What is SaaS Churn Rate?

SaaS Churn Rate Formula

To calculate your SaaS churn rate, you need to figure out what you’re looking to track. You could either track the revenue you’re losing or your customers. Here are a few churn numbers:

• Annual Revenue Churn

• Monthly Revenue Churn

• Subscriber Churn

ARR churn and MRR churn would calculate the revenue lost. Whereas the Subscriber/Customer churn rate will calculate the rate at which you’re losing your customers.

For most businesses, ARR churn isn’t a key indicator––since the measurement intervals are too far apart (yearly), you can’t make any active changes.

Subscriber churn

Subscriber churn is calculated as the ratio of the number of customers lost during a period (typically a month or a year) and the number of customers present at the beginning of that period.

Subscriber Churn = ([Customer at the beginning of a given period] - [Customers at the end of that time period]) / [Customers at the beginning of that period]

If the number of customers at the beginning of the year 2019 is 100 and through 2019 five of those customers canceled their subscriptions, subscriber churn is 5/100 or 5%

MRR Churn

Monthly Recurring Revenue Churn is calculated as the ratio of MRR lost during that month minus new upgrades/subscription revenue and divided by total MRR at the beginning of the month

MRR Churn = ([MRR beginning of the month - MRR end of the month] - [New subscription revenue or upgrades]) / [MRR beginning of the month]

If a company had $300,000 MRR at the beginning of the month, $250,000 MRR at the end of that month, and $70,000 MRR in new subscription revenue from existing customers, the Monthly churn rate would be -6.6%.

A negative churn rate means that the new revenues added during the period were greater than those that canceled. The annual churn rate (ARR) churn can also be calculated by the same formula by adjusting the periods.

Net MRR churn rate gives a more accurate representation of the health of your business because it takes into account your revenue expansion from upsells and cross-sells as well.

What is an acceptable SaaS Churn Rate?

SaaS churn rate benchmarks can vary from industry to industry. It can also vary based on the stage of growth of a company. Here’s a survey conducted by Totango that shows the churn rate across different growth rates:

A 3% churn rate is usually seen as a great rate. But, the typical benchmark for the average churn rate is 5-7%. Anything above this could be considered a higher churn rate.

Why is SaaS churn rate a key SaaS metric?

Churn has profound implications on the health of a SaaS business. For example, A monthly subscriber churn of 5% translates to approximately 46% annual churn. That is, a business with 5% monthly subscriber churn will end the year with half the customers it had at the beginning of the year. In other words, it will have to add 50% more customers during the year just to break even with the customer base it had at the beginning of the year.

How do you reduce churn?

Churn is inevitable; businesses will always have subscription cancellations. But if you find yourself dealing with a high churn rate, here are a few tactics you could employ for customer retention.

Offer an annual pricing plan

Compared to an across the board SaaS churn rate of 5-7%, monthly contracts have churn rates as high as 14%. Offering an annual contract as a churn reduction method can convert 6.5% of the time, resulting in revenue lifts of around 4%.

Implement a smart Dunning Management System

A tenth of your recurring may be at risk, due to failed transactions. Many of these are due to expired credit cards, network outages, or insufficient funds on the card. By implementing a payment retry and dunning management system, businesses can lower churn rates and increase your MRR by as much as 35%.

Did you know that you can look at the churn in 20+ ways with RevenueStory? RevenueStory is a subscription reporting and analytics tool built on top of your billing system at Chargebee. You can try it out here