Customer Churn Rate
Churn rate is simply the number of customers that unsubscribed from your service (or stopped buying your product) over a period of time divided by the number of customers you started with. Churn Rate is vital to understand the health and stickiness of a business.
Churn Rate = [# of users unsubscribed for a period of time] / # of users at the beginning of the period.
What causes customer churn?
Churn isn’t simple and straightforward. A wide variety of factors come into play — and it differs for each set of users. Some common cause of churn includes things like:
Cost, poor onboarding experience, poor user interface or user experience, lack of features, competitor products, product-market fit, etc.
How does churn affect other SaaS metrics?
Churn is a direct reflection of the value of the product and the features that you're offering to customers. Your company should constantly optimize your product to reduce user churn rate. Additionally, user churn directly affects your financial metrics (MRR/LTV/CAC). Churn affects recurring revenue, lifetime value, and acquisition costs:
- Monthly recurring revenue: If customers leave, so does the revenue. In SaaS, monthly recurring revenue (MRR) is not only the lifeblood of a company, it's also an indicator of long-term viability. User churn directly decreases revenue, so it is vital to keep it at bay.
- Customer lifetime value: The lifetime value (LTV) of a customer also indicates the profitability and longevity of a SaaS company. Churn directly lowers LTV because when users leave, the value or revenue that could have been earned decreases.
- Customer acquisition costs: If you are spending to acquire customers and they churn before you make back those costs, then you are running a tough deficit. Churn increases your average customer acquisition cost. If you are reducing churn at every chance you get, then you can secure your CAC back from your users quickly.
What is a good churn rate?
Average churn rates are everywhere from 2% - 8% of MRR, per our churn studies. Therefore, a churn rate at the low end (2%) would be considered “good”. By company age, 10+ year old companies have a 2-4% churn, whereas younger companies range from 4% - 24%.
How to calculate churn based on MRR?
You can also calculate customer churn based on revenue. Businesses that take this approach typically use monthly recurring revenue (MRR) as a baseline figure.
In the following example, a company had $500,000 of MRR at the beginning of the month, and $450,000 at the end. Now, let’s say that the company brought in $65,000 from existing customers who purchased upgrades that same month. The churn calculation looks like this:
[(%500,000 - $450,000) - $65,000] / $500,00 = ($50,000 - $65,000) / $500,000 = -3%
As you can see, the churn rate is negative – meaning that the company actually ended up making money despite the $50,000 loss in MRR. This is known as a negative churn.
What is a Negative Churn Rate?
Net negative churn is achieved when the total additional revenue generated from existing customers is greater than the revenue lost from cancellations and downgrades. When your recurring revenue grows without the addition of new customers, you’re achieving positive net revenue retention. Simply, net negative churn is when current customers are spending so much additional money (services, upgrades, and add-ons) that your churn is offset by it.