Customer retention

SaaS Churn Rate vs Retention Rate: How to Measure and Improve

Updated October 17, 2023
0

Profit or perish. That’s the reality for even the most well-funded SaaS companies.

If there was ever a word to make any business owner shudder, it’s “churn.”

Working tirelessly on your business day and night only to have your customers shuffling out just as quickly as they came in is one of the worst feelings as a business owner. If you want to thrive, your customers need to stick around. 

For long-term growth, profitability and peace of mind, you must focus all your business efforts on improving your SaaS churn rate.

In this article, we’ll break down everything you need to know about churn rates, how to calculate it and how it compares to retention rate. Keep reading to the end of this quick-start guide as we unpack definitions, strategies, industry averages and real-world examples you can learn from to keep your customers coming back for years to come.

What Is SaaS Churn?

Did you know it costs five times as much to acquire a new customer than it does to keep existing ones?

If you want to keep your acquisition expenses low and improve profitability, you need to understand how to reduce your customer churn rate. Before we dive into industry averages and tips on improving it, let’s define the term.

SaaS churn rate is a critical metric to measure customer loss in the SaaS industry. It refers to the percentage of customers who leave a service during a given period. For example, if a company has 100 customers at the beginning of the month and loses 10 by the end of the month, its churn rate is 10%.

The significance of churn rate lies in its ability to provide insights into the overall health of a SaaS business. High churn rates can indicate a lack of value or poor user experience, while low churn rates can signify satisfied and loyal customers. SaaS companies with high churn rates must constantly work to acquire new customers to replace those who leave, which can be costly and unsustainable.

Simply put, knowing your churn rate is a critical metric for SaaS businesses (as well as any business with a subscription model). By knowing what percentage of customers are leaving, you can work on taking the right steps to improve the longevity of your customers' lifespan in your business.

What Are Voluntary and Involuntary Churn?

Churn rate can be further broken down into two categories: voluntary and involuntary churn. Voluntary churn is the most common type: it’s when a customer intentionally and purposefully cancels their subscription with a company. They could cancel due to a lack of value received, a poor user experience, or a better competitive offering. The other type is involuntary churn. This is when a customer cancels by accident, often due to a credit card failing upon their subscription renewal or another technical error.

What’s the Difference Between SaaS Churn Rate and Retention Rate?

Retention rate measures the percentage of customers or users who continue using a product or service over a certain period of time. It’s an important indicator of customer loyalty and satisfaction, as well as the overall health of a business. 

A high retention rate indicates customers are satisfied with the product or service and are likely to continue using it in the future. This can lead to increased revenue, profitability and a stronger brand reputation. 

The formula for calculating retention rate is: Retention Rate = [(CE - CN) / CS] x 100 (Where: CE = number of customers at the end of a period; CN = number of new customers acquired during that period; CS = number of customers at the start of the period) 

Retention rate differs from churn rate in that it measures how many customers are staying with a product or service, while churn rate measures how many customers are leaving. The churn rate is calculated by dividing the number of customers lost during a period by the total number of customers at the start of the period. 

Why Churn and Retention Metrics Matter

Churn and retention metrics are two of the most important indicators of a SaaS company's success. These metrics can directly impact a SaaS company's bottom line, customer satisfaction and market position.

In terms of the bottom line, high churn rates can result in decreased revenue and increased customer acquisition costs. This is because, as already mentioned, it costs more to acquire new customers than to retain existing ones. On the other hand, high retention rates can result in increased revenue and decreased customer acquisition costs as existing customers continue to use and pay for the service.

In addition to the financial impact, churn and retention metrics can directly affect customer satisfaction. High churn rates may indicate that customers are dissatisfied with the service and are seeking alternatives. Conversely, high retention rates may indicate that customers are satisfied with the service and are more likely to recommend it to others.

Finally, churn and retention metrics can also have an impact on a SaaS company's market position. A company with high retention rates is more likely to be seen as a leader in its industry, as it demonstrates customers are loyal and satisfied with the service. Contrarily, a company with high churn rates may struggle to maintain its market position, as it may be seen as an unreliable or unpopular option. If you’re constantly losing customers, you’re not just losing a single line of revenue. You’re losing that revenue marker every month, potentially for years. The value of a customer is much greater in SaaS than in other industries, which means you need to do everything in your power to fight for reduced churn and increase retention rates.

How to Calculate Your SaaS Churn Rate

Calculating churn rate is an important metric for businesses to measure customer retention. The formula for calculating churn rate is: Churn Rate = (Number of Customers Lost in a Given Period / Total Number of Customers at the Beginning of the Period) x 100

For example, if a company starts with 1,000 customers at the beginning of the month and loses 50 customers during the month, the churn rate would be (50 / 1,000) x 100 = 5%.

To accurately measure churn rates, businesses need to collect data from various sources, including customer relationship management (CRM) systems, billing systems and customer feedback channels. The metrics needed to accurately measure churn rates include the total number of customers at the beginning of the period, the number of customers lost during it and the reasons for customer churn.

Clean and reliable data is crucial for accurately measuring churn rates. Inaccurate or incomplete data can lead to incorrect conclusions and poor decision-making. It’s important to regularly audit and clean data sources to ensure it’s accurate and up-to-date.

You don’t have to be a math wiz to figure all this out, though. Several tools and software can help businesses streamline the process of measuring churn rates (hint, hint). 

How to Calculate Your Retention Rate

As with measuring churn rates, retention rates accurately require data from various sources, including CRM systems, user activity logs and customer feedback. Metrics such as customer lifetime value (CLV) (which we’ll touch on later), customer churn rate and customer satisfaction (CSAT) are essential to track customer behavior and understand their needs.

Dirty data, so to speak, such as incomplete or inaccurate information, can cause errors in calculations and lead to incorrect conclusions. That’s why it's necessary to regularly clean and audit data sources for accuracy.

To calculate your retention rate, you need to divide the number of customers you retained during a specific period by the total number of customers you had at the beginning. Multiply the result by 100 to get the percentage. 

For example, if you had 500 customers at the beginning of the month and lost 50 by the end of the month, your retention rate would be 90% for that month.

A high retention rate is also critical to the growth and sustainability of SaaS businesses. It indicates a stable and predictable revenue stream.

What Is a Good SaaS Churn Rate?

Now that you know how to calculate your churn rate, it’s time to benchmark it to see how well you’re doing versus your competitors so you know how much you need to improve. Keep in mind a healthy churn rate will vary depending on your industry, product and seasonality. These rates below aren’t a one-size-fits-all number, so you must compare your customer churn rate with similar businesses and products. An acceptable churn rate among businesses is 5-8%. However, as a rule of thumb, a great churn rate should be 3% or less. However, it’s good to keep in mind that churn rate data is sparse since many companies aren’t willing to share critical company figures with the public. For instance, while 3-8% is a decent churn framework to aim for, one survey from 2022 found a median churn rate of 5.6% among their respondents. However, this can be further broken down with B2C churn rates of 6.8% and B2B churn rates of 4.9%.

Another study found that average subscription service churn rates can vary dramatically, with business services at 16.2% and media more than double at 37.1%.

Other Churn Metrics to Track

Churn and retention rates are two of the most important metrics for SaaS businesses to track. But there are a few other related metrics you should regularly analyze if you want a holistic view of customer attrition.

Monthly Recurring Revenue (MRR)

MRR is the monthly revenue generated by a subscription-based business. It's a critical metric for measuring revenue stability because it provides a better understanding of a company's future revenue stream and can help identify trends in business performance.

For SaaS businesses, MRR is crucial because it provides an accurate picture of recurring revenue. This is especially important because these businesses rely on consistent revenue streams to sustain their operations. Monitoring MRR can help these businesses identify trends and take action to improve retention rates, which can ultimately lead to increased revenue and growth.

Annual Recurring Revenue (ARR)

ARR represents the total revenue a company expects from its customers each year, assuming all customers will renew their subscriptions and there are no additional sales.

The significance of ARR lies in its ability to provide a predictable and stable revenue stream for businesses, as it allows them to forecast their future revenue with greater accuracy. ARR is particularly important for SaaS companies as it helps them measure the success of their business model and the value they deliver to their customers.

The churn rate and retention rate of customers significantly impact a company's ARR. The higher the churn rate, the more customers a company will lose, decreasing ARR. On the other hand, the higher the retention rate, the more customers a company will retain, which will result in an increase in ARR.

Customer Lifetime Value (LTV)

LTV refers to the total amount of revenue a customer is expected to generate over the course of their relationship with a business. It helps businesses determine the long-term value of their customers and make informed decisions about customer acquisition and retention strategies.

Calculating LTV involves estimating the average revenue a customer generates over a certain period, such as a year, and then multiplying that number by the estimated number of years that the customer will remain a customer. This calculation can help SaaS businesses understand the potential revenue each customer can generate over their lifetime, which can be a valuable tool for planning and decision-making.

4 Churn Management Strategies to Increase LTV

One of the key benefits of using LTV to guide customer acquisition and retention strategies is it allows businesses to focus on acquiring and retaining the most valuable customers. By identifying the customers who are likely to generate the most revenue over their lifetime, businesses can tailor their marketing and retention efforts to those customers while also identifying which customer segments may not be worth targeting.

Customer Acquisition Cost (CAC)

CAC is the total cost incurred by a company to acquire a new customer. This includes all the expenses related to marketing, sales and other activities required to attract and convert a lead into a paying customer.

In assessing the cost-effectiveness of acquiring new customers, CAC plays a crucial role. A company can compare the cost of acquiring a new customer with the revenue generated from that customer to determine if the acquisition cost is justified. The lower the CAC, the more cost-effective the customer acquisition process is.

The relationship between CAC and churn rate is also important. A high churn rate can increase the CAC, as a company will need to spend more on acquiring new customers to compensate for the ones that have left.

Profitability can also be affected by CAC and churn rate. If the CAC is high and the churn rate is also high, it can make it difficult for a company to generate profits from its customer base. On the other hand, if a company has a low CAC and a low churn rate, it can be easier to generate profits as the cost of acquiring customers is lower and the revenue from existing customers is more stable.

Average Revenue Per User (ARPU)

 ARPU measures the average amount of revenue generated by a business for each customer or user. The ARPU is calculated by dividing the total revenue generated by the total number of users or customers.

ARPU is an important metric for SaaS companies to evaluate the overall revenue generated per user. It helps them understand their customer base and how much revenue they generate from each user. By tracking ARPU, they can also identify areas where they can improve their revenue streams.

Churn and retention rates can have a significant impact on ARPU. High churn rates mean a large number of customers are leaving a company, which can lead to a decrease in the overall revenue generated per user. Conversely, when retention rates are high, it means that a large number of customers are staying with the company, which can lead to an increase in the overall revenue generated per user.

Average Revenue Per Churned Subscription (ARPCS)

ARPCS helps SaaS businesses determine the amount of revenue lost due to customer churn. To calculate it, divide the revenue lost due to customer churn by the total number of customers who churned during a specific period. For example, if a business lost $10,000 in revenue due to customer churn and 100 customers churned during the same period, the ARPCS would be $100. 

Interpreting ARPCS can provide valuable insights into the impact of churn on revenue. A higher ARPCS indicates the business loses more revenue per customer churned, which could be a sign of a higher customer lifetime value. On the other hand, a lower ARPCS could indicate that the business loses less revenue per customer churned, which could be a sign of lower customer loyalty or a lower-value product. 

Average Churn Rates by Industry

Even though the average churn rate is about 5-8% and a good SaaS churn rate is about 3%, they can vary drastically from industry to industry. Here are the average churn rates broken down by different industries:

Several industries listed above have average churn rates dramatically higher than the general churn rate across all industries, so remember to benchmark against your industry rather than the general churn rate.

How to Reduce Churn

Now that you understand how churn rate works and what a good churn rate is, let’s break down a few churn management tips to reduce your churn rate:

  • Actively seek customer feedback

  • Implement surveys regularly

  • Implement retention-driven onboarding and customer support strategies

  • Offer and promote annual pricing over a monthly pricing plan

  • Segment your customers to understand their specific needs

  • Address pain points and complaints from feedback and surveys

  • Leverage churn management software to improve churn rates automatically

  • Tailor your products and services to meet evolving customer needs

  • Set up a subscription cancellation flow to prevent a percentage of cancellations

Want some more tips on how SaaS can avoid churn? Remember to check out our blog post filled with insights on improving SaaS customer retention.

How to Keep Your Customers and Grow Your Revenue

Your business won’t be able to thrive without your customers. Just like a leaky bucket, your business could dry up if you don’t address your churn rate and work towards fixing it. When your bucket leaks, aggressively acquiring new customers is a temporary fix, but it’s costly and can leave you strapped for cash. The solution? You need to fix your bucket by reducing your churn rate — the only long-term, cost-effective solution. While it’s impossible to bring the churn rate to zero, it’s important to set goals and start working towards lowering your churn so your business can grow. By analyzing your churn rate, assessing other related metrics and taking steps in the right direction to reduce churn and improve retention, you’ll see customers sticking around longer and your profit margins increasing.

How ProsperStack Can Help

One of the fastest ways to fix a leaky bucket is to simply upgrade your bucket entirely. By upgrading to an automated and enhanced subscriber experience software like ProsperStack, you’ll be able to easily save time, money and customers. At ProsperStack, we make it easy for SaaS companies and subscription-based brands to prosper by automating and enhancing customer acquisition and retention experiences. Our user-friendly platform and our team of experts can help you keep the customers you’ve already earned. Reach out today if you’re ready to reduce churn by 10-39% and improve your bottom line.

Sign up to stay current on all things retention