What is Churn? How to Calculate Churn Rate with Formula

“Churn” refers to the number of customers or subscribers who stop using your service during a given time period. For example, your annual churn rate is the ... BusinessAcademy SubscribeforUpdates ChurnRate:WhatitisandHowtoCalculateitCorrectly Glossary Nomatterhowhardyouwork,notallofyourcustomersaregoingtostickaroundforever.Considerthattheaveragecompanyswitchesupto30%ofitsappsperyear.Althoughlostcustomersarenothingtocelebrate,they’realsoinevitable.Why?Becausebudgetsdryup.Competitorscomeandgo. Heck,somecustomersjustmissapaymentandareneverheardfromagain.Eitherway,keepinganeyeonyourlostcustomersiscrucialforthelong-termgrowthofyourbusiness.Enteryourchurnrate.ChurniseasilyoneofthemostimportantSaaSmetricstomonitor.Inthisguide,we’llhighlighthowtocalculatechurnandwhatitmeansforthebiggerpictureofyourbusiness. TableofcontentsWhatischurn?HowtocalculateyourchurnrateCustomerchurnformulaRevenuechurnformulaHowtocalculatechurnrateforannualplansAnnualcustomerchurnformulaAnnualrevenuechurnformulaHowoftenshouldIcalculatemychurnrate?What’sagoodchurnrate?HowdoeschurnimpactotherSaaSmetrics?Whatcanchurnteachyouaboutyourbusiness?Howtofigureoutwhycustomerschurn Whatischurn? “Churn”referstothenumberofcustomersorsubscriberswhostopusingyourserviceduringagiventimeperiod.Forexample,yourannualchurnrateisthepercentageatwhichyou’relosingusersperyear. Andwhenwetalkabout“churned”users,we’retalkingaboutcustomerswhoarenolongeractive.Churnallowsyoutokeepapulseonyourcompany’sgrowth(ordecline).Evenarelativelysmallchurnratecanhaveamajorimpactonyourrevenueovertime.Let’ssayyou’reacompanywithasteady$20,000+MRR.Ifyou’reexperiencinga5%churnrate,you’relosingatleast$1,000/mo(andatleast$10,000+annually). Now,imagineyou’redealingwithachurnrateapproaching10%or15%.Notgood,right?Churnedusersareparticularlypainfulforup-and-comingcompaniesstrugglingtoscaletheiruser-base.Ifyouonlyhaveahandfulofcustomers,anysortofchurnseemsdevastating.ButkeepinmindthatchurnisintegraltotheSaaSbusinessmodel.Again,youcan’tavoidchurnoutright.Thatsaid,youcan(andabsolutelyshould)activelyworktowardsreducingit. WanttoReduceYourChurn?UseBaremetricstomeasurechurn,LTVandothercriticalbusinessmetricsthathelpthemretainmorecustomers.Wanttotryitforyourself? startfreetrial HowtocalculateyourchurnrateBeforeyoucanworryaboutbringingdownyourchurnrate,youneedtoknowwhereyoustand.Therearemultiplewaystomeasurechurn,whichistypicallypresentedeitherasapercentageofrevenueorcustomerslostduringatimeframe.Perhapstheeasiestwaytocalculatechurnistodividethenumberofusersyoulostwithduringatimeperiod(say,30days)withthenumberofcustomersyoustartedwithforthattimeperiod. Theresultingpercentagewouldbeyourchurn,allowingyoutomoreaccuratelyprojecthowmanycustomersyoumightloseonalonger-termbasis(think:quarterlyorannually).CustomerChurnRateFormula(CancelledCustomersinthelast30days÷ActiveCustomers30daysago)x100Ex:A5%UserChurnRatemeansthat5%ofthetotalcustomersyouhad30daysagohavecanceledwithinthelast30days. Youcanalsocalculatechurnbasedonrevenuelostasopposedtouserslost(thisisknownasrevenuechurn,shocker).Revenuechurnisarguablymoreimportantthanuserchurnasitmoreaccuratelyhighlightsyourbusiness’financialhealth. Theformulaforrevenuechurnisprettymuchthesameastheoneabove,exceptyou’recalculatinglostanddowngradedrevenueinsteadofcustomers.RevenueChurnRateFormula(MRRLosttoDowngrades&Cancellationsinthelast30days÷MRR30daysago)x100Ex:A5%RevenueChurnRatemeansthatyoulost5%ofyourMRRasitstood30daysagotochurninthepast30days.Specifically,revenuechurnissignificantifyouofferavarietyorpricingtiers.Forexample,therearemuchbiggerimplicationstolosing5%ofyour$100/mosubscribersversusfreemiumusers. HowtocalculatechurnforannualplansAbsolutely!Thatsaid,annualplansworkabitdifferently. Inthecaseofanannualplan(oranyplanthatisnotmonthly),youusethesameformula(s)asabovebutwithadifferentdateinterval. AnnualCustomerChurnFormula (Cancelledcustomersinthelast365days÷ActiveCustomers365daysago)x100 AnnualRevenueChurnFormula (MRRLosttoDowngrades&Cancellationsinthelast365days÷MRR365daysago)x100 HowoftenshouldIcalculatemychurnrate? Goodquestion! Onceyoucalculateyourchurnrate,youmaybeinclinedtostartobsessingoverit.However,considerthatday-to-dayorevenweek-to-weekchangesinchurnisn’tgoingtoteachyoumuch.Ifyou’realreadyreportingontherestofyourbusiness’metricsonamonth-to-monthbasis,churnshouldbeonyourradar. Generallyspeaking,though,it’sbettertolookatalongertimeframe.Quarterlychurncanhelpclueyouinonoverarchingcustomertrends,whileannualchurncanhelpyoubetterassessyourYoYperformance. Quarterlyandannualchangesinchurncanlikewisehelpyouunderstandifyourlong-termcustomerretentioneffortsareactuallyworking.Thegoodnewsisthatit’spossibletohaveaconstantpulseonyourchurnrate(minusanycomplicatedcalculationsorspreadsheets)withthehelpofBaremetrics. Inshort,ourdashboardallowsyoutoseeandunderstandthespecificsofyourchurnratealongsidetherestofyour SaaSmetrics. Forexample,youcanclearlyseewhereyourchurniscomingfrom… ...andhowthatchurnimpactsyourrevenue.TrackyourchurnwithBaremetrics What’sconsidereda“good”(oracceptable)churnrate? Theshortanswer?Itdepends.Generallyspeaking,achurnratebetween4%and7%annuallyisconsideredbothacceptableandrecoverable.However,these“ideal”numbersaren’tnecessarilythenormforstartupswhofacehigher,moreturbulentchurnratesastheystarttoscale.Therearealsofactorstoconsidersuchasyourpricing,ARPUandevenyourindustrywhichimpactyournumbers. Also,takeanynumbersyouhearaboutchurnrateonTwitterorLinkedInwithagrainofsalt(hint:founderscanexaggerateonewayortheother). Basedonreal-worlddatafrom Baremetrics’OpenBenchmarks,herearesomeworkingaveragesatthetimeofthiswriting:Userchurnrate:5.5%-8.0%Revenuechurnrate: 6.3%-9.4% HowdoeschurnimpactotherSaaSmetrics? Simplyput,yourchurnrateisgoingtotieintoanyotherrevenue-relatedmetricsuchasMRR. Forexample,higherchurnis(generally)goingtohaveanegativeimpactonyourrevenue.Theseverityofthisimpactagaindependsonwhichusersyou’relosing(freeversuspaid)andhowmuchthoseuserswerespending.Increasedchurnlikewisemakesitmorecostlytoacquirenewcustomersandreducestheirlifetimevalue(LTV). Whatcanchurnteachyouaboutyourbusiness? Yourchurnratecanbeatreasuretroveofinsight,grantedyouknowwhattodowithitonceit’scalculated.Chancesareyou’veheardthatitcostsfiveorsixtimesasmuchtoacquireanewcustomerthanitdoestoretaintheonesyouhave.Withthisismind,there’sobviouslyadirectcorrelationbetweenreducingchurn(orkeepingitstatic)andincreasingrevenue.Considerthatifyou’vegainedsomeone’strusttothepointwherethey’vebecomeasubscriber,you’vealreadydonethehardpart.Conventionalwisdomsaysthatcustomersshouldthenbecomemoredependentonyourproductovertimeandthereforemorelikelytobealoyalsubscriberforthelong-term.Sowhenacustomerchurns,thissignalsthatsomethingwentwrong.Althoughsomefactorsmightbeoutofyourcontrol(suchasyourcustomer'scompanygoingbelly-uporaneconomicrecession),churnratecanclueyouinonavarietyofimportantactionitems,including:OpportunitiestoincreasecustomerserviceandsatisfactionAsbuyersarespoiledforchoicewhenitcomestotheproductstheysupport,customersupportandsatisfactionarearguablymoreimportantthanever. Providingmorepersonal,attentiveservicecouldultimatelybethedifferencebetweenaloyalandchurnedcustomer.TheriseofcompetingproductsandservicesAriseincancellationscanalsobeattributedtonewproductsshowingupinyourmarket. Watchingchurncanhelpyoubettermonitortheactivityofyourcompetitors,includingemergingproductsandsolutionsthatmighttakecustomersawayfromyourown.ResolvingproblemswithyourpricingstrategyYourproduct’spricetagobviouslymatters.Alltoooften,churnoccurswhensomeonedeemsyourservicetooexpensivebasedonitsfeatures(orlackthereof). Churncanalsobeattributedtofirst-yeardiscountedratesorpromotionsthatdon’tendupre-uppingafterthepromoisover.Thisspeakstowhyyour pricingstructureissoimportant. HowdoIfigureoutwhycustomerschurn? Ifyouwanttoknowwhysomeonedecidedtocanceltheirsubscription,justask.Becauseunlessyourcustomersarepromptedtoprovideanexplanation,theanswerwilllikelyremainamysteryuntilyougetabadreviewonG2orCapterra.ThisisyetagainwhereatoollikeBaremetricscomesinhandy.Our CancellationInsightstoolessentiallyturnsyourreasonsforchurnintodatapoints,highlightingthemostcommonfactorsbehindchurnsoyoucanprioritizeyourbusiness’actionitemsaccordingly. Andthesooneryouhoneinonthereasonswhypeoplearechurning,thequickeryoucantakeaction.We’veactuallyputtogetheranin-depthguideonhowtoreduceyourchurnrateifyoususpectyou’rehavingissueswithcustomerretention.FamiliarizingyourselfwithcustomerretentionstrategiesandunderstandinghowoftencustomerschurnisasolidstartingpointtowardbuildingamoresustainableSaaSbusiness.Areyouwatchingyourchurnrate?AsaSaaScompany,retainingandgrowingyourcustomerbaseisclearlyamust-do.Andkeepinganeyeonchurncanhelpyouassessyourperformanceeachstepoftheway.Toensurethatyoualwayshaveahandleonyourcompany’scrucialmetrics,atoollike Baremetricscanbeagame-changer. Writtenby:BrentBarnhart UpcomingLesson SettingGoals Goals!KnowingwhatyourMRRis,butsettingrealisticgoalsandtakingstepstomeetthemisanother.We’regoingtoshowyouhowtodojustth... JointheAcademy! Enteryouremailaddressbelowandgetinstantupdatesassoonasnewlessonsarepublished.Soundsprettygreat,eh?