Understanding SaaS Churn Rate: Strategies to get Improvements

This guide dives into what SaaS churn is, how to calculate it, and, most importantly, proven strategies to reduce churn. Buckle up, because we are taking you through all of the important concepts so you can increase monthly recurring revenue (MRR) and drive sustainable business growth. As you read, ask yourself how these insights can be applied to your specific case?

You already know that to be successful in the rapidly changing world of Software as a Service (SaaS), especially B2B Tech companies, you must understand and manage churn. Monitoring average SaaS churn rates and other metrics gives data based insights into customer retention and revenue stability. Among the key SaaS metrics, churn rate stands out as it directly influences both financial health and long-term growth.

What is SaaS Churn and Why is it a Critical Metric in the B2B Tech Sector?

Defining SaaS Churn and its Importance in the SaaS Business Model

In the SaaS industry, churn rate reflects the percentage of customers who cancel their subscriptions within a specific timeframe. Churn rate directly impacts monthly recurring revenue (MRR) and annual recurring revenue (ARR)—the lifelines of your SaaS business. A lower churn rate signals a healthier business with loyal customers, while a higher churn rate may indicate issues with customer satisfaction, product-market fit, or competitive positioning.

Key Points on Churn and Customer Retention

Churn rate influences MRR, ARR, and the overall health of your business.
A lower churn rate often indicates customer loyalty and product-market alignment, while a higher churn rate may signal areas for improvement.
Early stage products and companies usually have higher churn rates than mature competitors. This is natural and part of the process to find the best product market fit. If the churn rate is too low, you may be giving up too much value, or not trying enough experiments to find broader product market fit. Be careful though, too much churn equals Game Over.
There are many ways to reduce churn, your job is find the right mix that works for your resources and customers. Here's a few common areas to get your thought :
- Enhancing product features based on customer feedback (e.g., you could see a reduction in churn by adding features highly requested by your users)
- Providing exceptional customer support and engagement (e.g., implementing 24/7 live chat support could help improve customer retention)
- Offering incentives to boost loyalty and retention (e.g., using loyalty discounts might successfully reduce churn rates)

Key takeaway: Monitoring churn rate helps SaaS companies recognize customer retention trends, identify potential issues, and develop strategies to improve customer lifetime value (CLV) and revenue predictability before customers issue cancellation notices.

How to Calculate Customer Churn Rate and Retention Rate to Reduce Churn

To calculate churn rate for your SaaS business, you'll identify the percentage of customers who have discontinued their service over a specific period, whether monthly or annually. For educational reasons, I'll give you the most straightforward calculation. You can choose use more nuanced ways later to evaluate different customer segments or assign weights based on customer value. The math process will be the same, you'll just be adding some different factors or splitting the calculation up.

For monthly churn rate, divide the number of customers lost during the month by the total customer count at the beginning of that month. For an annual churn rate, apply this calculation over a year, while also considering how churn patterns may vary across different time frames and impact metrics like gross churn and net MRR churn on a yearly basis. It’s important to distinguish between customer churn and revenue churn, as each offers a different business health perspective.

Calculating Churn Rate

To calculate churn rate, use the following formula:

Churn Rate = (Number of Canceled Customers During Period / Total Customers 
at Start of Period) x 100

Example Calculation:

If 20 customers cancel out of a starting base of 100 customers within a month:

Churn Rate = (20 / 100) x 100 = 20%

The Impact of High Churn Rates on SaaS Businesses

A high churn rate is like constantly losing water from a leaky bucket—it slows MRR growth and can negatively affect the brand reputation, making it harder to attract new customers. When churn rates are high, you are forced to pour more resources into customer acquisition just to maintain current revenue levels, diverting funds that could otherwise be invested in innovation or expansion. For some reason, retention efforts get less internal love than acquisition efforts. Perhaps because of inflated expectations that customers will love the product as much as you loved selling it to them. Regardless of why, managing and reducing churn is a must for sustaining growth and competitive edge.

Breaking Down the Different Types of Churn in SaaS

Customer Churn vs. Revenue Churn: Understanding the Differences

The business health indicators Customer Churn Rate and Revenue Churn Rate, are calculated in a similar manner, but show different aspects. Customer churn measures the number of customers who cancel, revenue churn focuses on the actual amount of MRR lost due to these cancellations—often referred to as gross churn in the subscription business.

Wise B2B tech SaaS companies monitor both metrics closely. Churn rate may be more commonly known, but revenue churn rate is the leading KPI influencing retention strategy development for high-revenue customers, such as personalized outreach, customized product offerings, or loyalty programs to prevent revenue losses. Sometimes, a small group of departing customers can account for a large portion of total revenue, revealing vulnerabilities that customer count alone may not show.

Key distinctions to keep in mind (There may be a test later):

Customer Churn: How many customers canceled their subscriptions in a given period?
Revenue Churn (MRR Churn): How much MRR was lost from cancellations?
Gross Churn: What is the total revenue lost from churned customers, excluding new revenue from upgrades or subscriptions?

Key takeaway: High customer retention rates may not fully reflect business health if departing customers represent a substantial revenue segment.

Involuntary Churn: What It Is and How to Prevent It

Involuntary churn, often caused by failed payment methods, happens when customers unintentionally lose their subscriptions—a common issue in the subscription business. Have you ever forgotten to update your credit card details and lost access to a service you wanted to keep? Though frequently overlooked, involuntary churn can have a substantial impact on MRR, making it essential to closely track the MRR churn rate. This one is an easy win. To minimize involuntary churn, take a look at your dunning and communication plans and make sure you have timely reminders about upcoming payments and prompts for customers to keep payment information current.

The Role of Onboarding in Reducing Early Churn

Effective onboarding reduces early churn and improves the annual churn rate. Helping new customers quickly adopt and find value in your product sets the foundation for lasting satisfaction and loyalty. Customers can't use the value they don't know about or can't find in your application so the burden is on you to make sure they can easily use the product to get the value they expect. Most customers won't reach out, they'll just "get busy with something else" then cancel their account later.

7 Onboarding Questions You Should Ask Yourself:

How effectively does your onboarding process guide new customers? (Be honest about how you gauge this. What data are you using?)
If you were to make 2 small changes in your customer onboarding, which two would make the most difference?
Are there other specific steps that could be streamlined to improve the user experience?
Is your customer support accessible enough during onboarding? If you aren't sure, run a report tracking customers who cancelled their accounts and never have a record of contacting your support.
What additional support channels could be provided to enhance the customer experience? (Note: This doesn't necessarily mean you need to add a high-touch channel. Think creatively)
How have you tailored your training materials to address the types of customers that purchase?
What is your process to handle customer feedback? (Do customers feel heard, even if you can't take immediate action on their feedback?)

These strategies can help you create a targeted retention approach. The right mix will depend on the nature of your SaaS application, but these ideas offer a strong starting point.

Best Practices to Reduce Your SaaS Churn Rate Effectively

Implementing Targeted Customer Retention Strategies

You'll satisfy more customer segments when you build targeted retention strategies. Good targeted retention strategies are heavily influenced by customer data. Make sure you collect and verify customer data so you can trust your analysis and identify the best tactics for customer behaviors and preferences to implement personalized content, feature updates, and offers that boost retention. Group customers into segments that share the types of characteristics you can address from a retention basis. Seasonal customers may respond to off-season discounting. Early adopter types may respond to getting access to the shiny but incomplete features.

Also, it's worth keeping in mind the number of groups you can handle from a resource perspective. If you go nuts creating a complex strategy you can't implement it's not going to help your churn metrics. Most businesses are sensitive to the time and resource costs, so it's important to be practical. The only thing worse than no groups is too many groups. Implementing customer retention tools can significantly enhance your ability to monitor churn and sustain growth.

Some examples include:

Who are your high-value customers? Who makes frequent purchases, spends more, or has been with your company for a long time?
How can you segment customers based on behavior? What patterns or trends can you identify to group customers effectively?
Are you personalizing communication? How can you use past purchases, browsing history, or preferences to engage customers?
Can you offer personalized recommendations? How can you use customer interests or purchase history to recommend relevant products or services?
Are you monitoring customer satisfaction? What feedback can you use to identify issues before they lead to churn?

Key takeaway: Targeted retention strategies based on customer data help create personalized engagement that customers value, leading to higher retention rates. Are you grouping your customers effectively to maximize retention efforts?

Enhancing Customer Experience to Foster Loyalty

Improving the overall customer experience reduces churn. This doesn't just mean enhancing the user interface and adding more product features but also ensuring strong customer support and regular engagement. Both support and engagement may not show up on the product roadmap, but are key elements in churn rate improvement and effective gross churn management. As I am sure you can relate, an exceptional customer experience fosters loyalty and turns customers into advocates for your SaaS product.

Points to consider:

Do you provide excellent customer support? Is your support team responsive, knowledgeable, and helpful? Are you offering multiple channels for support, like email, phone, live chat, or self-service resources? Are you proactive in addressing customer issues before they escalate?
How often do you engage with customers? Are you keeping in touch through newsletters, email updates, webinars, and social media? Are you informing them about new features, updates, and events? Are you soliciting feedback and actively listening to their suggestions and concerns?
Is the user experience personalized? Are you using data analytics and segmentation to personalize the user experience? Do you offer tailored recommendations, content, and promotions based on individual preferences? Are you showing customers that you understand their needs and are committed to providing value?
Is the onboarding process simple? Is onboarding smooth and intuitive? Do you provide clear instructions, tutorials, and resources to help new customers get started? Are you offering guidance and support to ensure a positive first impression?
How are you rewarding customer loyalty? Are you showing appreciation for loyal customers with exclusive perks, discounts, or rewards? Have you created loyalty or referral programs to keep customers engaged and encourage them to share positive experiences?
Are you measuring customer satisfaction? Are you using surveys, Net Promoter Score (NPS), and other metrics to track satisfaction? Are you identifying areas for improvement and taking proactive steps to address any issues affecting retention?

Focus on improving the overall customer experience to build loyalty. Loyal customers are more likely to renew subscriptions and recommend your SaaS product. Managing churn through great customer experiences drives growth and success. Are you actively managing the entire customer journey? Do you know what aspects of your customer experience need the most improvement? How are you ensuring every interaction adds value for your customers?

Using Customer Feedback to Address Pain Points

Actively seeking out and leveraging customer feedback is essential to identify and address product or service pain points. Regular surveys, NPS (Net Promoter Score) assessments, and customer forum reviews reveal valuable insights about customer dissatisfaction and areas for improvement. By addressing these issues promptly, SaaS companies can significantly improve customer satisfaction and reduce churn rates, aligning their metrics closer to the churn rate by industry standards.

Helpful tip: Don't shy away from adding a free text field or two on your NPS survey. Not everyone's satisfaction can be boiled down to a simple number. Plus, you never know what insights you will glean by merely providing an opportunity for open feedback.

How to Use Churn Calculation to Drive Improvement

The Cheat Sheet Formulas for Calculating Monthly, MRR Churn and Annual, ARR, Churn Rates

Monthly Churn Rate Formula: Churn Rate = (Number of Customers Lost During Month / Total Customers at Start of Month) * 100
Monthly MRR Churn Rate Formula: MRR Churn Rate = (MRR Lost Due to Cancellations During Month / Total MRR at Start of Month) * 100
Annual Churn Rate Formula: Churn Rate = (Number of Customers Lost During Year / Total Customers at Start of Year) * 100
Annual ARR Churn Rate Formula: ARR Churn Rate = (ARR Lost Due to Cancellations During Year / Total ARR at Start of Year) * 100

Interpreting Your Churn Rate: Benchmarks and Industry Standards to Discover Average Churn Rate

Understanding how your churn rate compares to industry benchmarks and standards is essential for gauging your SaaS company's performance and understanding the average churn rate within your sector. Acceptable churn rates vary by market segment and product maturity. Below are two surveys of SaaS businesses you can look at to understand better what the market looks like and how your business compares on key facets.

Using Churn Metrics to Identify Improvement Opportunities

Churn metrics provide insights beyond current performance; they highlight opportunities for product or service enhancements. By analyzing why customers leave, you can identify common pain points, areas where competitors outperform you, or opportunities for new features that could reduce churn and boost customer satisfaction. Make sure to organize the analysis into formats other groups can use, like Product Management, Product Marketing, and Sales. Those groups may not dive into the raw numbers with the same enthusiasm as you do, but will be influenced by good data presented properly. The goal is for the analysis to influence as much the product and acquisition groups as the retention groups.

Exploring the Impact of Churn on MRR (Monthly Recurring Revenue) and Overall Success in SaaS

The Relationship Between Churn Rate and MRR Growth

The link between churn rate and MRR growth is direct. High churn quickly erodes MRR, making sustainable growth difficult. Reducing churn improves retention and stabilizes MRR since keeping existing customers is more cost-effective than acquiring new ones. What aspects of your onboarding could be enhanced to better support MRR growth?

Strategies for Achieving Negative Churn

Negative churn occurs when expansion revenue from existing customers exceeds revenue lost through cancellations or downgrades. Achieving negative churn indicates customers are increasing their investment in your product, which boosts average revenue per user (ARPU). Upselling, cross-selling, and excellent customer service are key strategies for turning churn into growth opportunities and improving net MRR churn. Many companies find it difficult to upsell and cross-sell because the customer relationships may not be broad enough to understand customer pain and influence the teams involved. You can do a better job with this by keeping customers longer and fostering loyalty so relationships can have time to strengthen.

Key takeaway: It's worth asking yourself, do you already have a good process to upsell and cross-sell based on relationships? If not, what could be done to improve this?

Conclusion and Next Steps: Churn Rate Benchmarks and Metrics

Successful SaaS companies with low churn rates invest in customer success, prioritize product innovation based on feedback, and use data analytics for personalized engagement. These practices help minimize churn and foster loyalty, driving MRR growth and positively impacting churn.

In our next article, we'll dive into churn rate benchmarks for B2B tech SaaS companies. We'll explore what constitutes a good churn rate, how B2B Tech compares across industries, and the best tools and techniques for measuring churn accurately.