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What is Customer Churn Rate and How to Calculate It?

Customer Churn Rate

If you are a SaaS business, then you must read this article for the following reasons:

  • What is Customer Churn Rate?
  • How to Calculate Customer Churn Rate?
  • Why is it important for a SaaS business to calculate this financial metric and how to optimize it?

One of the critical aspects of SaaS businesses that cannot be avoided is the customers canceling subscriptions. Though it is painful to lose customers but is one thing you just cannot get rid of if you are a SaaS business. That is why customer churn rate is an important metric in SaaS companies. Keeping track of the number of customers you are losing period-over-period is important to know its impact on your revenues. 

It might scare you to see customers canceling subscriptions over time. However, not tracking customer attrition is scarier. This is because you may be taking a huge hit on your revenues. However, you may not know about it and thus not take the necessary steps to reduce subscription cancellations. 

Customer retention is not easy when it comes to SaaS companies. Further, it is impossible to retain all of your customers. However, there are some important ways in which you can reduce customer attrition. 

Let’s first have a look at what is customer churn rate. 

What is Meant by Customer Churn?

Customer churn is the percentage of customers who stop using your products or services in a given period of time. In the case of SaaS companies, it is the percentage of customers who cancel subscriptions in a given period of time. 

Accordingly, the lower the churn rate, the better is it for you as there is less number of customers canceling product subscriptions. Similarly, the higher the churn rate, the higher the number of customers who stop using your products or services. This is certainly not good for you as results in lower revenues. 

Now, since your SaaS business has a recurring payment model, measuring customer churn rate is a critical metric. As said earlier, it is unrealistic to retain all of your customers. However, it impacts your bottom line if the customer doesn’t continue to use your product or service until you meet the average cost you spend in acquiring him. 

Also, it is easy to get confused between customer churn and revenue churn rate. Where customer churn rate tells you the rate at which customers stop using your product or service in a given time period. Revenue churn is a metric that tells you the amount of revenue that you lose as a SaaS business for a given time period. 

Why is Customer Churn Important?

Customer churn is one of the key SaaS metrics that must be tracked and evaluated by a SaaS business. This is because it helps you to know the success of your marketing activities and the degree to which your customers are happy. 

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Further, it gives you insights into which product or service has the maximum attrition. This can help you to take further steps of drawing plans and strategies to improve your customer attrition. 

For instance, you may ask your customers the reason for cancellation and see ways in which you can resolve such issues. Here are some key reasons why tracking customer churn is important for your SaaS business. 

1. Know Business Challenges Via Reasons Behind Customer Attrition

Customer churn helps in identifying some of the key challenges your SaaS company might be facing. For instance, issues with the product, poor customer support, user interface problems, etc can be some of the key challenges that you can immediately look into.  

2. Improved Interaction Between You and Your Customers

Tracking customer churn and making efforts to reduce the same translates to improved communication between you and your customers. The more you communicate with your customers, the more you come to know of the issues they are facing. This helps you to know the critical areas which need your attention. 

For instance, you can know if the customers are happy with your product pricing and its features. Likewise, you can improvise your product based on features customers would like to have in your product in the future. 

Further, this may also include potential customers who registered for a free trial but did not purchase the product. Taking feedback from them can help you understand why you lose customers and what can you do to resolve these challenges. 

3. Efforts Towards Enhanced Customer Retention 

Another reason why tracking customer churn rate is an important metric is that it will always keep you on your toes to make efforts for customer retention. It is always more costly to acquire new customers than to retain the existing ones. Therefore, measuring and analyzing customer churn rates will always give you a clear picture of the challenges customers are facing. Further, you will always make efforts in the right direction to retain your valuable customers. 

4. Know your MRR, CAC, and LTV 

Finally, customer churn helps you to keep a track of the Monthly Recurring Revenue (MRR) and the average number of customers who cancel subscriptions. With a stable churn rate on a monthly basis, you can forecast the MMR for the upcoming months and see if your SaaS company is achieving those figures in the future months. 

Similarly, the churn rate increases your Customer Acquisition Cost (CAC). This is because they may leave before you actually cover up the cost you spent on acquiring them, increasing CAC, and reducing MRR. Thus, by tracking and reducing the churn rate, you can control the CAC. 

Finally, a higher churn rate also impacts your Lifetime Customer Value. This is because losing customers means losing the revenue that you could have earned if the customers stayed which means a lower LTV. 

How To Calculate Customer Churn Rate? 

There are certain things that you need to decide in order to calculate the Customer Churn Rate. 

1. Deciding the Period for Calculating the Churn Rate

The first step in calculating the customer churn rate is deciding the period for which you need to calculate the customer churn rate. You can calculate churn rates monthly, quarterly, and annually. 

2. Determine the Total Number of Customers at the Beginning the Period

The next step is to determine the number of customers at the start of the month, quarter, or year for which you are calculating the churn rate.

3. Determine the Total Number of Customers Lost at the End the Period

You now need to figure out the number of customers you lose at the end of the month, quarter, or year for which you are calculating the churn rate. 

4. Use the Customer Churn Rate Formula to Calculate the Churn

Finally, plug in the values determined in the above steps in the customer churn rate formula to calculate the customer churn rate. 

Customer Churn Rate Formula = (Customers lost at the end of the period/Total number of customers at the beginning of the period) *100

Let’s say you have 200 customers at the beginning of March. You lose 5 customers at the end of March. Thus, the customer churn rate for March would be 

= (5/200) *100

= 2.5%

What is a Good Customer Churn Rate?

The lower the customer churn rate, the better it is for your SaaS business. Similarly, higher the churn rate, less profitable it is for your SaaS business. 

As for a specific figure for a churn rate, it varies from industry to industry. One of the typical things SaaS companies are interested to know is the SaaS churn rate. 

What is a Good Monthly Churn Rate for a SaaS Business? 

There are a number of studies that have been undertaken to determine the ideal SaaS churn rate. For instance, Baremetrics is an analytics firm for SaaS businesses. 

On its Open Bechmarks Page, it colates the date of 800 SaaS startup firms who use Baremetrics. Further, it undertakes cohort analysis of companies having a similar average revenue per user. 

Average Revenue per User Under $10$10 – $25$25 – $50$50 – $100$100 – $250$250 & up
User Churn6.8%6.9%6.2%6.3%5.3%6.5%

Ways To Reduce Customer Churn Rate

One of the biggest challenges that SaaS businesses face today is switching from reactive to proactive customer retention. 

In simple words, SaaS businesses face the challenge of retaining customers before they decide to end their contract and identify customers with a high churn risk.

Here are a few of the ways in which SaaS businesses can reduce their customer churn rate.

1. Improve Pricing

Improper pricing of a SaaS product is one of the primary reasons why customers abandon a specific product and shift to other products. Thus, it’s extremely important for a SaaS business to align its product to the value that each customer persona sees in the product.

In other words, a SaaS business must practice the value-based pricing approach while setting up the price for its products. The value-based pricing approach means a business must charge according to the actual volume of usage in some manner (seats, page views, etc.). 

Such a practice helps a SaaS business to avoid the problem of dead accounts. Furthermore, it also ensures that the volume of their product usage expands and generates huge dividends with actually charging on value. 

This means a SaaS business would charge an enterprise differently from a startup. As a result of adopting this approach, the overall ARPU of the SaaS product will increase substantially.

Thus, a SaaS business will have to make efforts in aligning the value in the product with their pricing and expanded usage. It will have to work to create as much active usage as humanly possible and hence create value for the customers. 

2. Improve Customer Onboarding

One of the other important reasons why customers abandon a SaaS product is that they do not see the value that the product adds to their life. 

Customer Onboarding refers to a set of activities that the customer success teams at a SaaS business undertake to showcase the true value of the SaaS product to the customers. Communicating the core value of the SaaS product to the customers when they subscribe to a product is of utmost importance for a SaaS business.

The first impression that customers carry with regards to using the SaaS product and how it can help them resolve their problem can go a long way in enhancing customer engagement,

Thus, customers’ overall experience with the Saas product has a great impact on the churn rate of a SaaS business. This means a good customer onboarding experience may lead to increasing customer loyalty, enhancing customer satisfaction, and increasing customer referrals.

Thus, it’s extremely important for a SaaS business to adopt various tactics to enhance its customer onboarding experience.

3. Proactive Approach in Servicing Customers

Many times, the prospects find it difficult to access the information they have been looking for on the SaaS business’s website. As a result, they may get overwhelmed, abandon the webpage, and may never come back.

To overcome this challenge, it is important for a SaaS business to have a customer support team in place that acts proactively. 

Proactive customer service ensures that the customer support team of a SaaS business is responding to customer challenges before they raise the challenge with the customer support team.

SaaS businesses can use a host of tools like live chat to engage the customers and offer them immediate solutions. This helps in creating a better experience for customers and hence reducing customer churn rate.

4. Enhance Customer Engagement

It is important for a SaaS business to have a well-defined customer engagement strategy in place. Such a strategy ensures that the SaaS product captures the attention of the customers and gives a great experience to the customers.

A SaaS business can adopt a host of strategies to enhance customer engagement. These may include implementing chatbots, implementing customer loyalty programs, offering a personalized experience, using visual engagement tools, and much more.

Besides this, a SaaS business can provide regular content in varied formats to the target audience on a regular basis. These formats may include product-led content, blog, videos, and much more.

It is important to note that a consumer comes across a variety of information provided by different SaaS businesses. Thus, if a SaaS business wants to make a mark, it needs to provide regular content to its target audience that solves its problem.

This increases the confidence of the target audience in the SaaS product and hence helps in reducing customer churn rate.

5. Get Customer Feedback

It is important for a SaaS business to gain customer insights through conducting customer surveys. These insights help the SaaS business in understanding the challenges that the customers face using the product. As a result, the business is able to make requisite changes in the product or systems.

Why do SaaS Customers Churn?

It is important for SaaS businesses to fully understand a customer’s behavioral churn path and the factors responsible for customer churn to better manage customer churn rate. 

The following are the determinants of Customer Churn for SaaS businesses.

1. Customer Dissatisfaction

One of the major causes of customers abandoning a SaaS product is customer dissatisfaction as a result of poor customer service or difficulty in using the product.

For instance, the customers may have a bad onboarding experience with a SaaS product. Proactive customer service can play a great role in retaining customers. This calls for analyzing the customer funnel and understanding where it breaks. Such insights will help a business in understanding customer challenges and making appropriate fixes.

SaaS businesses can also obtain direct feedback from customers on a regular basis. The customer insights help a SaaS business to understand the issues that customers are experiencing and take the requisite steps to overcome such challenges. 

SaaS business owners can either make improvements in the product or make the customer service teams more proactive in their approach.

They can make use of the insights through analyzing the Cohort reports. Cohort reports group the customers into groups that help SaaS businesses in understanding the specific issues faced by each customer group and hence make informed decisions.

2. Switching Costs 

A customer may keep on using a SaaS product for two reasons. The first is that they are loyal to the product and want to stay in a relationship with the SaaS business. Secondly, the cost of switching to other alternative products is too high. This means they do not have a reason to shift to other products and hence have to stay in a relationship with the SaaS business.

Thus we can say that the switching costs act as a constraint for the customer if they are too high. This is because such costs prevent the customers from freely switching to other service providers. 

Thus, SaaS businesses must have a strong customer retention process in place. A strong customer retention process helps the business in reducing its customer churn rate. SaaS businesses can adopt a host of strategies to increase customer retention. Their product should deliver constant value to the customers.

In simple words, SaaS customers should not receive added value from other SaaS providers. The cost of switching must act as a barrier from the perspective of customer retention. 

3. Poor Product Quality 

No SaaS product is perfect and it cannot be. They’re going to be issues like downtime, unexpected bugs, and hacks as they are inevitable parts of running a SaaS business. 

However, if the product quality issues are to an extent that it forces customers to abandon the product, then a SaaS business must address them as early as possible. 

Quick response is the key to dealing with product quality issues. Besides quick response, a SaaS business must have a proper plan in place in implementing measures to fix the issues. In fact, if need be, a SaaS business must compensate customers by offering discounts or free months. 

Thus, to monitor the customer satisfaction levels, a SaaS business can take the support of technology. It can make use of tools like Net Promoter Score (NPS) survey to quantify the customer satisfaction levels. Further, through the insights gained, the SaaS business can identify upsell opportunities and anticipate the customer churn rate.

4. Strong Competitors

There are high chances that customers abandon a SaaS product irrespective of a great customer support service. That’s because the SaaS business may fail to help its customers reach their eureka moment at the product-trial phase itself. 

This would mean that such businesses lack the capability of providing constant value to their customers. Such businesses are unable to help their customers achieve their goals early in their journey.

This happens with SaaS businesses because they do not identify the right KPIs, that is, KPIs around the problem that their product or service solves. In addition to this, such businesses fail to monitor such KPIs closely. As a result, they fail to put in place a proper plan of action and solutions like customer engagement, product upgrades, and much more.

5. Lack of Personal Relationship

There are higher chances that a SaaS business may not come across the right customer. In addition to this, there is a possibility that there is a mismatch between the customer support team and customers.

In this case, if the customers stay in touch with the customer support team for a long period of time, the chances of customer churn increase substantially. To avoid such a situation, a SaaS business must constantly measure support scores through customer satisfaction surveys. They can even switch customer support representatives for customers having a lower rating.

In addition to this, a SaaS business can use tools that measure the tone of voice in chat conversations to see if that’s a problem. Also, the business owners must ensure that the customer support members are open with customers and always try to build a personal relationship with the customer.

Difference Between Customer Churn Rate and Revenue Churn Rate?

The following table showcases the difference between customer churn and revenue churn.

AttributeCustomer ChurnRevenue Churn
MeaningCustomer churn is the rate at which the customers of a SaaS product cancel their subscriptionsRevenue churn is the rate at which a SaaS business loses monthly recurring revenue
FormulaNumber of Subscription Cancellations in a Period/Number of Subscribers at the beginning of the Period(MRR at the beginning of the Month – MRR at the end of the Month – Additional Revenue from the existing Customers)/MRR at the beginning of the Month
RelevanceCustomer Churn indicates the number of customers who leave the SaaS businessRevenue Churn indicates the amount of monthly revenue a SaaS loses
PurposeSaaS businesses track customer churn because of the high new customer acquisition costs. This means if a SaaS business experiences a high customer churn rate, its operating costs can increase significantly as it needs to spend more to acquire more new customers.SaaS businesses track revenue churn rates because it helps them in identifying the customer segment that contributes more towards revenue churn
ExamplesSubscription Cancelation, product abandonment, product downgradeProduct downgrade, Customers Churned

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