Calculating Churn Rate: Essential Metrics and Indicators to Consider

Juliet D'cruz

Updated on:

Calculating Churn Rate

No matter how well you are working or how high your company is ranked, you cannot keep all your customers stuck around you forever.

On average, a SaaS company switches around 30% of its users every year. Though there is nothing to celebrate about losing customers, you cannot resist it as it is inevitable. 

Why so? Sometimes, users have no budget to carry on using your services or they may be attracted by your competitors. Keeping an eye on your lost customers is the key to the long-term development of your business.

Churn is undoubtedly one of the most important SaaS metrics to keep an eye on. In today’s post, we will tell you the method to calculate it and how you can use it to grow your business.

What is Churn?

It refers to the number of customers who stop using your services or simply paying you during a given period. 

For example, your churn rate is the rate at which you are losing users or subscribers every year. The users who are not active are called churned.

Churn permits you to keep an account of your company’s development or decline. Even minor churn rates can sometimes have a major impact on your business. Let’s say you have a stable $20K plus MRR and are dealing with a 5% churn rate. It means you are losing $1k every month, and more than $10K every year. Imagine the churn rate is 10% or 15%.  Not a good sign for you, right?

Churned users are painful for emerging SaaS companies as they are already trying hard to scale up and develop their customer base. If you already have a few customers and lose 2 or 3 of them, it will be devastating.

However, churn is inevitable for SaaS business models. You cannot avoid it but try to reduce it and you must put all your efforts to minimize it. 

Calculating Churn Rate- The Nitty Gritty Details

You cannot start thinking about reducing the churn rate without knowing your current position. There are numerous ways to calculate churn. It can be presented in two forms:

  1. Revenue lost per year
  2. Customer lost per year

The easiest way to calculate churn is to divide the users left during a given period by the total number of users you had at the start of that period.

If the given period is of 30 days, then: 

Customer Churn Rate Formula

(Cancelled Customers in the last 30 days ÷ Active Customers 30 days ago) x 100

Example: A 5′ churn rate means 5% of the total users you signed at the start of the month have left within a month.

You can calculate churn based on revenue as well. It is called a revenue churn shocker and is estimated as the revenue lost in a given period. It is more important than user churn as it gives a better idea of your business growth. Sometimes you lose users that are on the freemium plan, so losing them may not impact your business or revenues. You can calculate revenue churn by using the formula:

Revenue Churn Rate Formula

(MRR Lost to Downgrades & Cancellations in the last 30 days ÷ MRR 30 days ago) x 100

Example: A 5% revenue churn means that in the last 30 days, you have lost 5% of the revenue that you have at the start of the month. 

Revenue churn is more applicable when you have several subscription plans. For example, a 5% churn of a $100/Month plan will be more painful as compared to that of a freemium plan.

Calculating Churn for Annual Plans

No matter which metrics you are dealing with, annual plans work a bit differently. For a duration longer than a month, you can rely on the same format just by changing the period.

Let’s say the period is a year, the formula will be:

Annual Customer Churn Formula

(Cancelled customers in the last 365 days ÷ Active Customers 365 days ago) x 100

Annual Revenue Churn Formula

(MRR Lost to Downgrades & Cancellations in the last 365 days ÷ MRR 365 days ago)

x 100

After How Much Time Should I Calculate Churn?

It’s a good question indeed. 

Once you know the churn of your SaaS company, you may get obsessed with it. However, calculating it on a daily or even a weekly basis is not going to help you. 

Generally speaking, it’s better to focus on longer time frames. Quarterly churn helps you get an idea about your overall churned users and annual calculation lets you know about your YoY performance.

Quarterly and annual churn calculations will give you an idea about the effectiveness of your efforts to retain customers. Here’s some good news for you. It is now possible to constantly keep an eye on your churn rate by using Baremetrics. Your dashboard on Baremetrics helps you have a pulse on churn and other SaaS metrics. 

What’s an Acceptable Churn for Your SaaS Company?

Looking for a short answer? It depends!

A churn rate between 4 to 7 percent is generally considered acceptable and can be recovered as well. However, these churn rates are not normal for starting SaaS companies as they have to deal with more turbulent churn rates. 

You need to consider some other factors as well. The average revenue per user, pricing, and the nature of the industry are the key things to consider. Don’t believe in the numbers you see on social media platforms especially Twitter and LinkedIn as the owners sometimes exaggerate as well.

Impact of Churn on Other SaaS Metrics

Churn rate can simply impact any other metrics that involve revenues like MRR, ARR, etc.

For example, a higher churn is going to hurt your revenue. The severity of damage will depend upon the users you are losing. If you are losing users from a high-priced plan, it will hurt more than losing freemium users.

Unveiling Business Insights: What Churn Can Teach You

If you know what to do with the churn rate after calculating it, it can give you a treasure of deep insights into your business and revenue models. 

You must have heard that it costs 5 to 6 times more to get a new customer as compared to losing one. So, you can say that there is a correlation between churn rate and revenue.

Consider that, when you win people’s trust to turn them into your customers, you have done the hardest part. There are chances that if you focus a little bit, you can turn them into long-term loyal subscribers or users.

So, when your customers churn, it indicates something happened wrong. There are numerous factors behind it. However, some of them are not in your control such as the financial condition of your subscribers that sometimes makes them unable to pay for your services.

Churn rate can give you a clue about a number of things. Such as:

Chances to Boost Customer Service and Satisfaction

A churn rate means your customers are not satisfied. Therefore, you can focus on improving your services and increasing customer satisfaction. You can give personal attentiveness to turn them into loyal customers. 

Rise in Competition

A common reason why customers are churning is a rise in competition. The churn rate gives you an idea about it as well. Watching churn can assist you in monitoring the activities of competitors in a much better way and developing your strategies accordingly. 

Resolving Pricing Problems

If everything is going fine but customers are still churning, it means there is a problem with your pricing strategy. Churn rate helps you monitor your pricing strategy. It allows you to develop a robust SaaS pricing strategy that will be helpful in keeping the customers around.

How to Find Why Customers Churn?

The simplest way is to ask them. Because the answer will remain a mystery unless your customers tell you the exact reasons behind their decision to cancel your subscription or stop using your services.

Baremetrics can be helpful at this point as well. Its cancellation insight tool can turn churn into data points. Above all, it highlights the common factors behind churn. So you can set your action priorities accordingly.

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