At its very essence, SaaS churn is a way for you to measure your company's successes and downfalls.
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 churns rates to evaluate, where do you start and how do you know if you have a 'good' SaaS churn rate?
Let’s get you up to speed on:
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. Both just as crucial as the other.
For start-ups, measuring customer churn rates are 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. 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
On the other hand, 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 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:
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 ball-park 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 goal to aim for is a 2% churn. Lower than 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.
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%.
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 enterprise companies.
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.
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 enterprise companies 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.