Some of your customers are going to leave you. It’s inevitable.
The average SaaS business changes about 30% of its tech stack every year, which guarantees some customers will abandon software-as-a-service (SaaS) companies.
But how much abandonment—or churn—is too much? Can your company survive if it is constantly losing customers?
The best way to keep tabs on your company's sustainability in a fast-paced, competitive space is to measure SaaS churn rate.
While many companies dismiss customer attrition as a minor blip or regular part of business growth, there is widespread misunderstanding of the churn rate metric.
Not only are many business leaders unsure of what churn rate means for their business, or what a reasonable churn rate is, but they don’t know how to measure the average churn rate correctly. Many SaaS company leaders focus on monthly churn rate instead of annual—a potentially critical error.
This article will take a deep dive into SaaS churn rate to determine why it matters and what it can tell you about your business. Also, we'll show you how to calculate SaaS churn rate and give you the SaaS churn benchmarks for the world's leading industries.
Let’s get started.
What is Churn in a SaaS Company?
SaaS churn is the percentage rate that customers cancel a recurring software-as-a-service subscription within a defined period. As SaaS companies depend on recurring revenue, churn rate is one of the key SaaS metrics and a vital barometer of company health, providing insight on historical performance, customer retention, and by extension, the continual growth (or decline) of the organization.
A common mistake is to misinterpret the SaaS churn definition as merely measuring how many customers cancel their subscriptions. But SaaS churn rate is not that simple for a couple of reasons.
Firstly, not all churn is equal. For example, if an international restaurant franchise with 1,000 locations cancels its subscription, that churn is a much more significant loss than if a single private takeaway business cancels.
Secondly, there are multiple ways to analyze churn, which can lead to skewed figures or a misconception of how well your company is doing. To properly understand SaaS churn rate and how it impacts your business, you must know how we determine churn rate.
Editor’s Note: You can use FROGED’s retention tools to increase customer engagement and reduce churn. Take a look.
How to Calculate Churn Rate for SaaS Companies
There are several ways of calculating SaaS churn rate, and some of the formulas present more valuable business intelligence than others.
Here, we’ll take a closer look at four ways to calculate churn rate, as follows:
- Customer churn rate
- Revenue churn rate
- Annual customer churn
- Annual revenue churn
Let’s dive in.
How to calculate customer churn rate
The most straightforward SaaS churn calculation is to divide the number of customers lost in a single month by the number of customers you had at the beginning of the month.
You can calculate customer churn with the formula below:
(# canceled customers in the previous calendar month ÷ # active customers at the start of the month) x 100
For example, let’s say on May 1, you had 100 customers. By May 31, five customers have canceled their subscriptions. Using the formula above, we can determine the churn rate as follows:
(5/100) x 100 = 5%
For new companies, it's important to understand how many customers you lose each month. But while this is a common way to calculate churn rate in SaaS, it does not give you the complete picture.
As your business matures, customer churn is not enough—you’ll need to evaluate the bottom-line impact. In other words, you need to know your revenue churn.
How to calculate revenue churn rate in SaaS
Revenue churn is the percentage of monthly recurring revenue (MRR) a SaaS company loses due to customers canceling their software subscriptions.
You can calculate revenue churn with the formula below:
(MRR at the start of the month - MRR at the end of the month) ÷ MRR at the start of the month) x 100
For example, imagine your MRR is $500,000 on June 1. By June 30, your MRR is down to $450,000 because a few customers either canceled or downgraded to a cheaper subscription. Using the formula above, we can determine the revenue churn rate as follows:
(500,000 - 450,000)/500,000 x 100 = 10%
In this case, you’d have a 10% monthly revenue churn rate—enough to set off the alarm bells!
Revenue churn is a more accurate indicator of a company's financial health, so companies should keep a watch on this metric every month or quarter.
But what if you want to evaluate the SaaS churn rate based on a longer period? Let’s move on from monthly churn rate to annual.
How to calculate annual customer churn in SaaS
Many companies track churn rates on a monthly basis to keep a close watch on customer retention and loss. With an annual SaaS churn calculation, you can assess the year-on-year performance.
Here is the formula to calculate annual customer churn:
(# canceled customers in the previous 365 days ÷ # active customers 365 days ago) x 100
For example, we’ll say you had 200 customers on January 1, 2021. By January 1, 2022, forty customers canceled their subscriptions. Using the formula above, we can determine the annual customer churn rate as follows:
(40/200) x 100 = 20%
On a monthly basis, a low SaaS churn rate may seem innocuous, but this gradual loss can contribute to a significant impact over the course of a year. In the long-term, a 20% churn rate is not sustainable.
How to calculate annual revenue churn in SaaS
When you want to understand your churn rate’s full impact each year, you must consider the revenue churn.
Here is the formula to calculate annual revenue churn:
(MRR at the start of the year - MRR at the end of the year) ÷ MRR at the start of the year) x 100
For example, let’s say your MRR is $100,000 as of January 1, 2020. By December 31, your MRR is down to $50,000. Using the formula above, we can determine the annual revenue churn rate as follows:
(100,000 - 50,000)/100,000 x 100 = 50%
Another quick way to calculate annual revenue churn rate is to follow the steps below:
- Calculate your monthly revenue churn rate
- Convert the percentage rate to a decimal value (e.g., 5% = .05)
- Open a spreadsheet in Google Sheets or Microsoft Excel
- Insert the following formula, adjusting the decimal value of your monthly churn rate if needed:
- =(1-.05) ^ 12
By now you'll understand how to calculate churn rate, and you can use tools like a Churn Calculator to calculate annual revenue loss and other metrics but, now it’s time to answer an important question:
What is a good average churn rate for SaaS companies?
Average Churn Rate for SaaS Companies: What You Need to Know
There is widespread consensus in the SaaS industry that a 5-7% churn rate is an acceptable loss. However, it’s crucial to realize that this refers to annual churn—not monthly.
For instance, if a startup with 100 customers has an annual churn of 5%, it would lose five customers in a year. While not ideal, the company should be sustainable through consistent customer acquisition.
But if we compare a 5% monthly churn rate to annual churn, the loss would be catastrophic. The startup would lose 46 customers in a year, which is almost half its customer base. Even with an aggressive acquisition campaign, few startups could survive for long with such high churn rates.
What are the SaaS churn rate benchmarks in 2022?
As of March 23, 2022, the SaaS churn rate benchmarks are as follows:
- User churn rate: 5.9%
- Revenue churn rate: 7.7%
Baremetrics publishes real-time data on its Open Benchmarks Report, where you can check the latest SaaS churn rates according to their live data analysis of over 800 SaaS businesses.
Why is the revenue churn rate higher than the customer churn rate?
As we now know, customer churn (or user churn) only tells part of the story. In the example above, if you lose 46% of your customer, the impact on revenue churn may be much worse, especially if you lose some of your most lucrative customer contracts.
Therefore, it's normal for the revenue churn rate benchmark to be higher than the user churn benchmark.
Is my churn rate too high?
SaaS startups shouldn’t worry too much about a high churn rate in their first year. For early-stage companies, customer churn rates may be significantly higher, around 15% or more. But once the company optimizes its product, marketing, and user experience, customer attrition usually settles down.
However, suppose an enterprise has been in business for several years and still has an annual customer churn of more than 10%, or a monthly churn rate of more than 5%. In that case, there are serious customer retention issues that must be identified and rectified.
Why do SMBs have higher churn rates?
The typical business model of an SMB is still undergoing change, as startup companies adapt to the market demands and try to acquire new customers. In other words, they are still working on product-market fit.
Furthermore, many companies that purchase from smaller SaaS companies will also be small companies that are testing out multiple tools and may not be ready to commit. Hampered by limited budgets and cash flow volatility, these customers are quick to cancel and more likely to switch between competing products.
As a result, the SaaS churn rate benchmark is often higher for startups and SMBs in their infancy.
Why do large SaaS companies have lower churn rates?
After establishing product-market fit, and a solid footing in the market, SaaS enterprises tend to target larger companies for a few reasons:
- Larger companies have bigger budgets than SMBs, enabling them greater flexibility and commitment with top-tier subscriptions.
- Large SaaS enterprises can secure customers on extended contracts with annual billing requirements, which increases the friction for customer churn.
- Large customers present opportunities for much higher annual contract value (ACV), which is better aligned with SaaS company goals for long-term growth and rapid scaling.
Ultimately, given the expense of larger SaaS products, customers are less likely to quit or switch to a competitor. It would involve too much time and money for training and implementation.
As you can see, the average churn rate for SaaS companies may vary dramatically, depending on the age and size of the company and the size and budget of its customers.
To get a better understanding of how this applies to your business, look at the SaaS churn benchmarks below.
SaaS Churn Rate Benchmarks by Industry
We've analyzed the most recent studies on SaaS adoption across several key industries. While SaaS products shape the future of these markets, the ever-increasing competition and changing consumer expectations make churn ebb and flow.
Whether you’re a new SaaS startup or burgeoning enterprise, here are the latest SaaS churn rate benchmarks to help guide your business:
SaaS products are integral to the evolution of healthcare, as cloud computing and advanced technology drive a shift towards electronic health records, informatics, and telemedicine. With massive investment in rising companies like eVisit, the U.S. telemedicine market alone is projected to grow beyond a value of $64 billion by 2025.
The latest reports on the SaaS churn rate for healthcare subscription services indicate a 7.5% churn per month.
SaaS is a massive aspect of modern-day education, especially in the wake of the COVID-19 outbreak. As more students and adult learners turn to virtual classrooms and mobile apps, EdTech SaaS is destined for a more significant role in the future of education, with platforms like Coursera, Udemy, and Skillshare leading the market.
According to a ProfitWell report, education services have monthly churn rates of around 9.6%.
Cloud-based infrastructure offers financial services the flexibility and scalability that a traditional, hardware-first approach can not deliver. In the data-driven age, where mobile payment services, challenger banks, and blockchain drive huge growth rates, SaaS products are a central tenet for any company that wants to remain competitive.
Data from Latka on the B2B SaaS companies shows that the leading fintech enterprise, Xero, has an annual churn rate of 12%.
As mentioned above, SaaS products facilitate faster supply chains. In the thriving eCommerce space, cloud-based apps offer a myriad of ways to improve the buyer experience. These SaaS products are attractive to established brick-and-mortar shops, enterprise retailers like Amazon, and dropshipping entrepreneurs on Shopify.
According to data from Recurly research, the annual churn rate for consumer goods is 9.62%.
5. Business Services
The SaaS model is arguably the most dominant in business services—a category that includes apps for marketing, sales, customer support, internal communications, and data storage. Based on those departments, some popular examples of business services SaaS include HubSpot, Salesforce, Froged, Slack, and Dropbox.
According to data from Recurly research, the annual churn rate for business services is 6.25%.
6. Media & Entertainment
The last industry on our list is a B2C space where SaaS is readily engaged by people worldwide. SaaS is now a pillar of modern media and entertainment through gaming platforms like Steam and streaming television content services like Netflix and Hulu.
The round-up from Recurly includes two relevant figures in its research. The churn rate for SVOD (subscription video on demand) services is just above 10%. If we look at the broader media & entertainment industry, the report indicates a relatively low churn rate of 5.23%.
Wrap Up: Focus on the Customer Experience to Reduce Churn (and Drive Lead Generation)
Competition within the SaaS space is constantly growing, with a recent Forbes report noting that the sector will be worth almost $95 billion by 2022. As the market becomes more saturated, users have more choice, which forces SaaS companies to do more to reduce the churn rate.
If you're a startup or new SMB, you can expect the churn rate to be close to 5% per month. As your company establishes a product-market fit with a high-quality product, a 5-7% annual churn is a solid benchmark target.
In the beginning, don't worry too much about your churn rate. Instead, focus on building a trusted reputation as a company that delivers excellent onboarding support and an enjoyable user experience.
With this customer-centric approach, you will find it easier to secure large enterprise customers. After that, your churn rate will fall, and your company will be more sustainable in the long run.
Are you ready to take your customer service and onboarding support to the next level? Sign up with Froged today.