How to Calculate Churn Rate (Formula) & Reduce Customer Churn
Churn rate is one of the most important metrics you can track—at least if you want to remain (or become) profitable.
Are you losing more customers than you’re acquiring? How much is that costing your business? Answering “I’m not sure” to either question likely means churn is leaking profits from your business.
This guide shares how to calculate customer churn, with eight steps to reduce churn and become more profitable.
What is Churn Rate?
Negative churn, on the other hand, happens when you acquire more customers than you lose. If you lose 50 customers but acquire 78 new ones over the same period, income from the new customers would replace the revenue you’ve lost through churn.
Why is it Important to Track Churn Rate?
Tracking churn rate goes a long way in improving your profitability and customer retention rate. The more customers you lose to churn, the more you’ll have to spend to acquire new customers—even to stay at the same MRR/ARR level.
Positive churn compounds over time. What might sound like a low percentage of cancellations can end up costing your business thousands each year since you lose out on the customer’s lifetime value.
Let’s put that into practice using the rule of 78. In January, you lose a $499 customer. By year-end, that cancellation would’ve cost you $38,922… and that’s lost revenue for just one customer.
In other words: a high churn rate could be costing you thousands each year. You’ll have to acquire more customers to replace the lost revenue. Even then, it’s more expensive to acquire a new customer than keep an existing one.
How to Calculate Churn Rate
Now we know what churn is, let’s take a look at a churn rate calculation you can use to find out how many customers your SaaS company is losing over any given period of time.
Customer Churn Rate Formula
Customer churn rate is the number of customers you’re losing. Calculate yours per month or year with this formula:
Customer churn rate = (Lost customers during time period / Total number of customers at the start) * 100
If you had 3,000 customers at the start of the month and 2,850 at the end, for example, you’d have 150 churned customers. That equates to a monthly churn rate of 5%.
Revenue Churn Rate
Revenue churn rate works similarly to the number of customers you’re losing, but measures the financial impact of churn.
Use this formula to calculate monthly or annual churn rate:
Revenue churn rate = (Lost revenue during time period / Total revenue at the start) * 100
For example: if you had $50,000 MRR at the beginning of the month and $47,350 at the end, you’d have lost $2,650 in monthly recurring revenue. That equates to a 5.3% monthly churn rate.
How Does Your Churn Rate Compare?
Now you’ve calculated the churn rate for your SaaS company, the real question is: how does it compare to your competitors?
According to ProfitWell, the average churn rate for SaaS companies falls between 2% and 8% of MRR.
This supports Recurly’s research which shows the average churn rate for a SaaS company is around 4.79%. Some 3.73% is voluntary churn, where the customer has specifically requested to cancel their subscription. The other 1.06% is involuntary and happens when their subscription is canceled unconsciously.
However, it’s difficult to accurately benchmark churn since the rate of losing customers can differ by:
- Company age
- Company size
- Subscription model
Use churn rate alongside other subscription KPIs—such as customer acquisition costs (CAC)--to understand whether yours is “good” or “bad.”
Let’s say you have a churn rate that’s losing your business $10,000 per month. Your marketing goal is 175 new paying customers per month, and your customer acquisition cost (CAC) averages $75. In that case, you’re still losing $3,125 each month—even if you do meet the number of new customer growth rates.
8 Techniques to Fix a Poor Customer Churn Rate
No matter your churn rate, there’s always room for improvement. Just the smallest increase in churn can contribute thousands of dollars to your SaaS business’ bottom line.
Let’s take a look at different use cases for why churn happens and actionable ways to reduce it.
- Segment Churned Customers Using Cohort Analysis
- Ask Customers Why They’re Churning
- Match Onboarding Preferences to Pain Points
- Offer Discounted Upgrades & Downgrades During the Cancellation Process
- Refine Your Buyer Personas and Marketing Messaging
- Offer Proactive Customer Support
- Contact Customers with Soon-To-Expire Payment Cards
- Push Annual Subscriptions Over Monthly Billing
1. Segment Churned Customers Using Cohort Analysis
Customer success teams are notoriously time-strapped.
Alongside answering support queries, processing tickets, and communicating feedback with the rest of the organization, reducing churn is a time-consuming task—one that often falls to the backburner for busy teams.
Take advantage of the wealth of data available at your fingertips. Speed up the process and retain low-hanging fruit using a combination of website, app, and sales data. Segment existing customers by:
- Pain point
- Acquisition channel
- Product use case
- Feature used
Calculate churn for each segment and figure out why (more on that later.) Prioritize improving retention in the cohort with the highest rate to see the biggest improvements to overall churn.
For example: customers you’ve acquired through LinkedIn advertising have a 3.8% revenue churn rate. Those coming from sales outreach, however, have a 2.8% monthly churn rate.
While churn in both segments can be improved, it’s not worth prioritizing your sales outreach. Your advertising campaigns, however, are losing the most MRR—and therefore need a strategy in place to reduce revenue churn.
2. Ask Customers Why They’re Canceling
The more you know about your current customers, the better you can finetune your sales and marketing campaigns to convert them.
Common reasons for churn include:
- It’s too expensive
- The company is cutting costs
- They don’t know how to use it
- They’re unsure of the value of the software
- The dashboard or functionality is confusing
…but you don’t really know the reason for churn until you ask.
Quiz churning customers before they hit the cancellation button. Ahrefs, for example, tells soon-to-churn customers they’re sorry to see them go. Customers are prompted to leave honest feedback and explain why they’re canceling.
If the average customer churns because the product is too expensive, for example, Ahrefs could consider offering a lower-priced plan or put more effort into educating customers on the value of its software.
Similarly, if most customers churn because they don’t know how to use the software, an onboarding sequence that walks through key features could prevent more users from feeling the same way (and therefore, contributing to a higher churn rate.)
While you can’t expect everyone to fill in this survey before canceling, don’t let churned customers leave silently. David Watkins, director of customer experience at EthOS, tries to dig deeper into a person’s issues by calling churned customers “to see if we can win them back—or at least find what we can do better to win their business back in the future.”
If churned customers are hesitant to get on the phone, offer an incentive and an alternative. David adds, “We send out a survey to better understand the reason for the churn. We keep the survey simple and offer a $50 reward for just five minutes of the person's time.”
3. Match Onboarding Preferences to Pain Points
When it comes to SaaS churn, prevention is better than cure.
Find out what customers want before they sign up for a subscription. Then, personalize the onboarding process to make sure their wants and needs are met—reducing their likeliness to cancel.
- "Broadly speaking, churn is much higher in the first three months of a customer's lifecycle. This is why onboarding is so critical to high retention: the customers that churn early on were likely never truly onboarded, they were essentially paying for a trial. It sounds counter-intuitive, but to improve customer retention, you have to focus on the period before they were even customers." —Corey Haines, founder of SwipeWell
Using a hypothetical example: you get on a sales call with a potential customer who tells you they’re spending too much time analyzing company expenses.
The software you’re selling has a suite of accounting tools. Instead of walking the new customer through each once they sign up, provide a personalized onboarding experience that demonstrates how the tool uses artificial intelligence to automatically categorize receipts—and therefore, save time.
Ryan Draving, head of strategy at M+Co, took this approach to reducing churn for a client: “In earlier days, their platform had been easier to navigate. As the company grew, the product team had naturally focused on feature expansions, and in doing so their SaaS platform had become too complex for the average user.
“To resolve the issue, we identified the primary points of user overwhelm, and created a roadmap to simplify the user experience with a custom interface depending on user needs.”
The results were impressive. Within 12 months of implementation, customer churn was reduced by 23%. The company also saw an increase in daily engagement.
4. Offer Discounted Upgrades & Downgrades During the Cancelation Process
Not all customers who show signs of churn plan to do so. Oftentimes, they go through the cancellation process looking for better deals.
Play around with your pricing strategy and prevent people from churning by adding exclusive upgrades, downgrades, or discounts throughout the cancellation flow. That could be:
- A percentage discount on their existing plan
- Downgrading to a cheaper plan
- Upgrading to add extra features for the same (or discounted) price
Take Otter, for example. As part of the cancellation process, the transcription SaaS company gives soon-to-cancel customers 20% off their plan. It also reiterates the benefits of keeping a subscription, with a bold, high-contrast button that persuades them to keep their subscription.
While this is an effective way to prevent customer churn, use the technique with caution. Some loyal customers complain if new customers get a better deal than them, risking your reputation and contributing to a high churn rate.
5. Refine Your Buyer Personas and Marketing Messaging
Churn can be high if you’re attracting the wrong customers or closing bad deals.
Use market research and competitive analysis to get crystal clear on your buyer persona—the type of person/company most likely to get the most value from your product (and therefore, not churn). Tailor your marketing messaging, app experience, and sales pitches around that.
Let’s visualize that using an HR SaaS company. Market research, customer feedback, and app analytics show its capacity management software is best suited to HR managers at Fortune 500 companies. Customers who stick around longest fit that criteria.
If the company’s marketing campaigns target organizations with fewer than 250 employees, it’s likely contributing to a high churn rate. Granted, those people might get use from certain features inside the software. But on the whole, they’re likely to find the features confusing since the software, onboarding sequence, and customer education portal weren’t designed with that persona in mind.
On the other hand, if you’re:
- Inviting HR managers from well-known firms to co-host a webinar
- Using sales intelligence to pitch HR managers at Fortune 500 companies
- Publishing blog posts related to capacity management for 500+ employee-strong teams
…you’ll attract a new customer base that gets the most value from your product, decreasing customer churn and improving profitability.
6. Offer Proactive Customer Support
It’s common for SaaS customer success teams to only engage with customers once they’ve made the first move. Yet reaching out to customers before they come to you helps nip churn in the bud. You’ll identify potential churn—and resolve their issues proactively—before they enter the cancellation process.
When you do, 85% of prospects and customers are dissatisfied with their on-the-phone experience. Keep the conversation short, to-the-point, and helpful. Your goal is to find out what they’re struggling with, and how you or the software can solve it.
According to Joe Sinkwitz, CEO of Intellifluence, “Showing a user that your SaaS is not only receptive to feedback, but is willing to act on it, can go a long way.
“At the end of the period, if the issue resulted in an actionable change which the user can be notified for, the support team closes the loop with that resolution and offers a discount to subscribe again.
“Lost customers whom you save by fixing your product or process become evangelists.”
7. Contact Customers with Soon-to-Expire Payment Cards
Passive churn happens if a customer’s credit card has expired when you try to take their next payment.
Use a dunning software like Paddle or Churn Buster to remind existing customers when their credit card is about to expire. Give them an opportunity to update it before their next billing date before they passively churn, like this example from Mangools:
Richard Felix, founder of Stunning, was puzzled when happy customers of a previous SaaS business churned: “We realized that their credit cards were failing for all sorts of reasons; insufficient funds, oversensitive fraud filters and expired cards were some of the main reasons why.
“It's one of the worst kinds of churn because it usually involves customers who actually want to give you money.”
To solve the problem, Richard “started sending out dunning emails to let customers know that their payments were failing, and gave them an easy way to update their billing information. They could click on the link in the email and directly enter new billing information without having to log into anything.”
The team also enabled push notifications inside the product so customers with soon-to-expire payment cards could update their details while getting value from the product.
The result? Richard says, “This had an immediate impact and helped us reduce our churn from about 30% to between 3% and 5%, depending on the month.”
8. Push Annual Subscriptions Over Monthly Billing
The SaaS business model uses monthly or annual subscriptions to bill customers in exchange for product access. While the preferred payment schedule is ultimately your customers’ choice, swaying them in one direction could decrease churn rate.
ProfitWell research shows how churn rate decreases in companies with a higher percentage of annual contracts. Those with fewer than 25% annual contracts see 7.5% churn rate. Those with more than 75% of customers locked into an annual contract, however, see just a 3% customer churn rate.
There are two main reasons for this:
- People who lock in annual contracts see value in the product. People show greater signs of commitment if they’re locked into an annual product and paid their yearly subscription upfront. This proves they see the value in your software and are therefore less at risk of churn.
- People forget to cancel subscriptions. We spend an estimated $133 per month on subscriptions we’ve forgotten about. If customers on an annual plan forget to use it three months in, they’re likely to let the subscription active until their next payment date. But when that time comes, they forget.
Experiment with whether this is the case for your SaaS company. Nudge new customers towards annual plans with a discounted subscription (such as one month free.) Offer customers in the “at risk of churn” cohort a time-sensitive deal to upgrade.
Measure churn rate between each plan. Put more time into promoting the subscription option which makes customers less likely to cancel.
Final Thoughts: Don’t Let a High Churn Rate Sabotage Profits
Customer churn is a compounding hole that needs to be plugged in your SaaS business. Neglect it and you’ll see revenue dwindle, impacting profitability and sacrificing the longevity of your company.
While the financial incentive for you to reduce churn is clear, even if your churn rate meets the baseline for “good”, remember: the lower your churn rate, the better.
Do cohort analysis to identify the segments most likely to churn, and create a strategy to improve it—be that offering discounted upgrades, finetuning your sales strategy, or onboarding customers based on the pain points they’ve already expressed.
It might seem like a time-consuming process, but it pays dividends—especially once you reach positive churn.
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