Customer churn – an introduction
Customer churn (also known as customer churn rate - CCR) is one of the most important metrics that SaaS businesses need to keep a close eye on. It refers to the rate at which customers leave a service or product.
What is customer churn?
Customer churn is a measurement of the number of customers (or logos) who stop their subscription. It’s the percentage of customers that leave a service or product over a given period of time. It’s a crucial metric for SaaS businesses – once a customer has been acquired, it’s all about lifetime value. If a customer churn, that value ceases.
Revenue churn is a related metric, which looks at the revenue that’s churned, typically from a downsizing in number of seats or plan. Customer churn, is where the logo churns completely and you no longer have a billing relationship with that client. We will focus on customer churn rate in this metric.
Why is customer churn so important?
Customer churn is a vital metric that can determine the success or failure of a SaaS business. A high churn rate can be a sign that something isn’t working and that your business needs to take action to retain customers. A high churn rate means that a business must acquire more customers to keep their growth rate steady, which is expensive, and reputation can be damaged from the churned customers. On the other hand, low churn rates indicate that the product or service is effective, and customers are happy.
In addition to customer churn, it’s advisable to look at complementary metrics such as CAC, LTV, NPS and MRR, or look at revenue expansion opportunities, as growing existing revenue is often considered easier than acquiring new customers.
Customer churn can also be viewed on a cohort basis, so specific groups of customers who signed up for your service at the same time may follow a similar trend. Did a cohort receive a different onboarding experience that was more successful?
What is a good customer churn?
A good customer churn rate varies significantly by industry and the nature of the product or service. For SaaS businesses, a good customer churn rate could be seen as less than 5%. per month, particularly on lower ARPA subscriptions, under £30 a month. There have been a few studies that suggest 5% for a SaaS business is good. What this means is that out of 100 customers, no more than five should stop their subscription[AB3] [LS4] in the month. B2B subscriptions, with higher ARPA would expect a lower churn, this could be less than 1% a month for example.
Churn will vary from sector to sector and product by product. The price and whether you sell B2B or B2C are also important factors when assessing what acceptable churn rate. Either way, it's important to you understand what’s influencing your churn rate. Did you set yourself an assumed churn in forecasting and how have you performed against this? Can you research comparable companies to understand what their churn rate is?
What does Customer churn look like?
How do you calculate customer churn?
The formula to calculate Customer churn is:
Customer churn = Number of customers lost / Total number of customers x 100
The answer is expressed as a %.
Customer churn worked example
If a SaaS business had 100 customers at the beginning of a month, and five customers ended their subscription during that month, the customer churn rate would be calculated like this:
Customer churn = 5 / 100 x 100 = 5%
If those 100 customers had an average subscription value of £100 per month, and the five lost customers had average subscription value of £110 per month, the revenue churn would be a higher percentage.
Revenue churn = (5 x £110) / (100 x £100) x 100 = £550 / £10,000 x 100 = 5.5%
Conclusion
Customer churn is a crucial metric for SaaS businesses that can determine their success or failure. By understanding what customer churn is, why it’s important, what a good customer churn rate is, and how to calculate it, SaaS businesses can take corrective measures to retain their customers and improve their profitability. By focusing on customer satisfaction and providing high-quality products and services, businesses can reduce their customer churn rate and build a loyal customer base.
