By Mike Wolfe
What keeps SaaS marketers and executives up at night, costs companies hundreds of thousands of dollars, and is just as certain as death and taxes? Customer churn. Churn is a metric that most SaaS marketers loathe talking about because marketing is responsible for bringing leads in the front door, not keeping customers from exiting out the back.Well yes, but actually no. The leads marketing brings in are only worth as much as their lifetime value. If those leads are becoming customers that churn at a high rate, they will be less valuable and may not be worth the marketing investment. This may also be a signal that marketing is targeting the wrong people altogether or that the messaging used to attract new business isn’t aligned well with the actual product/service.
A high churn rate limits total monthly recurring revenue (MRR)—which is just as much of a problem for marketing as it is for sales, operations, support, or any other department in the company.
Tracking churn rates in a few different ways will help your entire organization understand how effective you are at retaining customers and give you ideas about what you can do across all teams to reduce customer churn. Here are five considerations to track your churn rate:
1. Basic Churn Rate
First, let’s take a quick look at churn rate. Churn is the number of SaaS customers that cancel their recurring revenue services, downgrade to a free plan, or stop paying their bills. Churn is inevitable and one of several marketing metrics that every SaaS company should be tracking in order to measure the success of marketing initiatives. Churn rate is simply churn expressed as a percentage.
How churn rate is calculated:
(Number of customers who have churned / Number of customers) x 100
Example: If you have 1,000 customers at the beginning of the year and 70 of those customers churn throughout the year, you’d be looking at a 7 percent annual churn rate at the end of the year.
(70 / 1000) x 100 = 7%
Basic churn rate is a simple metric that SaaS companies can track over time to monitor customer satisfaction. From a marketing perspective, churn can also be an indicator of how well you are attracting ideal customers that are a good fit for your software.
2. Churn Rate by Time Frame
When comparing churn rate over time, annual churn rate is often expressed as a goal and monthly churn rates are often expressed as benchmarks or monthly indicators contributing to the annual goal. Both annual and monthly churn rates are calculated the same way.
How it's calculated:
(Number of customers who have churned in a defined period / Number of customers at the beginning of the defined period) x 100
However, it’s important to note that monthly and annual churn rates are not equal. In fact, they are drastically different. Let’s assume you have a 7 percent annual churn rate goal. In order to track monthly progress toward that annual churn rate goal, you’ll need to convert the annual churn rate into a monthly rate using the following calculation.
1 - (1 - Annual churn rate) 1/12
Example: If you have 1,000 customers and an annual churn goal of 7 percent, your monthly churn rate benchmark would be 0.6 percent—or roughly six churned customers per month.
1 - (1 - 0.07) 1/12 = 0.6%
Monthly and annual churn rates are helpful when monitoring trends or making comparisons over time. Ideally, SaaS companies will run churn reports on a monthly, quarterly, and yearly basis, and share the reports with all departments within the company to identify any potential correlation between churn and various activities that affect customer experience, such as product bugs, product updates and rollouts, or pricing changes.
3. Churn by Revenue
Churn can be defined in terms of lost customers or lost revenue. If your SaaS product has different pricing tiers, the customer churn alone won’t tell the full story. Instead, you would also want to track the impact those churned customers have on your monthly recurring revenue because not all customers have equal value.
How it's calculated:
(Tier A pricing customers churned * Tier A pricing) + (Tier B pricing customers churned * Tier B pricing) /
(Total customer revenue from Tier A and Tier B)
Example: If you have 1,000 customers, but 800 of them pay Tier A pricing at $100 per month and 200 of them pay Tier B pricing at $50 per month, your monthly recurring revenue would be $90,000. For simplicity’s sake, let’s say the six customers that churned this month are Tier A pricing customers.
(6 x 100) + (0 x 50) / ($80,000 + $10,000) = 0.6% annual revenue churn
If the six customers that churn this month are Tier B pricing customers, your revenue churn would be quite a bit less.
(0 x 100) + (70 x 50) / ($80,000 + $10,000) = 0.3% monthly revenue churn
Tracking churn in terms of revenue lost provides a better understanding of what the impact of churn is on the company, especially when subscription prices can vary.
4. Net Churn Rate
The previous examples of churn rate tracking are helpful when looking at the effect churn has on total customers and gross revenue, but these calculations don’t take new business, upsells, and cross-sells into account. Factoring these activities into your tracking will help give you a much clearer picture of how churn will impact overall revenue.
How it's calculated:
(Churned MRR - New MRR gained) / Total MRR churn
Example: Using the same data as above, if you have 1,000 customers and six Tier A pricing customers churned this month for a loss of $600 in MRR, but you gained $1,200 in new MRR from a combination of new customers and upsells, the result is negative churn—which is a good thing overall.
(600 - 1200) / 90,000 = -4% net monthly revenue churn
It’s important to track gross revenue churn so an organization can pinpoint costly churn and improve customer retention among the higher valued customers, but net churn provides a more accurate view of overall revenue growth.
5. Churn by Customer Segment
As you are digging into gross and net churn over different time frames, it can be helpful to track any patterns or trends in the types of customers that are churning. I mentioned pricing tiers in the example above, but consider additional customer segments that may be churning at a higher rate than others.
You may find that monthly contracts are churning at a higher rate than annual contracts, or that there is higher churn among certain product types, customer personas, or by the particular way a customer was onboarded. Identifying customer segments that are churning at a higher rate than other segments can help you identify ways to address churn issues with those groups or how you can make updates to those areas of your product or service.
Once you come across issues with churn, there are a number of ways to increase retention. You can ensure the customer has a proper onboarding experience, encourage more upselling or cross-selling of your products throughout the customer journey, or improve your customer experience with enhanced support and service.
As you track churn rate, you may come across customers who simply aren’t a good fit for your product, in which case churning might not be so bad if you consider the cost of time and resources your customer service team has to spend working with them. Perhaps some customers are using the product service in a different way than it was intended and it’s ultimately best for them to find a product or service better designed to do what they truly need.
Do a full analysis either monthly or quarterly on churned accounts to see what the major takeaways are and what your entire organization can do to limit churn in the future.
Want more information on ways you can minimize churn? Join our free Intelligent Inbound® Bootcamp for SaaS Marketers. This email series provides guidance for identifying opportunities for improvement and resources that will help you implement more strategic demand generation programs.