What is Churn Rate?
The Churn Rate measures the percentage of a SaaS company’s existing customers that opted to cancel their subscriptions (and discontinue being a customer) across a specified time horizon.
In simple terms, the churn rate is a measure of the lost customers across a specified time frame.
The churn rate is calculated by dividing the churned customers by the total number of customers at the beginning of the period, expressed as a percentage.
- The churn rate is the rate at which a SaaS company lost customers or revenue within a stated period, usually on a monthly or annual basis.
- The churn rate measures the percentage of a company’s existing customers that decided to cancel their subscriptions or discontinue being customers over a specified period.
- The churn rate is calculated by dividing the number of churned customers by the total number of customers at the beginning of the period.
- The churn of customers (and revenue) is critical to manage for the long-term viability of subscription-based and SaaS business models, because acquiring new customers is futile if unable to retain them.
- The churn rate is inversely related to the retention rate, which measures the percentage of customers that remain customers.
Table of Contents
- How to Calculate Churn Rate
- Churn Rate Formula
- Customer vs. Revenue Churn: What is the Difference?
- SaaS Churn Rate Calculation Example
- Churn Rate vs. Retention Rate: What is the Difference?
- How Does Churn Impact the LTV/CAC Ratio?
- How to Interpret Customer Churn Rate
- How to Reduce Churn Rate
- SaaS B2B vs. B2C Market: Customer Churn Analysis
- Monthly vs. Annual Churn: Average SaaS Industry Rates
- Is 5% an Acceptable Monthly Churn Rate?
- How Does Customer Lifetime Impact Churn Rate?
- Churn Rate Calculator
- 1. Customer Churn and New Subscriber Assumptions
- 2. New vs. Churned Subscribers Forecast
- 3. SaaS Bottom-Up Revenue Build
How to Calculate Churn Rate
The churn rate—or “attrition rate”—is the proportion of existing customers at the beginning of a period that was lost over a given period.
The churn rate answers the question, “Of the company’s total existing customers at the beginning of the period, what percentage of the customers were lost by the end of the period?”
Currently, the modern business model is oriented around recurring revenue and subscription-based pricing models, such as Spotify and Netflix.
In particular, the software-as-a-service (SaaS) model—in which companies provide cloud-based services on a subscription basis—is an integral part of practically all industries, either directly or indirectly.
Simply put, the long-term viability of SaaS companies depends not only on their capabilities in acquiring new customers but also on retaining them, which coincides with low churn rates.
The distinction from the traditional business model is that in the SaaS business model, a service is delivered on a multi-year basis, and customers make payments periodically, like a monthly subscription.
Calculating the customer churn rate is a four-step process:
- Step 1 ➝ Select Time Metric – e.g. Monthly, Weekly, Quarterly, Annual
- Step 2 ➝ Count the Number of Customers at Beginning of Period (BOP)
- Step 3 ➝ Determine Number of Churned Customers by End of Period (EOP)
- Step 4 ➝ Divide Churned Customers by Number of Customers at Beginning of Period (BOP)
Churn Rate Formula
The churn rate formula divides the number of lost customers by the total number of customers at the beginning of the period.
The numerator of the churn rate formula—the number of churned customers—can be calculated using the following formula:
In order to calculate the metric correctly, it is imperative to choose the period (e.g. quarterly, annual) and ensure consistency in all subsequent calculations, as well as explicitly state the period chosen.
Customer vs. Revenue Churn: What is the Difference?
There are two different methods of calculating the churn rate:
- Customer-Based Churn ➝ The customer churn measures the percentage of lost customers relative to the customer count at the beginning of the period.
- Revenue-Based Churn ➝ The revenue churn measures the recurring revenue (MRR, ARR) lost from churned customers and cancellations of a subscription service over a specified period.
SaaS Churn Rate Calculation Example
Suppose a SaaS company had 200 customers at the beginning of last year, and eight customers decided not to renew their contracts at the end of the year.
- Beginning Customers = 200 Customers
- Churned Customers = 8 Customers
The customer churn for the year is 4.0%, which we calculated by dividing the churned customers by the beginning customer count.
- Customer Churn = 8 Churned Customers ÷ 200 Beginning Customers = 4.0%%
Churn Rate vs. Retention Rate: What is the Difference?
Customer churn describes the users that sign up or subscribe and then later on cancel, whereas customer retention is the percentage of customers that remain customers.
The inverse of the churn rate is the retention rate, which reflects the proportion of customers that continue to use a certain product over a specified period.
Since churn and retention are inversely related, subtracting the retention rate from one will output the churn rate.
Both of the aforementioned KPIs—the churn rate and retention rate—are necessary to analyze customer behavior and perform churn analysis on spending trends.
On the subject of churn analysis, the most common (and recommended) approach is to perform cohort analysis, where the customer behavior analytics data is analyzed based on the shared traits among customers.
How Does Churn Impact the LTV/CAC Ratio?
The most informative insights can be retrieved by identifying the underlying drivers that are causing customers to churn (or remain a customer).
Customer retention is an integral component of a company’s business model, and its capacity to achieve long-term, sustainable growth, particularly for the SaaS industry.
While the churn rate often flags potential issues to fix, the retention rate offers insights into a company’s target end market (and customer profile).
Based on the information derived from analyzing the data set, a company should alter its business model as deemed necessary to not only maximize its recurring revenue, but to improve its customer lifetime value (LTV) to customer acquisition cost (CAC).
The LTV/CAC ratio is a fundamental KPI for SaaS and subscription-based companies that measures the value obtained from a customer on average relative to the cost of acquiring said customer.
For example, if a company’s retention rate is 60%, the implied churn rate is 40%.
- Customer Churn = 1 – 60% = 40%
- Retention Rate = 1 – 40% = 60%