What Are Different Types of Churn, How To Measure It in SaaS, and What To Do After Churn Calculation?
How can you make the best use of SaaS churn calculation?
The churn rate is a critical metric for all subscription-based businesses. No matter how high your recurring revenue is, you will not recover your customer acquisition costs if your churn rate is too high.
To learn more about the different types of churn you should measure and how they can be used to drive customer retention, read this article.
- In SaaS, the churn rate is the percentage of customers who cancel their subscriptions in a given time frame.
- There are four different types of churn: customer churn, revenue churn, gross MRR churn, and net churn.
- A low churn rate improves your MRR, customer lifetime revenue, and customer retention rate.
- A good monthly churn rate for SaaS businesses is below 1%. However, SaaS companies that target SMBs can have a 10-15% monthly churn rate in the first year, which should fall to 3-5% later on.
- Companies should regularly collect customer feedback on metrics such as customer satisfaction and use their insights to improve user experience and decrease churn.
- Tracking user behavior using an analytics tool like Userpilot gives you valuable insights into how users interact with your product and what engages them the most.
- Personalizing onboarding experiences for different customer segments based on their use case helps drive product adoption and boost retention.
- Providing in-app self-service support in the form of resource centers allow customers to get quick solutions to common problems and reduce friction.
- Using in-app churn surveys, businesses can figure out users’ grievances and offer alternatives to churning based on the responses.
What is churn in SaaS?
The churn rate in SaaS indicates how many customers leave your product during any given period. The two major factors that contribute to profitability are activation and retention, so reducing churn is crucial for all SaaS companies.
What are the different types of churn?
There are 4 types of churn in SaaS. These are:
- Customer churn
- Revenue churn
- Gross churn rate
- Net churn rate.
Now let’s have a look at each one.
Customer churn is the percentage of customers who canceled their subscriptions with your business within a given period.
Customer churn rate calculation formula
Calculate the customer churn rate by dividing the number of lost customers by the number present at the beginning of a period and multiplying the result by 100.
Suppose you had 300 customers at the beginning of July that dwindled by 20 customers by the end of the month. This makes your churn rate: (20/400) x 100% = 5%.
Gross Churn Rate
Known as the gross MRR churn rate, this metric is the percentage of total monthly revenue lost from contracts canceled by your users. It includes any money lost from both downgrades and cancellations.
Gross churn rate calculation formula
The gross churn rate is equal to the total MRR churn in a given month divided by the total MRR at the beginning of that month, multiplied by 100.
For instance, if your MRR for November amounts to $120,000 and users cancel $15,000 worth of contract, your gross churn rate will be: (15,000/120,000) x 100% = 12.5%.
Net Churn Rate
The net revenue churn rate gives you the percentage of revenue that is lost from downgrades and cancellations after accounting for the expansion MRR generated from existing customers.
Net churn rate calculation formula
The net churn rate formula is the ratio of the difference between revenue lost and new revenue earned in a given period to the total revenue at the start of that period.
Drawing from the previous example, let’s consider that you have a starting MRR of $80,000 and the contract losses are $8,000. This time, a few customers upgraded to the premium plan, generating an additional $4,000 in revenue.
So, the net revenue churn stands at: (8,000-4,000)/80,000 = 0.05. Multiply this ratio by 100 to get a percentage figure of 5%.
Revenue churn, or MRR churn, is a measure of how much MRR your business loses from existing customers in a certain time period. It includes users downgrading their plans.
Revenue churn rate calculation formula
You can measure this metric by dividing the revenue you lost from existing customers in a given time period by the revenue present at the start of the period.
For example, if your December loss from downgrades is $3,000 while the MRR is $75,000, your revenue churn is 0.04.
Why is churn rate calculation important?
As previously mentioned, tracking the churn rate is imperative for subscription-based businesses. Moreover, a high churn rate has a direct impact on other SaaS growth metrics, making it all the more important to pay close attention to the metric.
An adequately low churn rate improves your MRR, customer lifetime revenue, and customer retention rate.
Monthly recurring revenue
The monthly recurring revenue is the amount you earn from all active subscriptions every month. MRR provides a correlation between customers and their subscriptions, revealing their renewal behavior to you. While a rising MRR suggests an increase in renewal rates or acquisitions, a falling MRR can mean high net churn.
Customer lifetime revenue
Customer lifetime value is the expected revenue stream from a user throughout the life of their relationship with you. CLV not only analyzes past and present users but also forecasts future earnings.
Customer retention rate
The retention rate measures the percentage of customers you have retained as active users in a given period. According to SaaSScout, even businesses that retain as low as 5% of users can raise profits by 25-95%. Since product optimization is a never-ending process, you are constantly investing in your product. And retention helps you recoup the investment.
What is an acceptable customer churn rate?
A zero churn rate is idealistic and, not to mention, highly impractical. Instead, you should strive to reach negative churn, a point at which the revenue earned exceeds any losses from churn.
There is no standard benchmark for an acceptable churn rate. Always target to reduce churn and compare present figures to values a week/month/year ago.
In the SaaS industry, a good monthly churn rate is typically below 1% and lies within 5-7% for yearly churn. Note that startups or SaaS businesses targeting SMBs tend to struggle with higher rates than these benchmarks.
Thus, they should start with a more humble rate and work toward improving it later on. Their monthly rate should be between 10-15% in the first year and decrease to 3-5% over time.
What to do after churn calculation to improve retention?
Now is the time to incorporate the insights from SaaS churn calculation into your retention strategies. So here are some tactics to cover one of them – churn reduction.
Ask for feedback across different stages of the user journey and act promptly
Customer feedback is one of the most important ways of knowing where to make improvements in product design and experiences.
Use microsurveys to gather user feedback at different stages of the user journey. Bite-sized and to the point, these surveys are usually displayed in-app, which makes it easier for users to give you more data.
You will need to use different types of in-app surveys like NPS (Net Promoter Score) surveys, customer satisfaction surveys, and surveys for feature requests and customer health scores.
You can set triggers to show these surveys only to certain groups of customers to target specific segments, such as customers who have low feature adoption rates.
Once you have the data at hand, you can make informed decisions regarding your product roadmap. Take quick steps to remove friction points across your user journey and improve in-app experiences.
Track in-app user behavior and identify at-risk customers
Tracking and analyzing in-app user behavior presents a pattern in user interactions with your product.
Suppose that you have launched a new feature and want to know who adopted it and how they discovered it in the first place. Product analytics tools can record and tell you the path taken by different users.
You can also do this to identify disengaged users who are more likely to leave so that you can take proactive measures to help them gain more value from your product.
The image below shows how Userpilot lets you track feature engagement without coding. You can just tag a feature using the UI and monitor the metric without even setting custom events.
Moreover, Userpilot offers advanced segmentation capabilities that make the analyses even more detailed and valuable. By segmenting customers according to their behavioral traits, you can personalize onboarding experiences for each group and boost user engagement.
Let’s dive deeper into how onboarding can reduce the SaaS churn rate.
Perfect your onboarding flow for new customers
Onboarding does not end with the initial AHA moment. Customers should be able to experience multiple such moments along their journey as they unlock more features that would bring them value.
A great onboarding flow is a key to user activation and retention. Personalize onboarding as much as you can to drive continuous value for your customers.
For example, you can create welcome screens to not only introduce yourself to customers but also segment them according to their goals and needs. This helps to customize product experiences to suit their specific use case.
Other onboarding elements like tooltips, checklists, and interactive walkthroughs guide customers on how to make the best use of your product. What’s more, you can trigger them to appear contextually, i.e., right when users need them.
For instance, Rocketbots provides a checklist to users after they sign up that directs them to the activation point.
Use an in-app resource center to help users find support quickly
Customer satisfaction is key to your overall SaaS growth. This makes in-app self-service support a valuable tool for a SaaS company to scale its business.
An in-app resource center is one of the most efficient means of offering self-service support. Users can stay inside your product while looking for solutions to their problems, typically those of repetitive nature.
You can include a link to your knowledge base and other educational resources in your help center. Plus, a help center includes other helpful elements like open chats and FAQs.
The instant gratification earned from such customer support gives users a sense of accomplishment. It saves time for both the customers and the support agents, who can pay more attention to more complex issues.
Additionally, resource centers reduce friction and shorten the learning curve with their guides. Such excellent services translate into less frustration, high customer satisfaction, and reduced churn rates.
Use churn surveys to understand why users are leaving
Churn surveys are one type of microsurvey that you can send to users when they are on the verge of leaving.
You can use these surveys to understand why customers leave. You can learn what their pain points are and start strategizing how to resolve them.
It is best to use them in-app since users will see them right after they hit the cancel button. In comparison to emails that can get lost in the inbox, in-app surveys ensure a higher completion rate.
The survey also lets you offer alternative solutions to churn based on the responses, e.g., pausing their accounts.
The questions in churn surveys can be multiple-choice or open-ended, or both, like the one shown below. Having mixed questions serves two purposes:
- The multiple-choice format helps users give answers easily.
- The optional open-ended questions let them give more detailed reasoning if they wish to.
Churn is one of the most important metrics you need to improve if you want to have sustainable growth. To get the big picture of your financial situation, you should consider all of its 4 types: customer churn, revenue churn, gross MRR churn, and net churn.
A low churn rate positively impacts 3 other critical SaaS metrics – monthly recurring revenue, customer lifetime revenue, and retention rate. This makes it necessary to minimize churn to acceptable benchmark rates.
Want to gain valuable insights and analyze SaaS churn calculation? Get a Userpilot demo and start improving your customer retention.