If someone were to ask you today what your company’s SaaS churn is, could you answer?
Knowing churn will give you helpful insights into your SaaS product or services. In addition, it will help you calculate your company’s market value, understand your superpowers, and identify where you lose to competitors.
And once you understand your churn, you can come up with a strategy to lower your rate and improve customer retention.
In the ever-changing world of SaaS, it’s especially important to know how many customers you are losing. And if you didn’t know, venture capitalists (VCs) look at churn when deciding whether or not to back companies—which makes it a crucial metric to monitor.
In addition to increasing your SaaS company’s value, knowing churn can also:
So the next question you might be asking yourself is: what’s the best way to report on SaaS churn?
Below is a list of four common metrics to report on—including formulas you can easily follow to help you gain visibility.
Net revenue retention measures the total change in recurring revenue from a pool of customers over time and is one of the most comprehensive metrics to measure churn. It tells a complete story: both the positive impact of price changes and the negative impact of lost customers.
You will need the following numbers to calculate your net revenue retention:
Retention is an important number to know. Customer acquisition cost (CAC) in the SaaS world is expensive—to gain $1 in annual recurring revenue (ARR) per customer, the average cost is $1.32. Maintaining your existing customers costs less—down to $0.71 per customer.
The higher your NRR, the more likely it is that your business is providing valuable offerings to your customers. Established companies consider 125% a good number and startup SaaS companies see rates even higher than that.
Once you know your NRR, you can evaluate if you’re happy with your number or if you need to start implementing new strategies to entice your customers to stick around.
This metric refers to the percentage of customers your company has lost after a month and provides a more immediate indication of your company’s overall churn. Keep in mind, if your business is growing quickly, monthly churn will not accurately reflect your overall churn.
This metric is also a fairly volatile number. If you are choosing to use this metric for immediate results, make sure you take this number with a grain of salt.
To calculate monthly churn, you need to know the following:
In B2B SaaS, you want to aim for a monthly churn rate of about less than 2%. If you keep getting a high number, it’s time to strategize ways to reduce monthly churn. Start by asking for feedback from your existing customers. Then, scrutinize every touchpoint—from onboarding to solution implementation. How can you make things better for your user?
And don’t forget—even if you have a high monthly churn, evaluate other aspects of your company (such as sudden growth) before taking action.
Gross revenue retention measures annual revenue lost from your customer base. GRR indicates how your company is really doing when it comes to retaining revenue from your customers over time. This metric will always be equal to or lower than your net revenue retention.
To calculate gross revenue retention, you need to know the following:
However, keep in mind that the MRR for each current individual customer cannot exceed the MRR for that same customer last year.
While GRR will always be less than 100%, a good rule of thumb is to have the ratio closer to 100 than 0. The lower your GRR, the less likely VCs are to invest in your business because it indicates that your business isn’t viable in the long run.
If you have a low GRR, it’s time to take a serious look at customer retention and work to lower your churn.
This metric is often used in conjunction with net revenue retention. It is based on the count of active customers from one year ago—and how many of those customers are still active today.
Customer count retention treats all customers as financial equals, and because of this, tends to overstate the impact of churn.
In order to calculate customer count retention, you will need to know the following information:
You want a high CCR rate. This metric is useful because it takes a step back from a purely financial standpoint and adds color to the picture. You can more easily grasp weaknesses in your customer retention strategy that metrics such as NRR or GRR overlook.
Remember: these calculations are here to help you get an idea of how churn impacts your company. SaaS in particular is constantly changing, so don’t just choose one calculation and settle for it. If you want to get more granular, continue to do research on measuring churn. Here are some helpful steps to determine which SaaS metrics work for you:
Evaluate what’s working—and what’s not. Take advantage of the lower CAC associated with retaining customers and use these SaaS churn metrics to your advantage. Identify your superpowers and strengthen their impact.
Knowing your SaaS churn and how to lower your rates could be the difference between VC funding or not, so don’t skip out on this important information.