How to use the churn rate formula for your SaaS company

Did you know that the average annual churn rate for SaaS businesses was 5.2% in 2024? That means, on average, SaaS companies lose over 5% of their subscribers each year!

In this article, we'll explore how to calculate and interpret your churn rate. We’ll also explain why it’s a critical metric for understanding customer retention and driving sustainable growth.

You'll also learn:

• The difference between customer churn and revenue churn
• How churn impacts your key SaaS metrics
• Common factors that contribute to churn
• Actionable strategies to reduce churn and improve customer retention

Let’s start by explaining what churn rate is and why it’s important in SaaS.

What is churn rate?

‍Churn rate, sometimes called attrition rate, is the percentage of customers who cancel or don't renew their subscription to your service over a specific time frame.

‍Think of it like this: If you had 100 customers at the start of the month and 5 of them canceled their subscriptions, your churn rate would be 5%.

Why is it important in SaaS?

‍It's a critical metric for SaaS companies because it directly impacts revenue and growth. A high churn rate can signal problems with your product, customer service, or pricing strategy.

On the other hand, a low churn rate suggests you're doing a good job keeping your customers happy and engaged.

Churn rate is essential for understanding customer retention and the overall health of your SaaS business. By keeping a close eye on this number, you can identify areas for improvement and work toward building a more sustainable and profitable company.

In the next section, we'll dive into how to calculate churn rate and discuss two approaches to the churn rate calculation.

‍Churn rate formula: How to calculate churn

Now that we've defined churn rate, let's explore how to actually calculate it. There are a couple of different approaches you can take, each with its own nuances.

‍Basic churn rate formula

‍The most direct way to calculate customer churn is using the basic churn rate formula. It's easy to understand and gives you a general sense of customer retention.

To calculate your churn rate, simply divide the number of customers who left your service during a specific period (e.g., a month) by the total number of customers you had at the beginning of that period. Then, multiply the result by 100 to express it as a percentage.

Here’s what the formula looks like:

‍Churn Rate = (Number of Churned Customers / Total Number of Customers at the Beginning of the Period) x 100

‍Example:

Let's say you started the month with 500 customers, and 20 of them canceled their subscriptions. Your churn rate would be:

‍(20 / 500) x 100 = 4%

‍Revenue churn rate formula

‍The basic churn rate formula focuses on the number of customers lost. The revenue churn rate formula looks at the financial impact of churn. It tells you the percentage of recurring revenue lost over a specific period.

‍The revenue churn rate formula looks like this:

‍Revenue Churn Rate = (Monthly Recurring Revenue Lost / Monthly Recurring Revenue at the Beginning of the Month) x 100

‍Example:

If your monthly recurring revenue (MRR) at the beginning of the month was $100,000 and you lost $5,000 in MRR due to churn, your revenue churn rate would be:

‍($5,000 / $100,000) x 100 = 5%

‍Remember: Both customer churn rate and revenue churn rate provide valuable insights into your business's health. By tracking both, you can get a more complete picture of customer retention and its impact on your bottom line.

Gross vs. Net churn rate

When analyzing churn, it's key to understand the difference between gross churn and net churn. While both provide valuable information, they paint different pictures of your business's health. Let’s zoom in and learn how these differ from one another.

‍Gross churn

‍Gross churn represents the total revenue lost from customers who cancel or downgrade their subscriptions during a specific period. Think of it as the raw churn rate, without factoring in any potential revenue gains from existing customers.

Net churn

‍Net churn, on the other hand, takes into account expansion revenue. That means revenue generated from existing customers who upgrade their subscriptions or purchase extra services. It's calculated by subtracting expansion revenue from the gross churn rate.

Why the difference matters

While net churn can seem more appealing because it factors in growth from existing customers, gross churn provides a clearer picture of your true customer retention. Here's why:

• Hidden issues: A low net churn rate might mask underlying retention problems. If your expansion revenue is high enough to offset gross churn, you might not realize you have a problem keeping customers.
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• Accurate reflection: Gross churn provides a more accurate reflection of how well you retain customers. It helps you spot potential issues with your product, pricing, or customer service that might be driving users away.

In super simple terms:

• Gross churn tells you how good you are at keeping customers.
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• Net churn tells you how good you are at growing revenue from your existing customer base.

Both metrics are important, but it's crucial to pay attention to gross churn. You need to do so even if your net churn looks healthy. A high gross churn rate can signal underlying problems that need to be addressed to ensure the long-term success of your SaaS business.

‍Remember: The churn rate formula you choose will impact the insights you gain. Choose wisely and use both gross and net churn to get a complete picture of your business's performance.

How churn rate impacts SaaS growth

Churn rate is a vital sign of your SaaS business's health and a key driver of growth. We’ll now dive into the multifaceted ways churn impacts your company's trajectory. Let’s take a closer look at the churn rate’s impact on key SaaS metrics.

Monthly Recurring Revenue (MRR)

MRR, the lifeblood of any SaaS business, is directly influenced by your churn rate. Here's how:

• Reduced predictability: High churn leads to fluctuating MRR. It makes it difficult to forecast revenue and plan for future investments.
  
  Imagine a leaky bucket — even if you're pouring in new customers, a high churn rate means you're constantly losing revenue. Consequently, it’s harder to predict how much you'll have at any given time.
• Higher Customer Acquisition Costs (CAC): Replacing churned customers requires ongoing investment in sales. The higher your churn, the more you need to spend on acquiring new customers just to keep your current MRR.

Customer Lifetime Value (LTV)

Churn rate plays a crucial role in determining your Customer Lifetime Value (LTV). Remember, LTV is the total revenue you can expect from a customer throughout their relationship with your company. Let’s see how churn rate impacts this metric:

• Shortened customer lifespan: High churn means customers are leaving sooner. That also means they spend less time paying for your service. This fact directly translates to a lower LTV.
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• Missed expansion opportunities: When users churn fast, you lose opportunities to upsell or cross-sell them on other products. This problem limits your ability to increase revenue from existing customers and further diminishes LTV.

Customer retention metrics

Churn rate is intrinsically linked to customer retention. Remember customer retention is your ability to keep customers engaged and subscribed to your service. So here’s how churn rates impact customer retention:

• Spotting pain points: A high churn rate can signal underlying issues that need to be addressed. It encourages you to analyze customer feedback, find pain points in their journey, and improve your solution.
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• Building a loyal customer base: Focusing on reducing churn is key. You cultivate a loyal customer base that's more likely to stick around for the long haul.
  
  This approach leads to more stable revenue and also fosters positive word-of-mouth marketing. The result? You’re basically attracting new customers and further fueling growth.

‍Reminder: The churn rate formula you use is just the starting point. The real value lies in analyzing the underlying causes of churn and taking proactive steps to reduce it. This way, you’re paving the way for sustainable and profitable growth.

Which factors can influence churn rate?

Calculating your churn rate is just the first step. To truly reduce churn retention, you need to understand the factors that influence it. Let's explore some of the most common culprits.

‍Poor onboarding process

First impressions matter, and in SaaS, your onboarding process is often that first impression. A clunky or confusing onboarding experience can leave customers feeling frustrated and unsure of how to use your product effectively. Here’s what to avoid during the onboarding process:

• Lack of guidance: Customers need clear instructions and support to get started. Without proper guidance, they may struggle to see the value in your product and quickly lose interest.
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• Info dumping: Bombarding new users with too much info at once can only lead to confusion. It's key to break down the onboarding process into manageable steps. You want to provide just the right amount of information at each stage.
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• Missed opportunities for engagement: Onboarding is a prime opportunity to engage with new customers and build a relationship. Failing to capitalize on this can lead to a sense of disconnect and increase the likelihood of churn.

Lack of customer engagement

Keeping customers engaged is crucial for long-term retention. If customers aren't actively using your product or seeing its value, they're more likely to churn. Let’s look at the factors in more depth:

• Infrequent usage: Customers who rarely use your product are prime candidates for churn. It's important to track product usage and spot inactive users so you can reach out and re-engage them.
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• Limited feature adoption: Failing to adopt key features can indicate that customers aren't fully using your solution’s capabilities. This issue can lead to a perceived lack of value and a higher likelihood of churn.
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• Poor communication: Regular communication is key to keeping customers engaged. Failing to provide updates, offer support, or solicit feedback can lead to a sense of neglect. Of course, this has a direct impact on increased churn.

Pricing issues

Pricing can be a notable factor in churn. Customers want to feel like they're getting good value for their money. These are some of the common issues related to pricing and churn:

• Lack of transparency: Opaque pricing structures can lead to mistrust and frustration. It's crucial to be upfront about your pricing. You want to clearly communicate the value customers receive at each price point.
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• Misaligned value proposition: If users don't perceive the value of your product to be worth the price, they’ll likely churn. It's important to make your pricing align with the value you deliver. Customers should always understand the benefits they're paying for.
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• Lack of flexible options: Offering a variety of pricing plans to cater to various needs and budgets can boost retention. A lack of flexible options can force customers to choose a plan that doesn't fit their needs.

Product or service quality

Ultimately, the quality of your product or service is a major determinant of churn. If customers aren't satisfied with their experience, they're unlikely to stick around. These are some common problems related to quality:

• Bugs and performance issues: Frequent bugs, glitches, or performance problems are a no-go. These problems can lead to frustration and a negative perception of your product. It's crucial to prioritize product stability and address issues promptly.
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• Lack of innovation: Failing to keep your product updated and innovative can lead to stagnation. Even worse, it can lead to a loss of competitive advantage. Users may churn if they perceive your product as outdated compared to competitors.
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• Poor customer support: When customers encounter problems, they need reliable support. A lack of adequate support can lead to a sense of abandonment, increasing the likelihood of churn.

Avoid these common churn mistakes

When managing churn, there are a few common pitfalls that many SaaS companies fall into. Let's shed light on these mistakes and explore how to avoid them.

‍Focusing only on customer count churn

‍It's easy to get fixated on the number of customers who cancel their subscriptions. However, solely focusing on customer count churn can give you an incomplete picture of your business's health. Why? Because not all customers are created equal.

Some customers might be on your basic plan. Others might be subscribed to your premium tier. Losing a high-value customer has a much greater impact on your revenue than losing a low-value one.

Solution

‍Use both customer churn rate and revenue churn rate. Remember thatcustomer churn rate tells you the percentage of customers you're losing. Conversely, revenue churn rate shows the percentage of recurring revenue lost.

‍Pro tip: By tracking both, you get a holistic view of churn's impact on your business.

Ignoring early warning signs

‍Customers don't just suddenly decide to churn. There are usually warning signs along the way. These signs might include decreased product usage or infrequent logins. Bolder users may also let you know through negative feedback in customer surveys.

Ignoring these early warning signs can be a costly mistake. It's much easier to retain a customer who's showing signs of disengagement than to win back one who has already churned.

Solution

‍Proactively monitor customer engagement metrics. Track product usage, login frequency, and customer feedback to identify at-risk customers. Then, reach out to those customers with personalized support.

Overlooking the onboarding experience

As we discussed earlier, the onboarding process is crucial for setting customers up for success. A poor onboarding experience can lead to confusion, frustration, and ultimately, churn. Fortunately, there are some ways to work around this mistake.

Solution

‍Create a frictionless onboarding experience. It should guide users through your product's key features and benefits.

Provide continuous engagement through in-app tutorials, email sequences, and readily available support. By investing in a strong onboarding process, your users will be happier. Of course, happier customers don’t usually churn.

Remember to avoid these common churn mistakes and stay vigilant about customer retention. This way, you can improve your churn rate and drive sustainable growth for your SaaS business.

FAQs about churn rate in SaaS

What is a good churn rate for SaaS?

‍Generally, a lower churn rate is better. Average churn rates for SaaS businesses can range from 3% to 7%.

How often should churn rate be calculated?

‍You can calculate churn rate daily, weekly, monthly, or quarterly. However, it's important to be consistent with the time frame you choose for accurate comparisons over time.

How do you reduce churn for high-value customers?

‍You can reduce churn for high-value customers by providing personalized onboarding. Also, considerproactive support and building strong relationships through regular communication and tailored solutions.

Can churn rate be negative?

‍Yes, churn rate can be negative. It occurs when expansion revenue from existing customers exceeds the revenue lost from churned customers.

Use Orb to reduce churn with these actionable pricing strategies

‍Orb is a done-for-you billing platform that empowers SaaS businesses to achieve pricing agility by making it easy to implement usage-based and hybrid pricing models. By offering the following capabilities, Orb helps businesses optimize their billing process and ultimately, reduce churn:

• Visibility into customer behavior: Orb provides real-time usage tracking. It allows you to proactively identify and engage with at-risk customers before they churn. You can set up alerts based on usage to quickly take action and drive better decision-making.
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• Flexible payment options: Orb integrates with popular payment gateways like Stripe. This way, you can offer your customers convenient payment options, which helps reduce churn caused by payment friction.
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• Easier revenue recognition: Orb handles complex revenue recognition scenarios. We help ensure compliance with ASC 606 standards and reduce the risk of revenue leakage.
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• Finance team aid: Orb's UI and reporting features provide your finance team with a single source of truth for revenue data. It frees them from manual data pulls and reduces the risk of billing errors.
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• Implement usage-based billing for AI: Orb is particularly well-suited for AI companies, who often face customer friction when it comes to pricing. Usage-based billing helps you reduce churn by tying price to value. Other features like prepaid credits and threshold billing reduce pricing concerns and minimize your risk of customers not paying.

With Orb, you can implement these actionable strategies to reduce churn:

‍1. Fine-tune pricing with usage-based billing

‍Traditional per-seat pricing can lead to churn. This issue is common when customers feel they're paying for features they don't fully use. Usage-based billing aligns cost with value, increasing customer satisfaction.

‍How Orb helps: Orb allows you to track and measure any billable metric. Think API calls, storage, or custom events.

Orb enables you to implement granular, usage-based pricing that accurately reflects customer consumption. This can reduce the likelihood of churn due to perceived unfairness in pricing.

2. Experiment with hybrid pricing models

Hybrid models offer flexibility and cater to a wider range of customer needs. They combine elements of flat subscriptions with usage-based billing. This approach can be very effective for businesses with diverse customer segments.

‍How Orb helps: Orb enables you to easily implement and manage hybrid pricing models. You can create tiered plans with different features and usage limits.

This way, you’re offering customers more choice and control over their spending. The result? Offering flexibility can reduce churn by making sure users find a plan that suits their needs.

3. Optimize pricing strategies with data-driven insights

‍Understanding how pricing impacts user behavior is vital. This information can help in optimizing your pricing strategy. Data-driven decisions lead to more effective pricing models and less churn.

‍How Orb helps: Orb's reporting and analytics provide a clear view of your revenue and its drivers. By analyzing revenue metrics in relation to different pricing tiers, customers, and usage patterns, you can spot areas for improvement. Ready to unlock the full potential of your pricing and reduce churn? Explore Orb's powerful features and check our flexible pricing options to find a plan that works for you.