Customer Churn Rate: Definition, Formula, and Tips to Reduce Churn

Any growing SaaS business has several key measures and benchmark to take into account on a regular basis. Customer churn is one of them! This is not the most uplifting measure; however, it is a figure that can provide your firm the difficult truth about its customer retention.

Success is hard to measure if you do not measure the concrete failures as well. While you should always strive for 100% of customer retention for your company, that is simply not possible. That’s where customer churn gets important.

Once you have defined your churn and calculate it, the next step will be to evaluate the actual number. Is your churn rate too high?
This can seem like a simple question, but it is actually not. Because a “good” churn rate for one organization might be terrifying for another. Hence, you will need to benchmark your churn rate within your specific line of industry.

Finally, once you have sorted out all of the above aspects in relation to customer churn you can start to focus on different tactics that can help reduce churn. We are going to include some of these strategies in this article. However, if you are losing a high percentage of valuable customers every month we advise you to read our article about reducing customer churn. By employing some of these strategies in your company, you should start seeing a reduction in your customer churn rate.

1) What is customer churn?

At its very core, a customer churn rate can be described very simply; it is the percentage of users that cancel or don’t renew their subscription plans over a specific amount of time. This can be quantified over a month, a quarter, or a year.

And why is this important? You might ask…

Because if you don’t know your customer churn rate, it might keep getting higher and higher and ultimately prevent the overall growth of your company. Therefore, you need to understand and continuously calculate your customer churn.

When calculating your churn rate, you will also get additional important information about other metrics such as customer lifetime value and retention rate.

Once you understand all of these different metrics, you will be able to build more accurate forecasts for growth, revenue, and scaling efforts for your SaaS company. The numbers will show how your product or service is performing now and what you should expect for the future.

2) How to calculate Customer churn rate: the formula

Churn can be calculated in various ways, depending on exactly what you need to know.
For some SaaS businesses, it might be beneficial to know their monthly rates in order to better understand monthly growth and retention. While other firms are more interested in their annual churn rates to learn how growth is progressing year by year.

Your company’s monthly churn rate can be calculated by using the following formula:

 

Monthly churn rate = Users lost this month / (Users at the start of the month + Users added this month).

 

Your company’s annual churn rate can be calculated by using the following formula:

 

Annual churn rate = Users lost this year / (Users at the start of the year + Users added this year).

So now, you are familiar with the most basic formulas for calculating overall churn for your business. However, it is not always a good idea to calculate your churn rate on a monthly or annual basis.

Because, while these two calculations are a good starting point to gain some entry-level values, they are not always comprehensive enough.

This is due to the fact that accelerated growth can make these simple calculations less accurate. This is particularly important to remember for any new SaaS business. In these cases, you should consider using a different formula such as cohort analysis.

Cohort analysis can be useful to calculate churn, as it makes the calculation more accurate.

When you use monthly churn rate calculation there is an underlying assumption that no consumers can churn in the first month. This is based on the presumption that all your buyers pay for the first month upfront. So, when you look at users at the beginning of the month and then divide that by the total number of churned customers, you won’t have any new buyers churning in that first period of time.

Now if you were to use the same model to calculate churn over a quarter that would cause some problems. There exists a potential for some of the new customers from the first month in the quarter, to churn in the second or third month of the quarter. If those churning buyers were included in the calculation by a mistake that would mean that, you would overstate the churn rate.

Instead, it can be helpful to utilize a solution where you make sure to exclude all new customers from your churn calculations. By doing that, you will get the churn rate of a specific cohort, which represents the install base at the beginning of a quarter. Consequently, by using cohort analyses you will be given the true churn rate, without replacement, of your customer base over a quarter.

Hence, instead of looking at all your consumers as a whole, cohort analysis breaks them down into relevant groups.

3) What is a good customer churn rate?

In a perfect world, the ideal consumer churn rate would be zero.

Is that realistic? Unfortunately not!

Because no matter how great your customer service is or how excellent your SaaS solution is, you will lose buyers. That is inevitable.
Yet, it doesn’t mean you cannot pursue, achieve, and finally maintain an acceptable churn rate. Then the next question would naturally be, what an acceptable churn rate is?

Sadly, there is no right answer to that question, as it will depend on your industry. Some industries have significantly higher rates of customer churn than others do.

4) Customer churn rate by industry

Therefore, a customer churn rate that could be considered incredibly desirable for one kind of firm might be awful for another. Furthermore, each industry has different factors that affect churn.

In 2018, the subscription platform Recurly conducted a sample of over 1,500 subscription companies from across their customer base using their platform. This data gave them the opportunity to understand the average churn rate by industry.

Recurly’s collected data shows some clear trends:

  • SaaS companies average churn rate sat around 4.8%. The results showed an upper quartile at 8.5% and a lower quartile of 2.9%.
  • Media and entertainment services had an overall monthly churn of approximately 5.2%.
  • A bit higher was the average churn rate for healthcare subscription services with a rate of around 7.5%.
  • Both consumer goods and education services indicated identical monthly churn rates of roughly 6%.
  • Finally, subscription boxes showed the highest rate, with a monthly churn of 10.54%.

Overall, the data reveals that the biggest variations between the average churn rates by industry are influenced by whether services are sold to consumers or businesses.

For example, SaaS solutions include a higher amount of B2B products and services. These all tend to experience lower churn. On the contrary, consumer services such as subscription boxes and entertainment services like Netflix and Apple Music have a comparatively higher churn rate. This might be explained by the fact that these consumer-based services are not seen as being essential for the buyer.

5) Tips to reduce your churn rate

Unfortunately, we cannot promise a solid, fix-it-all solution when it comes to improving your average customer churn rate. Because every subscription firm struggles with churn for various reasons, and therefore there is no ONE right solution. What works for one business might not work for others.

Having said that, there are still a few specific things that every SaaS company can do in order to improve their average churn rate.

5.1 Increase your proportion of annual contracts

Several studies on SaaS churn rates have indicated that a low user churn correlates with a high number of annual subscriptions.
Increasing your proportion of annual to monthly subscription plans is, therefore, one of the fastest ways any SaaS company can reduce churn.

While it is a well-known fact that annual plans are essential when reducing churn, KBCM still reports that nearly 20% of SaaS companies still have an average contract length of less than one year.

There doesn’t exist any good reason for a SaaS company not to be offering annual contracts. Below we have gathered a few tips for encouraging customers to sign annual contracts:

  • On your pricing page, you need to highlight the savings on annual plans.
  • Offer customers a discount for switching to an annual plan by email.
  • Offer discounts on plans that are longer than a month. For example a reduction in prices between 15 to 20%.

5.2 Bring down your payment failure rate

Credit card delinquencies are another major churn factor, which you can fix easily.
Statistics have shown that between 20-40% of all churn isn’t caused by the actual product, service, or the given value of the offer. Rather, churn is often caused by failed payments.
These failed payments appear because of different reasons, including:

  • Customer credit cards either have hit their limit or have expired.
  • Incorrect billing information of your customers.
  • Credit card processors have updated their processes and those updates haven’t been implemented into your systems.

Make sure you reach out to your consumers when their credit card is about to expire. You can do this either through email, an app, or using in-app notification. Alternatively, you can employ automated tools like ProfitWell Retain, to help reduce churn due to payment failures.

By doing so, it will be easy for users to update their information. This will soon show a positive impact on your business revenue.

6) Conclusion

What is probably clear to you by now is that churn is inevitable for any SaaS business. Unfortunately, you cannot just wave a magic hand and make it disappear entirely.

However, you can continue to work on improving your average churn rate. It is a slow and steady process, but it will undoubtedly have a huge impact on your business revenue.
Don’t make it all too complicated. Focus on sticking to the basics, which include tracking your churn rate over time, concentrate on doing better than the day before, and employ the right tools whenever possible.

Ultimately, you will end up finding a sustainable churn rate, which will be beneficial for the overall revenue growth for your business.

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