There’s plenty of fish in the sea, and even more products for consumers to choose from in the SaaS market. Whether or not someone picks your product can be influenced by a hundred of different factors. So when you get someone on the hook and into your product you have to do your best to keep them happy or risk losing them to a competitor. One way that companies can keep track of just how many fish are being caught versus released back into ocean is through a metric called churn rate.

Churn really is the number one killer of all SaaS companies. It truly does not matter what your product is, how much your current customers are paying you, or how many new customers you’re bringing in. If your customers are churning at a high rate, your business will go under! So with that in mind let’s take a look at exactly what customer churn is, how to calculate it, and even better, how to reduce it.

What is Customer Churn

Customer churn, also known as attrition, is when a customer stops paying for your product—for any reason. Depending on the type of product you have, this could present itself in a few different ways. A couple examples are when a customer doesn’t renew their contract or subscription or when a customer cancels and closes their account.

Once you determine how your business wants to qualify customer churn you can begin tracking your churn rate.

How to Calculate Churn Rate

Churn rate is the rate at which you lose customers over a certain period of time. It can be calculated in a couple different ways depending on the kind of metric a company is concerned with:

  • The number of customers lost during a specific period of time
  • The percentage of customers lost during a specific period of time
  • The value of recurring business lost during a specific period of time
  • The percentage of recurring value lost during a specific period of time

The basic calculation for churn rate:

number of churned customers / total number of customers

Where the number of churned customers is the number of lost customers within a specific period of time over the total number of customers that you had during the same period of time. For instance, if your company had 100 customers during the month of May and you had 5 customers churn that same month then your churn rate would be 0.05 or 5% (5/100). Meaning 5% of customers were lost in the month of May.

Most companies keep track of churn over a span of time; typically monthly, quarterly, or yearly, but you can also track churn based on product or customer segment. For instance you could compare churn rates between different customer industries. If there’s a high churn rate for all your customers in one industry, it’s time to do some research. You’d want to determine if there’s additional product functionality required for that specific industry to succeed OR if your team should cut losses and stop selling to that industry. Regardless of which measure you choose, tracking churn is an important metrics for your business.

What Counts as a Good Churn Rate

This is a bit harder to answer and is subjective to your industry and company age. For SaaS companies, average churn rates are anywhere from 2% – 8% of monthly recurring revenue, per churn studies. In these cases, a churn rate on the lower end of 2% would be considered “good”. However, age factors in as well. Companies 10 years and older have a 2-4% churn, whereas younger companies are still finding their way in the market and tend to have a higher churn range from 4% – 24%.

The variation in particular is why it’s so important to continually track churn. You can’t always compare your churn rate to another company’s churn rate because every product and industry is different. You get a much better idea of how your own product is doing when you compare your churn rate now versus a year ago than if you try to compare your churn rate to another company’s churn rate in the same time range. But whichever way you stack up churn rates, lower churn is always better.

Why Customer Churn Rate is Important

Churn is important because it’s a reflection of the value that your product is providing to customers. It costs more to acquire a new customer than it does to retain one, so you should always be working to make your churn rate as close to zero as possible.

Churn also impacts other financial metrics for your business:

  • Customer Acquisition Cost (CAC): Companies pay a lot of money on sales and marketing to acquire new customers. The hope is that over time a customer will spend more on your product than you spent to acquire them. If you have a high churn rate you’re running into a long-term budget deficit.
  • Monthly Recurring Revenue (MRR): For young SaaS companies MRR is an indicator of long-term product viability, especially to investors. Churn is a reflection that you’re losing money and so a high churn rate is going to vastly decrease your MRR.
  • Customer Lifetime Value (CLV): CLV is the expected amount of revenue a customer is expected to spend on your product throughout their use of your product. This metric is also used to understand the viability of a company. Low churn helps increase CLV, while a high churn rate will start dragging the metric down.

A company’s churn rate can be used to measure long-term health, customer retention rates, loyalty between customer segments, and even forecasting performance. However, it’s good to remember that churn is a starting point, not an end point for analysis.

Not all Churn is Created Equal

Some churn is unavoidable and can even be expected. If your product moves in a new direction, drops specific functionality, or overall makes a market pivot you’re no doubt going to lose some customers. That’s not necessarily a bad thing. Customers sign up for a specific service and if they can no longer achieve their goals using your product they’ll find a different company. If customers are lost while you transition into a new market segment which is expected to offer more customers or increase the contract price for your product, then it’s an overall win for the company.

Also keep in mind the customer segment that is churning. High churn rates for the free tier customers are going to result in a different level of urgency than high churn rates from paying customers. High free tier churn may just mean that you need to expand some of the functionality to better demonstrate product value and secure conversion.

What you really don’t want are your ideal customers to suddenly start dropping off. If you’re building and marketing a product to a specific group of customers and they’re not finding enough value after signing the contract to renew, it’s time to hit the breaks and really pay attention. If there’s a hint that customers are unsatisfied it’s important to determine why. Is your product not solving their need? Are they unable to get in touch with support or success teams? Is a competitor offering similar functionality at a lower cost?

There are a number of factors that could cause an existing customer to churn. Understanding those factors helps you mitigate current issues and better prevent future ones from arising.

How to Reduce Churn

So now that you’ve got an idea of what customer churn is and the impact it can have on your business, let’s jump into a couple ways to keep that churn rate low.

Have a strong onboarding process

First impressions matter and the onboarding experience is really that first date with your product for customers. Their friends have talked you up but now they’re sitting at the dinner table and hoping for sparks to fly. New customers are less likely to churn, or leave the date early, if you exceed expectations from the moment they first sit down with your product. Understand the goals they hope to achieve with your product and provide the necessary resources to ensure they reach every milestone. This way, they won’t be tempted to look for other offers.

Pay attention to competitors

The SaaS landscape is always changing and someone is always claiming to have the newest and coolest product on the market. While you may know better, your customers may not. What other people are building and charging in the market directly affects your company’s chance of survival. It’s imperative to keep track of what competitors are offering your customers to maintain a competitive product.

Listen to customers

Listening to customers is one of the best ways to properly identify which customers are most likely to skip town on you. If a customer is threatening to leave your product because of costs take the time to listen and understand their experience. Did they just not have enough time to see the value your product provides? Where portions of the UX too hard to navigate? Or is your product actually charging more than your competitors?

When you take the time early on to listen to customers and align their goals with their product experience you can anticipate and prep for objections. Anytime you get a heads up that a customer is considering leaving you have the time to address their concerns and potentially secure a renewal. It’s by no means an easy task, but showing you care what your customers say can save your relationship and keep ’em around in the future.

Conclusion

There’s no beating around the bush here—churn is a company killer. Understanding what churn is and how it’s affecting your company is the only way to get ahead of it. It reflects the perceived value of your product to customers that you’ve spent time, energy, and money to acquire. The closer you can get your churn rate to zero, the more return on investment each and every customer has on your business.