At its very essence, churn is one of the fundamental ways to measure the success and stability of a SaaS company.
Churn rates can help indicate the areas you need to refocus your marketing efforts on and re-evaluate your current onboarding and customer retention strategies.
But with so many different ways to measure churn, SaaS metrics to consider, and different churn rates to evaluate, where do you start and how do you know if you have a 'good' SaaS churn rate? What SaaS churn rate benchmarks are available to us?
Let’s get you up to speed on:
The next time you receive your annual SaaS marketing report and see the words churn rate, you’ll be able to ask all the right questions to your internal team for next year's churn prevention initiatives.
- What SaaS churn actually means
- How to calculate SaaS churn
- Churn benchmarks for your company and market
Calculating SaaS customer and revenue churn rates
So what is churn rate in SaaS? SaaS churn is a type of metric, or key performance indicator (KPI), used 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 KPI within your annual marketing report to evaluate performance and forecast future revenue.
Your SaaS growth rate needs to stay above your churn rate to continue a successful SaaS growth trajectory. In this blog, we’ll focus on two types of churn: customer churn and revenue churn, either being as crucial as the other.
The SaaS churn formula
Calculating customer churn
For start-ups, customer churn rates are a great metric as a starting point for 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. Here's how to calculate SaaS customer churn:
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 SaaS customer churn rate is at 2%. Simple, right?
Now let’s look at the next type of churn: revenue churn
Calculating revenue churn
A software company's 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 what 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.
Factors that affect B2B SaaS churn rate
Many factors can affect your churn rate and the accuracy of the calculations, from too few customers to variations in contract renewal periods and more. To understand if your churn rate is acceptable, consider the following:
- Who your target customer or your ICP (ideal customer profile) is.
- If your SaaS is a start-up with a minimum viable product (MVP), or is well established and has achieved PMF.
Average churn rates for SaaS companies
The average churn rate depends a lot on how sticky your SaaS solution is. Some experts have tied that to revenue numbers, which in turn, reflect your company size - it's not perfect, but it is a nice ballpark way to do it.
I've seen early-stage startups churn around 10% of revenue, 15-20% on the high end.
That's pretty good, right?
Those numbers are churn per month.
At 10%, it's the equivalent of having an entirely new customer base every 10 months.
Yes, it's not the reality, because you're churning lower revenue and retaining higher revenue clients, but a good benchmark churn rate to aim for is 2%. Lower for enterprise solutions with more than $10,000-12,000 ARR.
To help you understand your B2B SaaS company’s churn rates, let’s explore churn rates by company size and the rationale behind SaaS churn benchmarks.
SaaS churn benchmarks for small to medium-sized businesses
For small to medium-sized businesses (SMBs), which typically bill 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 standpoint, you’re going to see between the ranges of 36 to 76%.
Why do SaaS SMBs have higher churn rates?
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:
- Access to shorter contracts or monthly billing lowers the friction to churn
- Volatility in cash flow leads to frequent cancellations
- Ease of switching between products due to low annual contract value (ACV)
Now that we’ve established a baseline for SMB SaaS companies, it’s time to look at churn rate benchmarks for enterprise SaaS companies.
Enterprise SaaS churn rate benchmarks
When targeting large enterprise companies with a product or solution priced for thousands of dollars, you should aim for 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.
Why do larger enterprise companies have lower churn rates?
A majority of large enterprise SaaS companies target larger customers, which significantly impacts churn. This is due to several factors, including:
- Larger companies have more money to spend than smaller companies
- Higher chances of annual billing and extended contracts, increasing the friction to churn
- Higher ACV, resulting in a longer-term vision
Track your 2023 churn rates and customer retention
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 enterprise companies with a higher pricing tier, you can expect to see lower churn rates because the cost to end contracts increases. 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.