Become profitable or perish. That’s the reality for even the most well-funded subscription-based companies. So you keep your head down and fight for every percentage point gain on essential metrics like:
Cost of client acquisition
Monthly recurring revenue
Customer lifetime value
These are all critical to watch closely, of course. But these metrics alone won’t help you scale. To achieve long-term growth and profitability, you need to keep your existing customers because finding new ones is much more expensive.
Seven times more expensive, to be precise.
At ProsperStack, we look at having a high SaaS churn rate like filling a leaky bucket. Aggressively acquiring new customers is a temporary fix when you're in a jam, but reducing your churn rate is the only long-term, cost-effective solution.
We recommend watching your churn and retention rates just as closely as any other financial measure you track. They’ll help you quickly see whether you’re poised for growth or temporarily plugging holes.
What’s the difference between SaaS churn rate and retention rate?
Before we dig into the numbers, let’s get on the same page about these metrics and their measures.
Churn rate is the percentage of your customers who decide not to renew their subscription (also called voluntary churn).
Retention rate is the percentage of your customers who keep their account over a specific period (e.g., monthly, quarterly, annually).
Combined, these key performance indicators help you see both sides of the same issue – how many customers are leaving (churn) and how many are staying (retention).
How to calculate your SaaS churn rate
Take lost customers over a certain period, divide it by the total number of customers at the start of that period, and then multiply that number by 100.
For example: If your business had 1,000 customers at the beginning of the month and lost 25 customers by the end, you would divide 25 by 1,000 to get 0.025. You then multiply 0.025 by 100, resulting in a 2.5% monthly SaaS churn rate. We recommend calculating monthly and annual churn rates, as these can differ dramatically.
Benchmark: The average SaaS churn rate across industries and business types is 5.6%.
How to calculate your retention rate
Choose the period you want to measure. Offer an annual subscription? Start there. Have monthly or quarterly subscriptions? Measure those, too. Then, find the number of customers you had at the end of a period, subtract the number of new customers you acquired during that period, and divide the result by the number of customers you had at the beginning.
For example: If your business had 25,000 customers in September 2022, you could determine your annual retention rate by subtracting the number of new customers you acquired from September 2021 to September 2022 and dividing the result by 25,000.
Benchmark: The average retention rate for IT and software is 77%.
Why churn and retention metrics matter
As you dig into these metrics, starting with realistic goals is critical. Don’t focus on eliminating churn — that’s a target you won’t achieve because some customers will always leave. Your goal should be to use these metrics as a data point to:
Make more intelligent, more informed decisions
Gather consumer insights about product market fit
Identify why customers are leaving
Adjust your strategy based on marketplace changes
Prioritize product feature releases
Forecast cash flow more accurately
Finally, you don’t need to overcomplicate this at first. Just start by gaining more clarity on why your customers leave and why they stay. Then, focus on driving your metrics in the right direction. Increasing your retention rate by even 5% can increase profits anywhere from 25–95%.
How to keep your customers, grow your revenue
One of the fastest ways to fix a leaky bucket is to upgrade your bucket instead. That saves time and money — especially when the upgrade is an automated and enhanced subscriber experience.
Our team of SaaS veterans built ProsperStack to deliver subscriber retention done right. We’re the only platform that automates and enhances subscriber acquisition and retention experiences, and we can help you keep the customers you’ve already earned.
Let's talk if you’re ready to reduce churn by 10–30% and improve your profitability.
