The SaaS Churn Handbook
A Guide to Reduce SaaS Churn Rates
SaaS churn is the percentage of customers that cancel their subscriptions in any given period. It is often a silent killer in SaaS companies, crippling growth in spite of marketing efforts.
A staggering percentage of SaaS businesses treat new customer acquisition as their highest growth priority. Don’t get the wrong idea –– acquisition is a crucial component to SaaS success, and sales and marketing teams should continue to pursue new leads and opportunities. Yet, when all the efforts are focused on acquisition, you might miss out on the low-hanging fruit of expansion revenue from your current customer base.
It is much easier to retain an existing customer than it is to acquire a new one, and in most cases it's also easier to sell more to an existing customer than someone who is not yet a customer.
Of course, this certainly doesn’t mean you should neglect new customer acquisition. It simply means you need to find creative ways to grow your revenue from your clients who are already committed to you. As customer acquisition cost increases in many SaaS verticals, expansion revenue can be a key source of growth.
Why is tracking churn important?
Churn rate measures how many customers or revenue was lost over a given period. While tracking churn rate doesn’t seem as exciting as tracking new sales, the reality is that customer churn can negate your acquisition impact. To illustrate this concept, think of your SaaS company as a (slightly) leaky bucket. Customers are water. Sales and marketing funnel new customers into the bucket. But if the bucket is leaking too fast, everything will eventually leak out no matter how much water you add. Not great. So, how can you counteract this problem? First, you need to repair the holes in the bucket.
When you focus on eliminating churn, you’re investing in customer LTV (Lifetime Value). An anti-churn approach increases the likelihood that newly won customers will stick with you for the long run, and therefore, keep revenue in the business.
Building strong customer loyalty, retaining customers, and driving expansion strengthen your company’s foundation. When you operate in this mindset, you’ll optimize your new customer acquisition impact.
How Do You Calculate Your SaaS Churn Rate?
Even if your math skills are a little rusty, calculating churn isn’t difficult. However, it does require a bit of nuance. You must understand exactly what you are measuring and what time period you care about. For our purposes of focusing on SaaS churn, we will go through calculating net revenue and net customer churn.
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 time 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 a great 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 final lesser known churn calculation is ATR (Available to Renew) Churn. ATR churn is like net revenue churn, except you are not counting any contracts that could not have churned in a given calculation period.
For example, assume your SaaS company caters to a large enterprise segment with customers that sign multi-year contracts. Each year, some clients would be in the middle of their locked-in contract, while others would have renewal opportunities coming up.
Say Customer A signed a three-year contract in 2018, and Customer B signed a three-year contract in 2019. Customer A’s contract would be up for renewal in 2021, but Customer B still has another year before their contract is up for renewal.
Bearing this renewal timing in mind, you see that not every customer has the opportunity to churn at any given time since their renewal could fall outside of your chosen calculation window.
ATR Churn Rate % = (Churned Revenue in a Time Period From Renewal Cohort) / (Total Starting ATR Pool) x 100
A final key consideration in churn calculation is what time period to use. Almost all companies use either monthly churn or annual churn depending on how long your average contract is.
If most of your customers are monthly, 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 of your customers are annual, 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
Before you jump in to calculate your customer churn, carefully consider how you define a customer as churned. Depending on how your business and pricing model is structured, your clients might actively cancel a subscription, they might neglect to renew their contract, or they may even experience a payment issue.
You may wish to be specific about churn qualification to ensure that customers actually churned and there is no way to get them back. Otherwise, you might inflate your attrition rate and miss the opportunity to win back customers. Give your team a strategy to check in with potential churning customers within a time period to make sure they are “churned beyond return.
Customer attrition rate matters because it can reveal critical health indicators for your business. While revenue churn is often what SaaS companies will focus on, logo churn can give insight into your customer success efforts, your product value, and even your place in the market. High customer churn might demonstrate a lack of product-market fit with specific cohorts, even if your net revenue retention remains high.
What is a good SaaS churn rate?
Once you understand how to calculate your logo and revenue churn rates, you probably want to know how to align your objectives and KPIs. It’s helpful to compare your numbers to sought-after industry goalposts as a starting point. Check out these general SaaS churn and retention benchmarks to see if you’re in good company.
Interestingly, a considerable range of churn rates persists, varying widely from company to company and across industries. Recurly compiled churn data over 12 months with a sample size of 1500 businesses using their billing platform. These businesses were based on subscription models and included all types of companies. They reveal that the overall average churn rate for everyone fell around 5.6%.
Recurly found that the average churn rate from their pool of SaaS companies fell at 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.
Industry-wide, a good SaaS churn rate benchmark falls between 5% - 7% for annual churn, roughly 0.5% monthly churn.
Let’s take a moment to talk about the opposite of churn –– retention rates. Think of retention as the alter ego to churn rate. Retention measures how many customers or how much revenue you retain over a period of time.
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. Here are a few benchmarks to give you an idea of whether you’re on track with your retention.
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 level of retention is most commonly seen in enterprise-level 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:
High volume of monthly contracts.
The target market is smaller, so there’s a higher likelihood of cancellation or payment issues.
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 upmarket so you can capture high-value clients and reduce churn.
A final word about revenue retention: The incredible 150% rate is quite extraordinary, and all SaaS leaders can learn from these inspiring success stories. However, most organizations, particularly startups, should view this extreme as aspirational, not necessarily the expected benchmark.
Now that you have an idea of ideal benchmarks to shoot for, it’s time to hustle to achieve your wildest retention goals. Here are some strategies designed to reduce your churn and improve your retention rates.
Track Customer Usage
If a user’s activity begins dwindling over time, it reveals a declining interest or a negative perceived value in the product. It could also demonstrate a lack of understanding or knowledge of how to use your product.
When you spot reduced usage, take action immediately. Reach out to the inactive client to remind them of your product’s value and offer guidance to maximize utility. Perhaps they have questions or feedback for your team that could help you in improving the platform.
To reverse potential churn due to low platform engagement, organize a specific action plan with your customer success or accounts team. Decide what levels of disengagement and length of inactive time define the danger zone for churn. If you have workflow software, set up automated workflows that alert your team to take the necessary steps to recapture disengaged users.
Leverage Onboarding to Build Rapport and Promote Engagement
Churn should be top-of-mind, even at the earliest phase of the customer lifecycle. Even before the sale closes, salespeople and marketers should operate in an anti-churn, retention-positive mindset.
If your new users don’t understand how to use your app, have trouble connecting with your team, or are unaware of all your platform features, they are more likely to churn. Recent findings on this subject are particularly eye-opening:
80% of people say they’ve deleted an app because they didn’t know how to use it.
63% of customers say that onboarding – the level of support they’re likely to receive post-sale – is an important consideration in whether they make the decision in the first place.
86% of people say they’d be more likely to stay loyal to a business that invests in onboarding content that welcomes and educates them after they’ve bought.
Over 90% of customers feel that the companies they buy from ‘could do better’ when it comes to onboarding new users/customers.
Quality customer training and support at the onboarding stage is critical to retaining your customers and reducing your churn.
Craft an onboarding program for your clients that demonstrates the value of your product and establishes rapport right off the bat with new clients. Be sure to offer simple, helpful training that shows your clients how to use your product well and optimize it for their success.
Prioritize Customer Success
No matter how well you run your company, occasionally, your users might need assistance solving a problem. When that happens, your customers will reach out to the support team. Therefore, your customer success teams must be firing on all cylinders to ensure the experience is positive. Otherwise, it could lead to churn.
Nothing erodes customer trust more than poor customer service.
66% of consumers have terminated their relationship with a company due to poor customer service.
Keeping customers happy is key, so ensure you have a personable and efficient support team to solve customer issues quickly.
Your technical support and customer success teams should keep retention at the forefront of their mind every time they interact with a client. But customer success transcends service tickets. If your success team really wants to make a difference with churn, they can get creative. Here are some ideas you might consider incorporating into your customer success strategy:
Customer Feedback Panels & Surveys - No matter how diligently you track customer data, hearing directly from your user base will reveal things you didn’t know. Make sure you show your customers that you care about their experience by asking for their feedback. You can get this insight in multiple ways, through one-on-one calls with account managers, regular customer panels or town-hall-style meetings, and surveys asking questions about the customer experience.
Knowledge Base & Ongoing Training - Customers often prefer to solve their own problems, if possible, before they reach out to support. According to the Harvard Business Review, 81% of customers attempt to take care of matters themselves before reaching out to a live representative. And a survey conducted by ZenDesk suggests that 67% of respondents prefer self-service over speaking to support. Provide a knowledge base for your customers containing help articles, product information, and support videos. If a customer has a simple question, they will likely find their answer from the knowledge base and avoid submitting a ticket. This improves the customer experience in two ways:
Cater to Customer Preference - The self-serve element capability empowers customers to solve their own problems quickly and get back to being productive.
Improves Ticket Resolution Times - When your users have resources to solve simple issues, it frees up your support team’s queue to focus on the most pressing tickets. Fewer tickets equal faster resolution times, which in turn creates happier customers.
You can also offer continuous customer training to support your customer as your product expands and your company grows. As long as your success team helps your clients find value, you’ll reduce customer churn.
Professional Services. Some customers might be interested in professional services to help them implement or use the product, train staff onsite, or provide consulting. This is something that larger clients will especially appreciate, so as you move upmarket, be sure to include this as part of your customer success strategy.
Generate Expansion Revenue Through “Sticky” Product
Not only are satisfied customers less likely to cancel a subscription, but they’re also open to paying you more. The key to unlocking this kind of expanded revenue from happy clients is through creating a "sticky" product.
What do we mean by calling a SaaS product sticky? It means that your offering is so useful that your customer can’t live without it. For SaaS, high usage and expanded revenue go hand-in-hand with a sticky product.
At Unbounce, customers who downgraded to a free plan from a paid subscription responded to the question, “Why did you downgrade? The most popular answer, at 31.4%, said they were under-utilizing the product. That wasn’t great news because it meant that perhaps their product wasn’t sticky enough.
To combat this, Unbounce made product tweaks to improve stickiness. They made sure that the platform was simple to use, introduced new products that work together in tandem to deliver value over the long term, reduced the time to value, and continued to deliver exceptional customer service.
In SaaS, you must deliver value quickly, and continue delivering value over a long time period to prevent customers from churning.
Target Different Subscription Plans
To keep your customers happy, you must understand their unique qualities. Your users are not one-size-fits-all; each has a set of goals and problems to solve. With this in mind, approach your anti-churn tactics in segments. Enterprise customers can quickly spot an ill-equipped or inexperienced SaaS company, so be ready to support all their needs and make them happy.
Reducing Churn for SMBs and Smaller Self-Serve Customers. As we touched on earlier when we spoke about customer success, providing a knowledge base and helpful resources is essential. But it’s even more of an imperative when you’re dealing with your smaller, self-serve customers.
Even if they aren’t paying for a personal account manager or professional services, your smaller subscription clients can still enjoy a great customer experience. To promote easy support and assistance: 1. Make sure users have access to a robust self-serve portal.
2. Regularly update your knowledge base.
3. Employ chatbots that can assist customers with simple issues. 4. Consider setting up an online community where users can post helpful tips and find answers.
Of course, if all else fails, make sure that all of your clients can get in touch with a service representative when necessary.
Reducing Churn for Enterprise Customers. Your larger customers drive a sizable chunk of your SaaS revenue, and they will typically have a lower churn. However, if you don’t put in the effort to please them, you could lose them.
To avoid this crushing heartbreak, offer a dedicated AE or accounts team to service each enterprise client. You need to be available for them at all times and respond as quickly as possible. If they feel prioritized and well taken care of, they will likely stick with you.
Enterprise customers can quickly spot an ill-equipped or inexperienced SaaS company, so be ready to support all their needs and make them happy. They will tend to be less price sensitive but pickier about support, so make sure to charge a high enough price point to be able to support these customers.
Dunning Emails and Reducing Involuntary Churn
We’ve discussed the customer experience and how to proactively prevent cancellations and downgrades. However, what about involuntary churn? What is it, and how do you avoid it? Let’s break it down.
Voluntary Churn: This occurs when a client actively decides to cancel their subscription, downgrade their tier, or otherwise reduce their spending or terminate their relationship with you. This could be due to several factors like their customer experience, price point, underutilization, etc.
Involuntary Churn: This type of churn usually happens when a customer undergoes payment failure, triggering account cancellation. The payment failure could occur because of insufficient funds, a maxed card limit, a bank halt on the business card, or a lost/stolen card.
If you are a B2B SaaS company that serves an SMB segment, you might encounter involuntary churn more often than a company with an enterprise target market. It’s essential to develop a plan to counteract payment failure. Without a solid strategy, you could lose customers who otherwise would have continued their relationship with you. By reducing involuntary churn, you’ll boost your customer LTV (lifetime value), and therefore gain higher ROI from your CAC (customer acquisition cost). While voluntary SaaS churn indicates more deep-rooted issues within your organization, involuntary churn is easily avoidable. You will drastically improve your retention when you are diligent about catching and correcting involuntary churn through simple tactics like dunning emails.
Dunning emails are emails you send to remind clients about subscription payments. There are several common Dunning email strategies used to combat involuntary churn.
You can begin counteracting payment failure before the bill is due. Create a workflow with your team that outlines the proper progression of actions to take before passive churn occurs. For example, you can reach out with a pre-dunning email that reminds the client to update their card or payment information before it expires. Within your platform, you can also send alerts and notifications that will appear when your customer logs in.
Payment Decline Emails
The name of the game is speed, so leverage an email automation platform, preferably one that specializes in dunning and payment reminder emails. Trigger an automated email if payment failure occurs. It’s also a good idea to notify a team member to reach out personally and assist the customer if necessary.
If a customer churns involuntarily, don’t give up hope just yet.
Send a series of follow up emails making sure they actually want to churn before them off, many times they will be grateful for the reminder!
Track your Net Promoter Score (NPS Score)
One way to measure the health of your customer churn is to actively track your NPS (Net Promoter Score). This metric is widely used and depended upon across all industries, especially SaaS. What is NPS? NPS measures your customer satisfaction and loyalty. It is based on a single simple question: How likely is it that you would recommend [Company/Product/Service] to a friend or colleague? How Does Scoring Work? Respondents respond to the question by providing a number: Respondents give a rating between 0 and 10, 0 meaning not at all likely and 10 meaning extremely likely. Depending on the number they choose, they will fall into a specific category:
Detractor (Score 0 to 6) - Detractors are respondents who choose a score between 0 and 6. These are unhappy customers who are unlikely to buy from you again and may even discourage others from buying from you.
Passive (Score 7 or 8) - Passives are not unhappy, but they may not be as enthusiastic as promoters. These respondents choose either a 7 or an 8.
Promoter (Score 9 or 10) - Think of promoters as your brand champions. Promoters are the respondents who chose 9 or 10 on the scale. They are very loyal and likely to be advocates.
To find your score, subtract the percentage of detractors from the percentage of promoters.
Net Promoter Score = Number of Promoters % - Number of Detractors %
Your NPS is important not just as a KPI for your support or customer success team but for understanding the entire organization’s health. You’ll discover how connected you are with your customers and what your likely level of churn will be for the future. Watching your NPS score is an excellent way to detect potential problems and stop increasing customer churn.
Offer Annual Contracts to Reduce Churn Rate
SaaS pricing models can vary widely, but often they are based on subscriptions or contracts. Many companies offer month-to-month subscriptions. Monthly pricing remains a popular option when serving SMBs or individual consumers. However, even if monthly pricing attracts customers, it could be contributing to churn.
Why do annual contracts reduce churn? Well, for starters, annual contract customers have fewer opportunities to churn since they can only cancel once a year instead of monthly or quarterly. Additionally, these types of customers will likely pay more upfront. Because of this financial commitment, they will make an effort to get the most use out of your product and integrate it into their essential work operations.
Introduce Additional Features to Expand Your Product Line
As your SaaS business grows and you’ve had some time to acquire customers, prove your product-market fit and earn loyal brand champions, you’ll probably start to expand your product line. A great way to drive more expansion revenue is by creating new products or adding additional services that enhance your value further to your customers.
If you’re able to build on your original product offering with additions that help your customer base, you’ll reduce churn in the long run because you’re making your product more valuable for them.
Go Upmarket to Attract the High-Value Clients
If you’re just starting out, you’re likely catering to lots of SMBs, and that can be a great thing. However, it can limit you to a higher churn rate. Of course, when you move upmarket, that changes.
Moving upmarket means you can pursue those large enterprise clients who favor more extended contracts. These high-value clients will help you expand your revenue and reduce your churn. In fact, SaaS companies often make a move upmarket for this very reason. The pool of enterprise customers is smaller, but the chance of churn is less.
Remember, Rome wasn’t built in a day. Moving upmarket will be something that is achieved slowly with time. You’ll notice that you will attract more enterprise clients when your product expands and matures, your workforce grows, and you develop your accounts team to serve enterprise clients.
All too often, SaaS companies tout their new customer acquisition numbers but neglect to address their churn rate successfully. By focusing most efforts on signing new customers, they could be ignoring revenue loss when those customers churn, an issue that can easily be rectified. You need a strategy to improve customer churn as early as possible. It should be just as high of a priority as acquiring new customers.
Revenue churn at its most basic measures the percentage of revenue lost over a certain period. Logo (Customer) Churn measures the percentage of customers lost over a certain period of time.
Net Revenue Retention Rate % = (Revenue at Start of Time Period + Expansion Revenue - Churn Revenue) / (Revenue at the Start of the Period) x 100 Logo Churn Rate % = (Total Customers Churned in a Period) / (Total Customers at the Beginning of the Period) x100
Industry-wide, a good SaaS churn rate benchmark falls between 5% - 7% for annual churn, roughly 0.5% monthly churn.
Target different parts of the customer lifecycle to reduce churn. Begin building rapport in the early stage by creating a thorough and helpful onboarding experience. Then build exceptional customer success through helpful self-service tools, attentive staff, and gathering customer feedback consistently. Finally, look for revenue expansion opportunities in the later stage of the customer lifecycle.
Dunning emails can help recapture customers and stop them from churning.
Move upmarket to attract higher-value customers and reduce your churn rate.
Remember, you don’t need to have it all figured out right now. Improvement takes time, iteration, and dedication!