It doesn’t matter how hard you work, not all of your clients or subscribers are going to cling around for ages.
Consider an average company swaps around 30% of its apps every year. Losing customers has nothing to celebrate, but it’s inevitable.
Why so? Because of low budgets. Competitors can also be the reason behind this.
Dang, some customers just miss a payment and leave without any trace.
Regardless of how you phrase it, keeping an account of your lost customers is integral for the long-term growth of your firm.
Enter your churn rate.
The churn rate is one of the most significant SaaS metrics to watch over. In this guide, we will emphasize how to calculate churn rate and how it impacts the growth of your business.
What is Churn?
Churn is the number of customers or subscribers who stop using your products or services during a given time.
For example, your company’s annual churn rate is the percentage at which you lose customers every year.
And when we say “churned” users, it means the users or customers who are no longer active i.e. not paying.
Churn has to play a major role in the progress(or decline) of your business. Even a minor churn rate can have a huge impact on your revenues over time.
For example, if your company has a steady Monthly Recurring Revenue MRR of $20000+. If your churn rate is 5%, it simply means you are losing $1000 per month and more than $10000 every year.
Now imagine, you are experiencing a churn rate of 10%, 15%, or even more. Not good news for you and your business, right?
For ups-and-coming businesses, churned users are very painful, especially when they are looking to scale their user base. If you already have a few subscribers, the churning of any one of them will be devastating.
However, churn is integral to every SaaS business model. You cannot avoid it completely. You can only try to minimize the churn rate and you should actively do this.
How to Calculate Your Churn Rate
Before you start worrying about reducing your churn rate, you need to know where your company is standing in terms of churn rate.
You can use multiple methods to calculate churn. It is commonly represented as the percentage at which you lost revenues or customers during a time period.
The easiest way to calculate churn is to divide the number of subscribers who have left within a time frame (say, 30 days) by the total subscribers you have at the start of this time frame.
The resulting percentage will be your churn rate. It will help you to appropriately estimate the number of leaving subscribers on a long-term basis (think of a year time frame).
Customer Churn Rate Formula
(Cancelled Customers in the last 30 days ÷ Active Customers 30 days ago) x 100
Example: A 5% user churn rate for a 30 days time frame describes that you have lost 5% of the customers that you have at the start of the month, or simply 5% of subscribers have unsubscribed your service in the last 30 days.
You can calculate the churn rate based on revenues you lost at the end of a time period instead of users. It is called a revenue churn. It is more important than user churn as it clearly explains the financial health of your company or firm.
The formula for revenue churn is similar to the user churn. The only difference is that you are calculating degraded revenues instead of users.
Revenue Churn Rate Formula
(MRR Lost to Downgrades & Cancellations in the last 30 days ÷ MRR 30 days ago) x 100
Example: If your revenue churn rate is 5%, it means you lost 5% of your MRR as it stood 30 days ago.
Precisely the revenue churn is important if you are offering a variety of pricing tiers. For example, a loss of 5%revenue outweighs the leaving of a freemium user.
How to Calculate Churn for Annual Plans
Absolutely, annual plans work a little differently.
The churn rate for an annual plane (or any plane that is greater than a month) can be calculated by using the same formula except for date intervals.
Annual Customer Churn Formula
(Cancelled customers in the last 365 days ÷ Active Customers 365 days ago) x 100
Annual Revenue Churn Formula
(MRR Lost to Downgrades & Cancellations in the last 365 days ÷ MRR 365 days ago)
x 100
How Often Should I Calculate My Churn Rate?
It’s a good question indeed.
Once you calculate the churn rate you may become obsessed with it.
However, considering day-to-day or even week-to-week changes in your churn rate is not going to help you.
You need to consider it on a long-term basis. If you are already reporting to other metrics monthly, then do the same for churn as well.
It’s always better to look at longer time frames. A quarterly churn rate helps you in clueing the overarched subscribers and an annual one helps to catch a glimpse of your YOY performance.
Quarterly and annual churn changes allow you to find out if your efforts for customer retention are working or not.
The good news is that you can have a constant pulse on your churn rate, without getting into complex calculations or spreadsheets, with the help of Baremetrics.
In simple words, your dashboard allows you to access your churn rate along with other SaaS metrics.
What’s Considered a “Good” (or Acceptable) Churn Rate?
The simplest answer is that it depends.
Generally speaking, a churn rate of 4% or 7% is acceptable and can be recovered. However, these ideal numbers are not necessarily normal for startups that are dealing with a more turbulent churn rate.
Your pricing, ARPU, and even industry are key factors to consider as they can impact your numbers.
Take any number you listen to about churn rate on social media platforms such as Twitter or Linkedin as a salt grain ( founders can exaggerate when describing something)
Founded on real-world data, Baremetrics’ Open Benchmarks, here were some averages. (these are the averages at the time of writing)
- User churn rate: 5.5% – 8.0%
- Revenue churn rate: 3% – 9.4%
How Does Churn Impact Other SaaS Metrics?
Simply put, your churn rate can impact any other SaaS metrics linked with revenue such as MRR.
For example, if your churn rate is high, it will definitely have a negative impact on the revenue. The severity of loss depends upon the types of users you are losing (paid or freemium users) and how much they are spending. Increases make it difficult and expensive for you to acquire new customers and reduce their LTV.
What Can Churn Teach You About Your Business?
Your churn rate can give you a deep insight into your business and grant you to know what to do with it after calculating.
Generally speaking, it costs you 4 or 5 times more on acquiring new customers than to retain the previous ones. So, there is a direct correlation between reducing churn and increasing revenue.
Consider if you have impressed someone with your services and gained their trust to turn them into subscribers, you have done the hard part. With time, they must become more dependent on your services or products and therefore more likely to be loyal and long-term subscribers.
So when a subscriber or customer churns, it hints something went wrong. Although some factors are not in your hands, churn can clue you in on a variety of action items, including:
Opportunities to Increase Customer Service And Satisfaction
Buyers are spoiled for chance when it comes to buying products. So, proper customer support services and satisfaction are very important.
Providing more concerned and attentive services can be the difference between loyal and churned subscribers.
The Rise of Competing Products And Services
A major reason behind the cacelation of subscriptions can be the launch of new products or services in the market.
Calculating the churn rate helps you keep an eye on the factors such as new products and services that can take your customers away.
Resolving Problems With Your Pricing Strategy
Your products or services’ pricing is very important. Many users can leave you saying tour products are too expensive.
It often happens when you launch the services at discounted rates for promotion purposes during the first year of your business. You may have several churned users at the end of this promotion period. Therefore, setting your pricing strategy is very important.
How Do I Figure Out Why Customers Churn?
The simplest way to know why customers are canceling their subscriptions is to ask them.
Unless you give your subscribers a chance to explain things, their leaving remains a mystery until you find out bad reviews about your business on G2 or Capterra.
This is yet another point where Baremetrics come in handy. It allows you to figure out the reasons behind the cancellation of subscriptions by providing a Cancellation Insight Tool. It turns the reasons into data points and highlights the most common reasons behind churn. So, you can plan your business strategies accordingly.
The sooner you hone into the reasons why users are churning, the quicker you can plan and take actions to deal with it.
Are You Watching Your Churn Rate?
As a SaaS company, maintaining and raising your consumer base is a must-do thing.
And accessing your churn rate can help you trace the progress of your every step of the way. A tool like Baremetrics can be a game changer for your SaaS company as it can help you have a handle on all crucial metrics of your company.
