customers who churned over the course of that time, and divide that by the number of customers you had on the first day of the period.

For example, say that you had 1,000 customers on August 1. By the end of August, you had 200 cancellations (meaning 200 churned). 200 divided by 1,000 equals a churn rate of 20%.

The formula looks like this:

Churn rate = ((Number of customers at beginning of month – number of customers at end of month) / number of customers at beginning of month

Churn rate = ((1,000 – 800) / 1,000

Churn rate = .2, or 20%

The major advantage to this method is that it’s simple, which makes it easy to understand and calculate.

The downside to this method is that it doesn’t really provide a lot of detail. It doesn’t account for significant growth if you have seasonal fluctuations, and it doesn’t tell you what to expect for the future — not unless your business happens to be a relatively stable one that doesn’t see much in the way of seasonal fluctuations.

The Adjusted Method

This method is a little more complex. It factors for growth, so you’ll need to take the number of customers from the midpoint of your time period.

So those 1,000 customers that you had at the beginning of August: To them, add the number of customers you had by the middle of August — let’s say another 250 customers, for a total of 1,250. Now divide that by the number of cancellations you experienced over the course of August — 200 cancellations from existing customers, and another 50 cancellations from those new customers for a total of 250 who churned. Divide the churn by the total customers to get your churn rate: 250 / 1,250 = 22% churn rate.

Here’s how to break this formula down:

Churn rate = Number of customers churned / ((number of customers at the beginning of month + number of customers at the midpoint) / 2)

Churn rate = 250 / ((1,000 + 1,250) / 2)

Churn rate = .22, or 22%

This method helps you account for growth by factoring in those big influxes of new subscribers in a given time period. 

What it doesn’t do, however, is scale well across different time frames. So for example, if your big influx happens over the course of one month, you’ll get one result — but if you try to apply this calculation over an entire year, you’ll likely see something very different, and very inaccurate.

The bottom line for this method is that it’s best used during periods of growth so that you can get an accurate picture of customer behavior within specific time frames. 

The Predictive Method

This is another complicated method, but it’s one that might be able to shed some light on who is likely to churn next. You need two months of data for the predictive method. Here’s how it’s calculated:

  • Create an array of the number of customers who are active on the first day of your time period, but inactive on the last day of your time period. In this example, say you have 1,000 customers who are active on August 1, but of those customers, 100 of them are inactive by September 1. 
  • Keep that number handy for a month. On October 1, how many of those inactive customers have unsubscribed? Let’s say that 50 of them did. Then that means your churn for inactive customers is 50%.

What makes this number great is that you can keep a running total of inactive customers from one month to the next. Over time, you’ll start to build a picture of how many of those inactive customers unsubscribe — and when they do it. After one month, two months, or longer? You’ll need to run this calculation to find out.

The Daily Average Method

This method builds on the Adjusted Method. To make it work, you take the number of customers who churned over a given time period and divide it by the average customer count between each day within that time period.

In other words, if you’re calculating for a month, then add up the number of customers you had on each day of that month. Then divide by the number of days in the month to get your average. Divide your churn by this average to get your result.

Here’s what this formula looks like in our hypothetical example, where we’ll say we averaged 1,050 customers every day for a one-month period:

Churn rate = Customers who churned over a period of time / average number of customers you had on each day of time period

Churn rate = 200 / 1,050

Churn rate = .19, or %19

This method is useful when you have periods of high growth, and it can also scale to different time frames if you want to calculate quarterly or yearly. However, as with all other calculations, there will be variations that this calculation can’t account for. Most notably, those variances include newer customers that churn at higher rates than older customers, plus differences between cohorts.

Understanding the Relationship Between Churn Rate and Other SaaS KPIs

When you’re in the SaaS business, your key performance indicators (KPIs) are fundamental numbers to keep track of. This includes things like monthly recurring revenue, customer lifetime value, customer acquisition cost, and beyond. 

Churn has an effect on each of your KPIs — in different ways depending on the specific metric. Here are some examples:

  • Monthly Recurring Revenue (MRR): This metric calculates the revenue you get on a monthly basis. It should be divided into several sections, including MRR for new customers, upgrading customers, and so on. You can see how churn might affect these numbers. Higher churn might mean fewer upgrades, or more downgrades offsetting those upgrades, for example.
  • Customer Lifetime Value (CLV): This is the profitability of a customer over time. Churn lowers CLV because when customers leave, you lose revenue that could have been earned over the customer’s lifetime had they stayed.
  • Customer Acquisition Cost (CAC): This is the cost of marketing to bring new customers in. Churn will always increase your CAC because the higher your churn, the more you need to spend to replace the customers who leave.
  • Net Negative MRR Churn: Net negative MRR churn means that the revenue you create from existing customers is outpacing that which you’re losing through cancellations and downgrades. This is a great type of churn to have. It means existing customers are valuable — and are likely upgrading to make even better use of your services. Typically when you experience this, it means you have a relatively low churn rate.

Frequently Asked Questions About Churn Rate

If you’re confused, don’t worry — churn is a difficult subject to tackle, with lots of variables and metrics that are easy to misunderstand. Here are some common questions about churn that may help clarify things for you.

What Is a Good Churn Rate?

There are lots of sources out there that claim to be able to tell you what your average churn rate should be. The truth is, it’s almost impossible to say what the actual average should be. All SaaS businesses are different, so what would be good churn rates for one might be bad for another. 

However, research shows that in SaaS specifically, a “good” churn rate is typically around 3% or less. Again, take these numbers with a grain of salt since churn can vary wildly between companies, product types, and markets.

What Is a Negative Churn Rate?

Negative churn rates happen when the revenue from new customers or upgrades is greater than the revenue you’ve lost from cancellations and downgrades. 

How Can I Track Churn?

Usually, you track churn through enterprise resource planning (ERP) software. This is a type of software that companies use to keep a close eye on all of their KPIs, including new subscribers, upgrades, downgrades, cancellations, and so on.

What Are Some Real-World Examples of Churn Rate?

Every company that offers subscriptions has a churn rate. Here are some examples:

  • In the TV world, Netflix has one of the lowest churn rates at 2.5%. The secret to their success is partly due to their dominating position among streaming services — and they’re always coming up with new shows and new offerings to keep subscribers engaged.
  • Hulu, a direct competitor of Netflix, reported a 5.2% churn rate over the same period — and likely for the same reasons. They’re a massively popular platform with plenty of content to keep users engaged.
  • Disney+ tells a similar tale with a reported churn rate of 4.3%.
  • For the first fiscal quarter of 2021, Peloton had a churn rate of less than 0.75% for connected services. This number is likely due in large part to the pandemic since gym closures left many searching for alternate ways to get fit. 

Interestingly, many public SaaS companies don’t report their churn rates — but most of them do report their MRRs and other key KPIs. Here’s a good resource to scout some of this data. For instance, you can see that Zoom reports using ARR, which is annual recurring revenue rather than monthly recurring revenue.

Empower Your Sales Team To Reduce Churn With Sales Assembly

As you can see, calculating churn is tough — but when you’re running a SaaS company, it’s an important part of remaining  competitive. 

Fortunately, Sales Assembly can help. We offer a variety of strategic resources along with our membership program to help you piece the whole revenue puzzle together. Masterclasses and training are available to help you build skills and accelerate your team’s growth, which positions you to be better able to scale. With access to our talent pool, you’ll be able to hire the right people for your business — and get on the fast track with onboarding. Connect with peers and thought leaders in your industry and elsewhere to gain valuable insights into leadership, strategy, teamwork, and more.

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Ready to get started? Contact us today to chat about how Sales Assembly can help your team reduce churn.