How to Calculate SaaS MRR Churn Rate
Most companies spend a great deal of time and financial resources on customer acquisition. This is particularly true in those early months and years of a startup. Acquiring new customers never gets old and watching your sales grow is a good indicator that you have a product that sells. But having a product or service that sells is not the only metric in determining the success of your company. Customer churn is another key metric to be concerned about.
What is Customer Churn Rate?
Customer churn is the opposite of customer retention. It is losing customers to a competitor or experiencing non-renewal of your services. Churn rate is expressed as a percentage and can be determined over any consistent time period, like quarterly. The only remotely positive churn is when you lose customers that are costing you more than they are worth or who are a pain in your assets.
Virtually everybody experiences churn, but keeping your churn rate to a minimum will have a tremendous positive impact on your bottom line.
How to Calculate Churn Rate for Your SaaS Startup
While determining an accurate churn rate for some products and services can be challenging, calculating the churn rate for a SaaS is relatively easy. Simply take the number of customers lost through non-renewal or cancellation and divide that number by the number of total customers you had at the beginning of the given period. If, for example, you started the quarter with 10,000 customers, but lost 480 of them through that quarter, your churn rate is 4.8% quarterly.
The Impact of Churn on Your Bottom Line
Most start-ups don’t pay a lot of attention to churn, especially early on. As we said, during this period it is all about the sales. But if you will be looking for investors, you can be sure they will be looking at churn. Churn rate is a huge indicator of customer satisfaction and can foretell the future of your company.
If you have a churn rate of 4% a month, that may make you feel pretty good. You could view that as a 96% retention rate. But if you are churning 4% of your customers each month, you are turning over almost half of your customers each year. As your business grows, the number of customers lost will increase, placing even more pressure on creating new sales.
You can determine the actual cost in dollars of churn by multiplying the number of customers lost by your average customer worth. It can really get your attention when expressed in actual dollars.
Minimizing Your Churn Rate
If you are uncomfortable with your churn rate, it is time to start talking to your customers and your recently lost customers. Determine what you are doing right, and the reasons churn is happening at the rate it is. It could be something easily fixed like better communication or small product improvements. But you can’t address it if you don’t have a churn rate to track. It is especially critical for new and growing companies.
Our Favorite Posts on SaaS Churn Rate
By now, you should understand the basics on calculating churn as well as why it is important. The next step is understanding what level of churn is right for your businesses and taking a look at some examples of how other SaaS companies have reduced churn in the past.
- SaaS Churn Rate: What is Acceptable? by Lincoln Murphy of Sixteen Ventures
- How One SaaS Startup Reduced Churn 71% Using “Red Flag” Metrics by Kissmetrics
- Churn, Retention and Reengaging Customers by Intercom
- Why Customer Churn Happens, and What You Can Do About It by Groove