At its very essence, churn is a way for you to measure your company's successes and downfalls. It can help indicate the areas you need to refocus your marketing efforts on and re-evaluate your current strategies. But with so many different ways to measure it, metrics to consider and different churns rates to evaluate. Where do you start and how do you know what a reasonable churn rate is?
Let’s get you up to speed on what churn means, how to calculate churn and a benchmark for your company to consider based on average SaaS industry churn rates. And the next time you receive your annual SaaS marketing report and see the word churn, you’ll be able to ask all the right questions to your internal team for your next years churn prevention initiatives.
Churn is a type of metric you can use to track either the number of customers that leave your services or revenue lost within a specific time frame. Your executive leaders must track this metric within your annual marketing report to evaluate performance and forecast future revenue.
Your growth rate needs to stay above your churn rate to continue your company’s successful growth trajectory. In this blog, we’ll focus on two types of churn: customer churn and revenue churn. Both just as crucial as the other.
For start-ups, measuring customer churn is a great metric as a starting point to understanding the perceived value of your current B2B SaaS product and services or, in other words, your Product-market fit (PMF). When you think about customer churn, it's the percentage of customers who leave your services monthly or annually. So how do you calculate it?
For example, if you have a total of 100 customers and see 2 customers churn per month. In this case, your annual churn rate will look like this:
This means your monthly customer churn rate is at 2%. Simple right? Now let’s look at the next type of churn: Revenue churn
On the other hand, revenue churn considers the percentage of monthly recurring revenue your company loses due to your customers leaving your product or services. Measuring revenue churn is a sure giveaway of your company’s real losses or what's costing your company’s revenue growth.
Think of revenue churn like this. In comparison to customer churn, revenue churn considers the different pricing models you charge your customers. It provides a granular view as it calculates your MRR instead of the number of customers.
For example, let’s say you have 10 customers paying your gold tier subscription of $10,000 per month and 10 customers paying $1,000 per month for the bronze tier subscription. In this scenario, you’ve lost 3 gold tier and 7 bronze tier customers. Here’s how your calculation would look like:
Revenue churn calculation:
This means your monthly revenue churn rate is at 2.6%. An important note to consider, you can use both churn rates in your monthly reporting. While customer churn helps your company see the number of staff you’ll need to manage your accounts, revenue churn evaluates your overall financial health and performance. Now that we’ve established how to calculate the above, it’s time to consider the different factors that affect churn rates.
Many factors can affect your churn rate and the accuracy of the calculations, from too few customers, variations in contract renewal periods, and more. To understand if your churn rate is acceptable, consider the following:
Your churn rates will vary depending on the size of your company. However, Barometrics notes that:
“Most early-stage SaaS companies I’ve observed typically have churn around 10-15% for the first year as they work out exactly what their product needs to do, then they’re able to reduce it pretty quickly.”
To help you understand your B2B SaaS company’s churn rates, let’s explore churn rates by company size and rationale behind those churn rates.
For small to medium-sized businesses (SMBs), which typically bills monthly, you’ll see a churn rate between 3 and 7%. If your SaaS company targets SMBs, you’re more than likely to see a monthly churn rate between 3 to 7%. However, when you look at it from an annual stand-point, you’re going to see between the ranges of 36 to 76%.
When it comes to SMBs, their business models create an environment for customer churn, especially before reaching their PMF. Additionally, businesses that purchase software from SMBs tend to do so in a lower price range, which leads to a lower switching cost based on the subscription model, for example:
Now that we’ve established a baseline for SMB SaaS companies, it’s time to look at churn rate benchmarks for SaaS enterprises.
When SaaS companies target large enterprises with a product or solution priced for thousands of dollars, you can expect to see a churn rate as low as 1%.
If you think about it, the higher the SaaS product’s cost, the less likely people are willing to switch due to costs associated with implementation, training and switching. However, lower churn rates are based on the assumption that you’re an established SaaS company. If you’re a start-up, expect your churn rate to be slightly higher.
A majority of large enterprise SaaS companies target larger customers, which significantly impacts churn. This is due to several factors, including:
If your SaaS company serves small business owners or SMEs with a lower pricing tier, you can expect to see higher churn rates. But if you’re targeting large enterprises with a higher pricing tier, you can expect to see lower churn rates because the cost to end contracts increases. But remember, benchmark your next churn rates against your previous years, it’s always good to set your goals based on your own results to see your improvements.
Whether you're an early SaaS start-up or an established enterprise company, track your churn rate and strategically price your B2B SaaS product for the new year to get yourself ahead of the pricing curve.