Understanding Churn Rate Benchmarks For B2B Tech SaaS Companies

Welcome to this installment of SaaS University, where we dive into churn rate benchmarks, averages, calculations, and strategies to help you reduce churn and grow your business. In your role, you know the importance of using churn rate is for assessing customer retention and the overall health of your business. This guide is designed to give you actionable insights and tools to keep your customers engaged and reduce churn effectively.

We've based our research on well-respected sources like the KeyBanc Capital Markets (KBCM) Technology Group's 13th annual Private SaaS Company Survey. This survey provides benchmarks that help you understand how your company compares to others in the industry and uncover areas for improvement.

About the survey cohort:

• Responses came from senior executives at over 100 privately-held SaaS companies worldwide.
• 62% of the companies are based in the US, and 19% are in the EU.
• Nearly 80% of participants had more than $5 million in Annual Recurring Revenue (ARR).

What is the Average Churn Rate for SaaS Companies in B2B Tech?

Breaking Down the Average SaaS Churn Rate

The average churn rate for SaaS companies helps you understand customer retention trends and align your strategies with industry benchmarks. In B2B tech, this rate varies. Previously, a 5-7% monthly churn rate was considered acceptable, but increased competition has pushed companies to aim for even lower rates. To achieve this, maintaining a strong customer base and using churn prevention tools is essential. According to the KBCM survey, the median annual logo churn was 13%.

This was determined by:

• Removing all companies with 2021 annual revenue of less than $5 million.
• Calculating churn based on pre-existing customers lost in 2021 divided by the total customers at year-end 2020.

Key findings:

• 4 companies reported zero churn, which is rare but impressive.
• 4 companies reported logo churn over 30%, with 2 exceeding 40%, indicating potential problems in customer retention.

Comparing Annual Churn Rate to Monthly Churn Rate

Both annual and monthly churn rates provide insights into customer retention, but they serve different purposes. Monthly churn shows an immediate snapshot of customer departures, while annual churn gives a broader view that can smooth out short-term changes. Understanding both metrics is essential for a full picture of your business's churn dynamics.

Consider the following:

• How do your current churn rates compare between monthly and annual metrics?
• Are there seasonal factors impacting your churn rate?
• Are you tracking trends in your churn rate to see if your interventions are working?
• How effective are your retention strategies, and are you measuring their impact?

If you struggle with any of these, Churn Assassin is designed to help you understand your Churn rates, and give you a complete picture of the health of all of your accounts, which strategies are effective, and which accounts are most at risk so you can focus your customer retention efforts where they have the most potential to help avoid customer account cancellation. 

How to Calculate Churn Rate for Your Business?

Understanding the Metric: Calculating Monthly and Annual Churn

Accurately calculating churn metrics is foundational for understanding business health; for more detailed calculation techniques and methods, explore our Comprehensive Guide on Customer Churn Analysis. Below, we walk you through the calculations so you can get an idea of how they work.

Monthly Churn Rate Calculation

1. Identify the Number of Customers at the Start of the Month**:  This is your starting point. Knowing your customer base at the beginning of the period helps in accurately assessing the impact of churn.
2. Count the Number of Customers Lost During the Month**:  This does not include new sales within the month. It's purely the count of customers who decided to discontinue their service.
3. Calculate the Monthly Churn Rate:  You divide the number of customers lost by the total number of customers at the start of the month using the formula

# of Customers Lost during the Month
divided by
# of Customers at the Start of the Month 
Then Multiplied by
100

This gives you a percentage that represents your monthly churn rate.

Annual Churn Rate Calculation

1. Total Lost Customers Over the Year: Sum up the number of customers lost each month throughout the year to understand the lot of churn you're dealing with.
2. Starting Customer Base: Use the number of customers you had at the beginning of the year.
3. Calculate the Annual Churn Rate: Applying a similar formula over a year,

Total Number of Customers Lost During the Year 
divided by
Number of Customers at the Start of the Year
multiplied by
100

This annual churn rate provides a broader perspective on how retention and attrition have trended over time, which is essential for calculating the median annual churn rate.

Importance of Churn Rate

• Evaluating Business Health: A low churn rate points to a healthy business with satisfied customers, while a high churn rate might indicate underlying issues with the product or service.
• Retention Strategy Assessment: By understanding your churn rate, you can gauge the effectiveness of your customer retention efforts and understand if you're experiencing a lot of churn. Successful strategies should lead to a decrease in churn over time.
• Revenue Impact Insight: Churn directly affects recurring revenue, especially in the SaaS model where subscription-based revenue is a key financial pillar. Understanding churn helps in forecasting and adjusting strategies for revenue generation.
• Benchmarking: Knowing the average churn rate in your sector, like the HR tech sector, helps in benchmarking your company's performance against industry standards. What's an acceptable churn rate? It often ranges between 3 to 5% monthly for many SaaS businesses, but it's essential to consider specific industry nuances.

Monitoring your churn rate is about retention and overall financial health; learn more about how churn impacts SaaS companies in this Key SaaS Statistics Revealed overview.

Implementing Improvements

Once you've accurately calculated your churn rate, use this insight to gauge the effectiveness of improvements for customer retention. Common areas you should consider are:

1. Improve Customer Success Programs: Ensure customers feel supported with regular check-ins and personalized guidance.
   Are we connecting with customers often enough to understand their needs?
2. Enhance Personalized Support and Feedback: Strengthen relationships by listening to feedback and offering tailored support.
   How can we better personalize our support to meet individual needs?
3. Use Predictive Analytics to Identify Risks: Spot potential churn early by leveraging tools that help identify at-risk customers.
   Are we using data effectively to know when a customer might leave?
4. Upgrade Customer Experience: Simplify product use, improve onboarding, and provide steady support for a smoother journey.
   What steps can we take to make our customer experience even better?
5. Speed Up and Improve Customer Support: Ensure fast, helpful responses to make customers feel valued.
   Are we responding quickly and effectively enough to customer needs?
6. Create Personalized Retention Plans: Show customers we care with special offers, tailored plans, and proactive engagement.
   What personalized plans can we implement to show our commitment to each customer?
7. Continuously Showcase Product Value: Regularly update and highlight how the product benefits customers to keep them engaged.
   How can we better communicate our product’s value over time?

The Importance of Revenue Churn vs. Customer Churn

Revenue churn and customer churn are two dimensions of churn analysis, with the former often highlighted in SaaS surveys as a key metric. While customer churn focuses on the loss of customers, revenue churn measures the impact of lost customers on monthly recurring revenue. You must differentiate between customer churn and revenue churn. Customer churn could be like losing a group of small fish—each one matters, but the overall impact may be minimal. Revenue churn, on the other hand, could be like losing a whale—it can leave a significant gap. Losing a high-value customer is more painful than losing multiple smaller ones, as the impact on your revenue is much greater. Imagine this: would you rather lose ten small accounts or just one that contributes half your revenue? There's more on this topic in this in-depth article.

Customer Churn

Customer churn refers to the number of customers who discontinue their subscription or service within a specific period. A high customer churn rate indicates indicates dissatisfaction with the product, service, pricing, or customer support, among other factors. It's an important metric because acquiring new customers is generally more costly than retaining existing ones. Therefore, work to get an understanding of why customers leave to improve your service and reduce financial loss.

Revenue Churn

While customer churn focuses on the number of departing customers, revenue churn is concerned with the financial impact of these losses. Revenue churn measures the amount of recurring revenue lost in a given period due to customer churn, downgrades, or contract cancellations.

Unlike business to consumer businesses, B2B SaaS company annual contract values often vary significantly between clients. Losing a few high-value clients could have a disproportionate impact on revenue, even if the overall number of customers lost is relatively low. This is why focusing solely on customer churn can sometimes be misleading; a company might maintain or even grow its customer base while still experiencing a decline in revenue if it is primarily losing high-value customers.

Balancing Customer and Revenue Churn

Unfortunately, there's no universal solution you can look up online. It takes research, intuition, and the willingness to adapt. Mistakes will happen, and that’s okay—what matters is striving for balance.

Focusing too much on your largest customers can be like building your house on sand. These big clients often have specialized needs that might not align with your product's core vision. If you bend too far to accommodate them, you risk losing sight of your broader customer base—and if that big client leaves, it could leave your business vulnerable. Remember, today's small customer might be tomorrow's major client.

Ask yourself: are you sacrificing long-term stability for short-term gains? You need to think deeply about the best strategy, weighing the needs of today against the possible changes in your customer mix in the future. A good goal is to keep a mix of account sizes and closely monitor account health to maintain predictable revenue. Tools like Churn Assassin can help by giving you a clear view of account health and highlighting at-risk accounts so you can take action before it's too late. Using tools helps you manage logo and revenue churn effectively, ensuring you don’t end up with an empty net or a missing whale.

Tools and Techniques for Measuring Churn Rate Accurately

Now that we are talking about tools, it's fair to mention you need the right tools to measure and manage churn. You may need to consult multiple sources like CRMs, product usage data, support databases, and payment history. The more fragmented the data, the harder it is to get a complete picture of account health. Missing something important can lead to costly consequences, right? Centralize your data as much as possible to avoid this risk.

While some use their CRM as the central hub, this may not always be feasible due to access restrictions or system limitations. Regardless, you must find a way to organize your account information to reduce "gathering time." The less time you spend compiling data, the more time you have to analyze what it means and act on it.

Consistency is key when gathering data. Streamlining your approach to data collection saves time and also makes it easier to identify common patterns across accounts. Even if analyzing your customer application usage data requires an ad-hoc approach for now, simplifying wherever possible will pay off. Today, it saves you time; tomorrow, it enables you to use the patterns you found to detect risks sooner and apply those learnings across your customer base.

Naturally, we are big fans of Churn Assassin because it gathers data from all your customer accounts, organizing it by how likely each customer is to churn over the next 3 to 6 months. Along with churn risk insights, it offers renewal probability scores and other helpful data, allowing you to zero in on the customers who need the most attention to drive retention. But we digress...

Points to consider:

• How is fragmented data hindering your ability to fully understand account health?
• What consequences do you deal with, if any, from spending too much time gathering data instead of analyzing it?
• Are there access restrictions or system limitations preventing you from centralizing data, and how can you overcome them?
• Would consistent and automatic data collection help in predicting customer churn more effectively?
• What small steps can you take today to simplify data collection and streamline your churn management process?

What Constitutes a Good Churn Rate for B2B Tech SaaS Companies?

What Goes In to Defining a "Good" Churn Rate in the Context of a SaaS Business?

A good churn rate reflects a balance between unavoidable customer turnover and successful retention. Many factors contribute to customer account churn, making it challenging to manage. Let's have a look at some characteristics that influence account churn.

Factors Influencing Churn:

• Company stage (e.g., early-stage versus mature companies)

• Product stage (e.g., beta version versus fully mature product)

• New entrants into the market increasing competition

• Changes in regulations beginning or ending

• A product gaining or losing a set of features

• Shifts in customer needs or industry trends

• Economic fluctuations affecting customer budgets

• Changes in customer satisfaction or support quality

• Shifts in key personnel at customer companies

• Market consolidation or mergers affecting customer loyalty

As part of your analysis, be sure to score each of these factors by how relevant they are, and how much you can control or influence the effect they have on your ability to retain customers.

Strategies to Reduce Churn and Improve Customer Retention in HR Tech SaaS

Targeting the Root Causes of Customer Churn

Reducing churn starts with understanding why customers leave. Are they dissatisfied? Are they not using your product as intended? Did your internal champion leave, leaving you without a key relationship at the customer? Some of this information is quantitative and easy to gather, while other insights are qualitative and require proactive customer conversations. To get ahead of dissatisfaction, you must talk to your customers long before issues arise.

• What are the root causes of your customer churn?
• Are you gathering customer feedback regularly?
• What is your capacity to have customer conversations?
• What is your ability to prioritize what you hear from customers and action it internally?
• What is your win-back rate, meaning the amount of at-risk customers you successfully rescue and retain?

Regular feedback sessions, usage analysis, and industry monitoring help pinpoint issues early. Implementing effective churn reduction strategies tailored to SaaS companies can make all the difference. Explore our Top Strategies to Reduce Customer Churn for a variety of approaches proven to enhance retention.

Using Data to Preemptively Tackle Involuntary and Voluntary Churn

Data analytics plays a key role in reducing churn. Involuntary churn, such as payment failures, can often be resolved through proactive communication. Voluntary churn, where engagement is declining, needs early intervention. Predictive churn software can help you spot early warning signs and take action.

• Are you using data to track involuntary and voluntary churn?
• How can you use data analytics to improve your retention efforts?

Emerging Trends: How is the SaaS Churn Rate Evolving in the Tech Industry?

The Impact of COVID-19 on SaaS Churn Rates

The pandemic had a mixed impact on churn rates. While some companies saw increased churn due to budget cuts, others experienced growth as clients adapted to remote work and increased digital adoption. Understanding how these trends affected your churn rate helps you understand the trends better.

• How did COVID-19 impact your business's churn rate?
• What is negative churn, and how can it benefit your company?
• How can innovation help in reducing churn?

Negative Churn: Turning Revenue Loss Into Growth

Negative churn happens when revenue from existing customers grows enough to offset any losses. To achieve this, you need strong retention and expansion strategies that continually demonstrate growing value in your product. Predictive models can identify opportunities for expansion, allowing you to focus on customers who are thriving and see the potential of your solutions. While this article emphasizes reducing churn, it's also essential to recognize expansion opportunities by identifying which customers are most successful with your product and likely to view your solutions as capable and valuable.

Conclusion and Next Steps

In conclusion, reducing churn in the competitive B2B tech SaaS sector is achievable with the right strategies, benchmarks, and tools. Regularly analyzing churn metrics—like monthly and annual rates, customer vs. revenue churn—and benchmarking against industry standards gives you a view of how to approach customer retention. As this article emphasized, staying vigilant to these numbers helps your business identify pain points, evaluate the impact of customer satisfaction efforts, and forecast potential risks that could affect revenue stability.

Churn Assassin helps you with retention goals. Equipped with predictive analytics, customizable dashboards, and segmentation tools, Churn Assassin identifies at-risk accounts and provides evidence-based account health so your team can focus retention efforts where they matter most. With real-time data insights, you can address emerging churn signals early, refine onboarding processes, and tune engagement strategies to save as many accounts as  you can.

Ready to take control of your churn rate? Sign up for a free trial of Churn Assassin today and discover how much simpler it is to manage churn and get better customer retention so you can grow a great SaaS business.

In our next installment of SaaS University, we'll discuss what you can do to reduce churn in your business.