SaaS churn can wreak some major havoc on your SaaS business. When customers leave you, downgrade their service plans, or allow their renewal to lapse, money bleeds out of your business. Avoidable customer churn is costing U.S. businesses $136 billion per year, and, for SaaS companies, churn is an ever-present battle to fight. According to a study on SaaS growth and churn, 30% of SaaS companies have reported that their churn has increased since the previous year.
We don’t live in a perfect world, so some level of churn is unavoidable. However, referencing some rules of thumb to formulate your SaaS churn KPIs is a must. So what is an acceptable SaaS churn rate?
The answer is a bit more complex than it might seem at a glance, but there are general SaaS churn benchmarks that serve as a reference point for most organizations. This guide will give you an in-depth look at the SaaS churn and retention metrics you need to understand where you fall on the spectrum. You’ll learn how to calculate churn, general benchmarks, and nuanced considerations to discover how you measure up against the average.
Calculating churn isn't difficult, but it does require a bit of nuance. Nevertheless, there are several churn metrics that most SaaS companies pay attention to.
Revenue churn at its most basic measures the percentage of revenue lost over a certain period of time. To find your churn, you will divide your total revenue churned in a period by the total revenue from the beginning of your specified period.
Revenue Churn Rate = (Total Revenue Churned In a Period)/(Total Revenue at the Beginning of a Period) x 100
However, to get a clearer picture of your SaaS churn rate, you will want to look at net revenue churn.
Net revenue churn takes into account your expansion revenue (like upsells, add-ons, or tier upgrades), as well as the churned revenue, which includes things like downgrades, cancellations, payment failures, and other revenue losses.
Net Revenue Churn = (Total Churned Revenue in a Period - Expansion Revenue in a Period) / (Total Revenue at the Beginning of a Period) x 100
Customer churn rate (commonly referred to as logo Churn) measures how many customers churn. Logo churn gives insight into how many customers choose to cancel or opt-out of renewal within a given time.
Logo Churn Rate = (Total Customers Churned in a Period) / (Total Customers at the Beginning of the Period) x100
This calculation gives you an excellent starting insight into your customer attrition. However, now we should consider how your new customers factor into the equation. Your net logo churn takes your new clients into account.
Net Logo Churn = (Total Customers Churned in a Period - New Customers Gained in a Period) / (Total Customers at the Beginning of the Period) x100
A churn calculation that sometimes gets left on the backburner (but shouldn’t) is Available to Renew Churn (ATR).
ATR churn is similar to net revenue churn, except you are not counting any contracts that could not have churned in a given calculation period, like customers on annual plans that didn't come up for renewal.
ATR Churn Rate % = (Churned Revenue in a Time Period From Renewal Cohort) / (Total Starting ATR Pool) x 100
A final key consideration when it comes to calculating SaaS churn is the time period. Almost all companies use either monthly churn or annual churn –– it depends on the length of your contracts.
If most of your customers are monthly subscribers, you will probably want to calculate your MRR (Monthly Recurring Revenue) Churn. To find your monthly churn rate, subtract your expansion MRR from your MRR churn. Then divide that by the Total MRR at the start of the month.
MRR Churn = (Total Churned MRR - Expanded MRR) / (Total MRR at the Beginning of Month) x 100
If most customers sign annual contracts, you will probably want to calculate your ARR (Annual Recurring Revenue) Churn. To find your annual churn rate, subtract your expansion ARR from your ARR churn. Then divide that by the Total ARR at the start of the year.
ARR Churn = (Total Churned Revenue in the Year - Expanded Revenue in the year) / (Total ARR at the Beginning of the Year) x 100
Now that you understand how to calculate your churn, it’s time to dive into the industry indicators. While SaaS churn metrics vary across the board, general patterns have emerged from collected data that can help illuminate the path to growth.
Massive amounts of data exist on net churn benchmarks for SaaS. Cobloom compiled research from a handful of studies and discovered some compelling insights.
Industry-wide, a good SaaS churn rate benchmark falls between 5% - 7% for annual churn and under 1% for monthly churn.
However, early-stage businesses or SaaS companies that target SMBs commonly grapple with higher churn than the benchmarks mentioned above. So instead, smaller companies should aim for a more generous goal that they will hopefully improve upon over time.
A good annual churn for early startups and SMB-market companies falls between 10% - 15% for the first year. Their monthly churn rate should fall between 3% - 5%.
It’s important to track not only the dollar amount of churn but also watch the number of cancellations and customers attriting. Even if your net churn doesn’t look huge, a rising logo churn might be deceptively hidden by a variety of factors like your larger clients buying add-ons or upgrading tiers or services, for example.
Logo churn isn’t just a problem for CSMs –– all leadership needs to be aware of logo churn to get the most accurate picture of churn and discover ways to retain customers. Remember, there’s a cost to acquiring new customers, so divert efforts into reducing logo churn.
*Mid-market and larger are more likely to have a 1 - 2% logo churn, but if you’re a smaller company, don’t worry! It takes time to get there.
So far, we’ve been focusing heavily on annual churn rates, but many SaaS companies operate monthly billing, so it’s worth gauging the averages for monthly churn, both net and gross.
According to Klipfolio’s research, enterprise-level companies should aim for a 1% Gross MRR Churn, and for SMBs, it’s between 2 % - 2.5%.
When it comes to Net Churn, negative numbers are the ideal objective. However, a Net MRR Churn of around 2% is reasonable for most companies.
Let's take a moment to talk about the inverse of churn –– retention.
Retention measures how many customers or how much revenue you retain over a period of time. Here’s the formula for reference.
Net Revenue Retention Rate = (Revenue at Start of Time Period + Expansion Revenue - Churn Revenue) / (Revenue at the Start of the Period) x 100
The lower your revenue churn rate, the higher your monthly or yearly retention.
As you'll notice, annual revenue retention rates will vary across SaaS companies, depending on their size or the target market. Use the following benchmarks to compare your retention rates to other SaaS companies.
90% Net Revenue Retention (Good for SMBs) - A 90% retention rate is typical for SaaS companies that target SMBs. Because their customers are smaller and probably paying monthly, the likelihood of revenue churn is higher. Therefore, 90% is a reasonable retention rate for this type of company.
100% Net Revenue Retention (Industry Median) - This is considered the industry median across all SaaS companies. If your net revenue retention rate is higher than 100%, that indicates company growth.
125% Net Revenue Retention (Extremely Strong) - This retention level is most commonly seen in enterprise-tier SaaS companies. This type of business typically attracts larger clients with annual contracts and has not only convinced them to renew but also to upgrade or purchase new products or services. These SaaS companies deliver exceptional value to their clients, which encourages high revenue retention.
150% Net Revenue Retention (Top End) - At the very top end of the spectrum, the biggest SaaS companies like Slack, Twilio, and Snowflake reach astronomically high revenue retention and consistently measure negative churn.
If you are a smaller SaaS company targeting SMBs and your net revenue retention rate doesn't exceed 100%, that's ok –– 90% and above is a normal, healthy level. The reason that smaller SaaS companies tend to have a lower retention rate is due to a couple of factors:
Smaller companies also lack the people power and organizational might of a larger business, so that is something to bear in mind. It simply comes with the territory. To improve your net revenue retention rate over time, plan to move up-market so you can capture high-value clients and reduce churn.
We’ve examined the generally agreed-upon SaaS churn KPIs, but that doesn’t mean there’s a one-size-fits-all narrative. Many factors, both within and outside of your control, could impact your SaaS churn. Therefore, to understand churn to the fullest extent, it pays to take a nuanced approach.
The size of your business can have a significant impact on your churn rate. The larger, more established SaaS companies will often have a lower churn rate than SMBs or startups. Here’s why:
Lower churn rates for large companies apply across the board, for the most part. However, a study conducted by SaaS Capital revealed compelling findings regarding the correlation between company size and churn.
While the larger companies performed well when it came to net churn, that wasn’t necessarily the case with gross churn. Interestingly, the gap between net and gross churn widened as companies grew:
This pattern reveals a possible explanation, as SaaS Capital proposes: As a company grows, customer success and retention efforts might become more complicated, prices may rise, or perhaps the customer base ages along with the company, and some fall off.
Yet, since these big companies have scored large clients with high-value contracts, and they also drive plenty of up-sells and cross-sells, they have still found ways to offset the dip in gross churn by extracting more dollars from their existing customers.
On the other hand, small startups may find that they have higher net churn rates in their early years. This is simply because small companies usually cater to customers with smaller budgets, so there is more cash volatility in that market. As startups mature, they can begin to seek out high-value clients and build rapport with their current base to boost revenue retention.
Your target market might impact your SaaS churn as well. Recurly compiled churn data over 12 months with a sample size of 1500 businesses using their billing platform. They found that the overall average churn rate for all SaaS businesses is around 4.79%.
It's worth noting that B2C SaaS companies experienced a slightly higher churn (5.06%) while B2B SaaS companies experienced a lower average churn rate of 4.67%. This difference makes sense; B2B customers typically make more extensive price commitments than the average B2C consumer. Additionally, B2B customers include multiple teams, approval chains, and decision-makers, so it's not usually up to a single individual to cancel.
Sometimes, product type will naturally yield higher or lower churn. Cobloom offers a helpful example: Software integral to core business functions like fintech or sales ops will likely be viewed as more of a necessity than a marketing tool or recruiting software. As a result, SaaS products regarded as essentials will probably have a lower churn rate than the solutions considered “nice-to-haves.”
Secondly, if you are just starting as a business and still nailing down your product-market fit, you might see higher churn in your early years as you learn and iterate. As your business matures, you will get better at acquiring and retaining good customers and, therefore, reduce your churn.
As you track your churn rates and compare benchmarks, remember to examine your voluntary and involuntary churn rates.
Voluntary churn occurs when a customer actively chooses to cancel their subscription, end their relationship with you, or downgrade their payment plan. This churn can be caused by a variety of things, like poor customer experience, high price points, or even low product usage. If you are seeing high voluntary churn, take a look at your customer success efforts, reassess your pricing model, and perhaps consider whether you’ve found that perfect product-market fit.
Conversely, involuntary churn occurs when someone didn’t intend to cancel but ended up churning anyway. Typically, this is due to a payment issue, like a card declining or a customer forgetting to pay their bill on time.
Recurly found that, of the SaaS businesses that they studied, 65% of sites experienced decreases in their overall churn rate compared to the previous year. The top reason for the improvement in 78% of those businesses was the reduction of involuntary churn.
*Helpful Hint: To help cut down on your involuntary churn, consider triggering automated payment reminders, payment decline notifications, and recovery emails to assist your team in keeping clients on board.
The devastating effects of COVID-19 impacted the entire world, including businesses. In 2020, at the height of the pandemic, some industries struggled to retain customers while other verticals faced surging demand. For example, companies like Zoom and Microsoft Teams experienced massively high growth in 2020 since many offices moved their employees to work remotely. However, for SaaS businesses catering to direct consumers or serving in-person markets (like live event management software), churn might have spiked last year.
If the pandemic negatively affected your retention, there are still things you can do to mitigate churn as things slowly return to normal over the coming years. Suggest temporary subscription pauses to customers who might need to cancel due to tight budgets, consider adding new features to your product and find creative ways to upsell or cross-sell from your customer base.
In the end, can we truly define what a reasonable churn rate is? After all, different reports gather different numbers from different companies.
The answer is yes and no. These churn and retention benchmarks are general guidelines to follow, but they don’t tell the complete story. You shouldn’t treat them as the ultimate indicators of failure or success as a business. Instead, they should be used as goalposts to orient yourself as you constantly iterate to improve customer retention, product-market fit, and upselling efforts.
So, what happens if your churn spikes? Are you doomed? Fortunately, no. Even if you have a disappointing year, what matters is the long-term trajectory. As long as your churn trends down over time, you’re on the right track.
Remember, if you are an early-stage business, your churn may be a bit higher than you’d like. But as you grow, you will nail down your business model, your target market, and your customer success strategy. Your churn rate will improve as you keep working at it.