February 17, 2023

SaaS churn rate—what it is and how you lower it

Lucas Gonzalez
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As soon as a company operates with recurring revenues such as customer subscriptions, customer retention needs to be measured and managed finely. The term used to describe the loss of recurring revenue or customers is churn, or attrition. Find out in this article how to calculate it correctly, why managing it is essential, and how to lower it.

1 - What is SaaS churn rate?

“Churn“ means “attrition.” Winning customers is vital to business success, especially for subscription-based companies. But the key is to keep them for as long as possible (i.e. keep your SaaS churn rate as low as possible). Here's how.

1.1 - Definition of revenue and customer churn rates for SaaS

Over a given period, attrition can be measured in terms of lost MRR or lost customers. The former is referred to as "revenue churn" and the latter as "customer churn".

Revenue churn is the difference between the decline in MRR due to churn and contractions in euros and MRR at the start of the period.

💡 Contraction is lost revenue due to the loss of recurring contracts or switches to cheaper subscriptions.

Customer churn is the rate of customer attrition. It is therefore the difference between the number of customers lost who cancel their subscription over a period and the number of customers present at the beginning of the period.

1.2 - How to calculate churn rates

Let's take a concrete example of SaaS:

• 90 customers take out a subscription costing 200 euros per month excluding VAT (total MRR 18,000 euros);

• 50 customers opt for the premium subscription at 400 euros per month excluding VAT (MRR 20,000 euros);

• 5 customers end their basic subscriptions;

• 2 subscribers end premium subscriptions;

• 1 subscriber who changes from the premium to the standard subscription.

In our example, here is how you calculate the churn KPIs:

• revenue churn = 5 x 200 + 2 x 400 + (400-200) = 2000 euros ;

• revenue churn rate = 2000/(18,000 + 20,000) = 5.26% ;

• customer churn rate = (5 + 2)/(90 + 50) = 5%.

2 - Why track SaaS churn rate?

Acquiring customers takes time and costs money, particularly in terms of team salaries and marketing and sales expenses. Retaining customers over the long term enables you to maintain your MRR at a cost that is generally much lower than the cost of acquisition. This is why churn is one of the essential SaaS KPIs to measure and manage.

2.1 – Churn is an integral KPI for companies with recurring revenues

Some activities are based on recurring revenues. This is the case with SaaS (Software as a Service), which provides access to online applications, usually on an annual or monthly subscription basis. These companies must maximize customer loyalty (and therefore measure and manage their churn rates to ensure subscriber retention).

Maximizing the average lifespan of the subscriber is a major factor in enabling SaaS to generate sustainable growth and achieve profitability. Indeed, as CAC (customer acquisition cost) can be high, the only way to achieve profitability is through a low and controlled churn rate, which translates into longer average subscription durations. That's why these companies keep a close eye on their churn KPIs.

2.2 - Knowing how to compare your churn with benchmarking

It's therefore important to periodically calculate each churn indicator for a business with recurring revenues. But how do you know if your churn rate is too high or not? We recommend setting SaaS metrics and use benchmark sources to help with the analysis.

🔎 Two important insights are worth noting: churn rates are correlated with both average revenue per account (ARPA) and MRR.

Here are 2 analyses presented by chartmogul.com, in a study entitled SaaS Benchmarks Report.

The higher the ARPA, the lower the customer churn rate:

The same is true of the customer churn rate, as shown in this graph which breaks it down by MRR:

According to an annual study by KeyBanc Capital Markets (conducted among 350 SaaS companies in 2021). When they excluded companies with less than $5 million in ARR from their analysis, the median annual revenue churn rate in 2020 was 12.6%. Here's how companies break down by churn rate:

3 - How to lower your company's churn rate

By tracking churn, companies with recurring revenues can take corrective action to improve user satisfaction with their services and increase their chances of growth and success. They can also review their offerings.

3.1 - General suggestions for lowering customer departures

Churn is an indicator that companies can influence. Here are several ways of analyzing and managing the attrition rate:

• understand your customers to identify reasons for churn;

• improve your product or service;

• run a customer loyalty campaign;

• review pricing offer by modifying or enhancing the package and pricing proposed;

• enhance the user experience of your application through a relevant, personalized customer journey;

• improve after-sales service, for example with an online chat system;

• fine-tune customer onboarding and product familiarization, as contracts are often terminated at the start of the subscription;

• work on customer segmentation (personas) to refine your sales strategy.

3.2 - Reduce bankcard-related technical churn

Technical churn penalizes many companies with recurring revenues. The problem is the expiration of credit cards. If customers fail to update their payment method in time, the impact on current customer subscriptions is immediate. By setting up an automated message to remind customers to update their payment details before the expiration date, SaaS companies naturally reduce their churn rate.

3.3 - Practical tools for managing customer feedback

A good marketing strategy now includes after-sales service and data analysis. This helps you understand why user satisfaction is falling. One way of optimizing churn is to set up various feedback channels.

For example, the company can deploy the following functions:

• using online chat ;

• always collect customer feedback when they unsubscribe;

• set up an email campaign to gather feedback on the application.

Correctly calculating your revenue and customer churn rate is a prerequisite for improving retention and engagement. Fincome can help you manage your performance with fast, reliable reporting. Request a demo to find out how our application helps you calculate and lower your SaaS churn rate.

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