What is a Good SaaS Churn Rate for Your B2B Business?

Are you struggling to understand what a reasonable churn rate looks like? There's so much advice out there, but how do you know what to trust? Think of internet advice like searching for answers about a pesky medical condition, you know, lots of expert-sounding words, but rarely tailored to your specific situation. So, take benchmarks with a grain of salt!

The truth is, when you strip away the "industry benchmarks" and generic advice for SaaS companies, there isn’t much that truly helps you determine if you’re on the right path. The specifics of your business matter.

For example, if you're an early-stage company investing heavily in awareness, you may attract lots of trial users, many of whom aren’t a perfect fit. Naturally, many will leave when they realize they need more than what you offer. However, some stay, and that adds to your bottom line. Plus, you get to expand your Ideal Customer Profile (ICP) and gain new insights. Should you worry if you have a higher churn rate than the "industry benchmark" in this scenario? I’d argue it’s not a big deal. You weren’t optimizing for SaaS metrics, rather, you were running a growth experiment. Sure, your SaaS metrics might look messier than if you’d played it safe, but you grew and learned something new. Isn’t that what really matters?

So, let's explore the factors that affect a company's churn and recurring revenue to help you make the best decisions now and interpret them correctly later. In this article, we'll dive into what a good churn rate looks like, how to find the ideal churn rate for your business, and the steps you can take to reduce it.

How to Find a Good Customer Churn Rate for B2B SaaS 

As you may have guessed, there's no one-size-fits-all answer when it comes to pretty much anything. While you felt that was the case, wasn't it nice someone else said it? We know industry experts suggest that an annual average churn rate for SaaS companies less than 5% is a healthy target and if its higher, you must look at your whole product experience and figure out what might need improvement. Churn rate benchmarks are an overly simplistic tool in this case that can influence you to make more conservative decisions. 

See, an acceptable churn rate for your business depends on several factors, including your company's stage, product maturity, and the competitive landscape. For early-stage companies, churn rates are often higher because you're still finding product-market fit, refining sales and marketing processes, and making tough prioritization choices that leave some product features underdeveloped. As your business and product mature, the goal is to reduce churn through disciplined decision-making, but don't feel pressured to match arbitrary benchmarks no matter what the first result on Google said. Focus on making the right choices for your current stage and growth path.

Factors That Influence Your SaaS Churn Rate 

Many factors are in play here. One easy factor is the churn rate by industry. Who you sell to affects how well you can sell and retain them. Below, we'll explore each factor in detail, why it matters, and provide reflective questions to help you assess its impact on your business.

How Your Company Stage May Influence Average Churn Rate

The stage of your company significantly influences churn rates. Early-stage companies experience higher churn because they are still finding their product-market fit, experimenting with marketing strategies, and refining internal processes, leading to a potentially elevated customer churn rate. At this point, mistakes are common, and the infrastructure needed to support a growing customer base won't be fully developed. In contrast, mature companies benefit from established practices, better-defined marketing approaches, and more staff, which helps keep churn rates lower.

Reflect on your business and consider the impact of customer churn on your overall strategy.

  • How does your current company stage contribute to customer retention or churn?

  • What specific challenges do you face at your stage, and how can you address them?

  • Are there opportunities to better support customers as you transition to the next growth stage?

  • Why might your current stage lead to higher or lower churn rates?

  • Are your customers still testing your product to see if it fits their needs?

  • How can you adjust your strategy to suit your current company stage?

  • Is it possible churn rates aren't as important as other SaaS metrics right now?

Product Stage Affects Customer Retention

If you are doing it right, your SaaS product in the early stages will see higher churn compared to mature stages, once you've benefited from customer feedback and refinement. Product maturity builds customer trust and satisfaction. Early-stage products lack features that some customer segments require, and onboarding can be a challenging journey filled with gaps, potentially leading to lower customer retention. Your customer success team may still be understaffed and developing processes, meaning support issues need creative problem-solving instead of relying on established solutions. As a wise product manager once said, "Every product is perfect until the users get to vote."

Reflect on your product:

  • What gaps exist in your current onboarding process, and how can you improve it?

  • Which customer feedback have you acted on, and what impact has it had on customer retention?

  • Are there specific product features that, if refined, could better serve high-value customers and reduce your annual churn rate?

  • How rough is your onboarding process? 

  • Is your product still evolving, or has it reached a mature stage?

  • How often do you gather and implement customer feedback?

  • Are there features you could refine to reduce churn?

New Entrants and Competition Impact B2B SaaS Metrics

New competitors entering the market can offer alternatives that may tempt your customers away, contributing to a higher customer churn rate. They might be drawn to shiny new features or attractive pricing models, which can lead to an increase in customer churn. New entrants often have the advantage of freshness, and they may even take inspiration from your ideas and present them with a new twist.

Reflect on your business:

  • How frequently are new competitors entering your market, and what are they offering that attracts your customers?

  • What unique value does your product provide that your competitors struggle to replicate?

  • How can you reinforce your product's strengths and consistently communicate value to retain customer loyalty? New competitors entering the market can offer alternatives that may tempt your customers away. They might be drawn to shiny new features or attractive pricing models, increasing the risk of high churn. New entrants often have the advantage of freshness, and they may even take inspiration from your ideas and present them with a new twist.

  • Are new competitors entering your market frequently, and how does this impact your revenue churn?

  • What unique value does your product offer that competitors do not?

  • How can you emphasize and communicate your unique value to retain customers?

Economic Factors Aren't Included in Churn Rate Benchmarks

Economic downturns tighten customer budgets, making it tougher to retain them. During tough economic times, customers may cancel subscriptions and cut back on spending. Even the most valuable product can fall victim to the "Ignore the Problem for Now" strategy when budgets are tight. Also, seasonality has an economic effect and in some cases, more often in the B2C realm, customers cancel and reinstate their account if, say their favorite sports team makes the playoffs. This behavior affects both the average monthly churn rate and the revenue churn rate. 

Reflect on your business:

  • Was the benchmark metric you are comparing yourself calculated over a similar economic period? If not, how would you fairly adjust the number?

  • How vulnerable are your customers to economic shifts, and how can you mitigate their concerns?

  • Can you offer flexible pricing or tailored solutions to help customers through challenging times?

  • How can you better demonstrate ROI to prove that your product is an essential investment even during economic uncertainty?

  • How will you separate out involuntary churn, since there wasn't much you could have done about it anyway?

Changing Customer Needs Creates Revenue Churn

As customer needs evolve, your product needs to adapt to stay relevant. If your product doesn't keep up, customers will naturally look elsewhere to meet their changing needs, resulting in a higher customer churn rate. Not all customer segments are worth pursuing, though. It's normal for some segments to become overly demanding, and at times, it's better to let them go. While losing these customers might make your churn rate look worse and lower monthly revenue, it can actually improve your overall business health by allowing you to focus on more sustainable, high-value customers rather than spreading your resources too thin. Not all business is good business, right?

Reflect on your business:

  • How well do you understand the evolving needs of your target customer segments, and what steps can you take to stay aligned?

  • Are there customer needs that are better served by your competitors, and how can you differentiate your solution to reduce your average churn rate?

  • Which customer segments should you prioritize for long-term growth, and which may be better to let go of?

Customer Satisfaction and Pragmatism

Customer support quality and satisfaction levels directly affect whether customers continue using your product, impacting your monthly churn rate. Poor experiences often lead customers to look for better alternatives. While you should always seek to give the best experience possible, if your product or company are in the earlier stages, there's only so much you can do. Learn from poor experiences and try your best to improve where you can, but be reasonable. We can't learn from the experiences we haven't yet had.

Reflect on your business:

  • How satisfied are your customers overall, and which areas of support could use immediate improvement?

  • Are there recurring support issues that, if resolved, could significantly boost customer satisfaction?

  • How can you create a more proactive support strategy that addresses potential concerns before they lead to account cancellation?

Best Practices for A Good Churn Rate

Reducing churn involves a combination of understanding why customers leave and implementing effective strategies to encourage them to stay. Here are some proven techniques for reducing churn in your B2B SaaS business:

  1. Enhance Onboarding: The quality of the customer onboarding experience is one of the most important elements for reducing churn. Make sure customers understand how to use your product effectively.

  2. Leverage Churn Prediction Software: Predictive churn software identifies at-risk customers before they decide to leave, allowing you to intervene.

  3. Improve Customer Support: Quick, efficient, and friendly customer support is a key driver of customer retention.

  4. Engage with Customers Regularly: Keep in touch with your customers, gather feedback, and act on it to keep them satisfied.

  5. Offer Competitive Pricing: Ensure your pricing matches the value you deliver and the customer expectations in your market.

Finding a Good SaaS Churn Rate

Ultimately, finding the best churn rate for your B2B SaaS business is about balance. It requires continuous monitoring, gathering customer feedback, and taking the right steps to satisfy customers.. Tools like churn prevention software or churn analytics are valuable assets in identifying trends and optimizing customer retention.

The goal is to create an environment where your customers are consistently getting value, which will naturally lead to lower churn. Remember, a slight reduction in churn can lead to significant growth over time, making all the effort worthwhile.

Conclusion

To really do this topic justice depends on where you are in your journey and how well you understand your customers. By focusing on customer experience, using predictive tools, and adapting to changes in the market, you can create a sustainable growth path for your business.

Keep an eye on the factors influencing churn, such as product stage, competition, and customer satisfaction, and make informed decisions to keep your churn rate as low as possible. Remember, each step you take to improve customer retention brings you closer to the ideal version of your business.

Next Steps

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