The churn rate measures how many people stop using your product or service in a given amount of time. Put simply, it's how fast your customers are leaving your company. For subscription-based businesses, this number is quite literally your life or death.
If you're shedding 5% of your customer base each month, you'll approach an almost 50% churn rate after a year. Which is why knowing and improving your churn rate isn't just important, it's a matter of survival in today's dog-eat-dog digital world.
ProfitWell's 2024 report reveals also that the B2B SaaS company typically churns about 4.2% of its business in any given month, while consumer subscription services can churn as much as 7-10% of their customers. But here's the kicker: reducing churn by even a small amount, just 5 percent, can increase profits 25 percent to 95 percent, depending on the industry.
Churn rate indicates how quickly customers are leaving. If the holes (churn) are too large, you will never fill it up, no matter how much water (new customers) you pour in.
On the basis of it, the basic formula appears devilishly easy:
Churn Rate = (Customers Lost During Period ÷ Customers at Start of Period) × 100
But here's where it gets interesting. Sometimes when even seasoned marketers try to compare monthly versus annual churn they get confused.
i"Confusing monthly customer churn and annual customer churn is the biggest sin I see"
— Dave Kellogg, SaaS metrics expert
The comparison between customer churn and revenue churn is next-level, though. You might lose 30 small customers but you keep one big one, which results in a high churn but low revenue. Both are important, but for distinct reasons.
Then there is the distinction between gross churn and net churn. Gross churn simply calculates lost sales, it considers new sales from existing customers, unlike net churn. A company can even celebrate negative net churn, the sign that they are adding more revenue from existing customers than they are losing.
The acceptable churn rate is completely different for each industry, business model and type of customer. What some of the latest research in the field demonstrates:
The average monthly churn rate for all B2B SaaS companies is now 4.2%, decreasing from 4.4% in 2023. But size is very important:
Streaming services have higher churn. Netflix has one of the lowest monthly churns in the business, at 2.3-2.5%. Prospective players like Paramount+ have rates that exceed 7%.
Subscription commerce comes in all shapes and sizes:
The telecom industry as a whole typically has a churn of 15% to a higher 25%, but with AI retention strategies, T-Mobile achieved a record low of 0.77% postpaid churn.
Banking and financial services have fairly consistent annual retention rates of 75%, indicating that a quarter of all customers leave per year.
The big problem is that the churn calculation that seems so simple is full of pitfalls that can ruin your analysis. Now onto the correct ways to do it:
Here's how you can work it out: (Customers lost in month ÷ Customers at start of month) × 100
If you have 1,000 customers on the first day of January and 50 of them go away, then your churn rate is 5%.
Never multiply out monthly churn to equal 12. It is the most serious and frequent mistake in churn analysis.
The correct formula is: 1 - (1 - monthly churn rate)^12
For instance, if 2 percent churn per month, 21.5 percent churn annually, not 24 percent.
You can do so with: (Total revenue at the beginning of the period ÷ revenue lost from customers churning) × 100
Sometimes that's an entirely different story from lost customers, especially if a high-value customer leaves.
To observe churn trends over time, segment customers by sign-up or by characteristics. Most SaaS businesses get their churn rate down from 10% in the first month to 4% in the third month.
Today, companies use machine learning to peer into patterns of behavior and venture a guess with 80,90% accuracy when people are about to leave. Some important features are:
The HubSpot Customer Happiness Index (CHI) turned the world on its head with what can be done for churn prediction. It's a comprehensive scoring system that extends beyond usage metrics. They don't need to wait for cancellation signals, instead, they monitor usage in a variety of ways, including how often people blog, how many leads they generate, how many emails they send and their level of activity on social media.
This proactive prevention saved 33% of unhappy customers who would have left otherwise. The true genius of CHI is that it predicts things. It can identify a customer at risk 3 to 6 months before standard metrics are able to do so.
Netflix does this, to a cost of more than $1 billion a year on their algorithm, which currently dictates 80 percent of what viewers watch on the site. Thank's to it's high individualization, they retain users a spectacular 2.3-2.5% of the time, while the industry average for streaming is 5.8%.
Their victory in reclaiming some of their customers is particularly impressive. The industry average is 34 percent of those followers who cancel return within six months. Netflix does better, with 50%. Sixty-one percent of their canceled subscribers return after a year.
What's unique about Amazon Prime is that it takes a value-stacking rather than a personalized approach. By combining shipping, streaming, music and reading benefits, they've created an ecosystem too important in your life to give up.
After year one, 93 percent remain with Prime, and after year two, 98 percent do. The psychology is great. Even if a member uses only one or two of the benefits a lot, the value of the entire package is greater than the annual fee.
T-Mobile turned to machine learning algorithms to study the way its customers behaved and predict how likely they were to churn. As a result of this technology, hyper-personalized retention campaigns can operate and attempt to communicate with customers before they churn. What happened? A record-low 0.77% postpaid churn, which is finally lower than the larger competitors.
Looking at how churn impacts the fundamentals of business explains why it should be the top priority. Churn Rate and CLV are negatively related. If you cut your churning in half, then your CLV is doubled.
Think about the unit economics. If your cost to acquire a customer (CAC) is $500 and your monthly churn rate is 5%, customers have to stick around for 10 months just to recoup the cost of acquiring them. But if churn slips to 2.5%, that same CAC will now fuel profitable growth almost immediately.
The impact on valuation is massive: SaaS companies with sub 3% annual churn will typically fetch 2 to 3 times the multiples of those with 10% or more churn.
i"Churn is a symptom of a much deeper, underlying disease, the disease is not ensuring that your customer achieves their Desired Outcome"
— Lincoln Murphy, Customer Success Expert
Companies create a different mentality around retention when they shift from trying to arrest churn to ensuring success. Public SaaS companies retaining over 120% of net revenue are worth far more than their peers because they've worked out the code on how to grow.
When you lump trial users in with paying customers, the metrics become meaningless. Users who take a trial might quit at 70%, whereas users who pay quit at 5%.
Customers who fail to renew their annual contracts don't leave in 11 months, but they do leave in month 12. Monthly-paying customers churn gradually in the course of a year.
Many companies review their budgets in the fourth quarter, leading to increased churn for B2B SaaS. Consumer subscriptions surge even more after the holidays. Studies in the field indicate that these regularities can be anticipated.
There are two kinds of churn: voluntary churn, which occurs when clients decide to leave, and involuntary churn, which is the failure of payments. Each needs a different solution. For businesses that experience less than 3% churn, you can lower your involuntary churn down to 0.5% or less.
Your churn rate is 5% (5/100) when you begin with 100 customers, add 20 and lose 5 of them. It's not 4.17% (5/120).
The most efficient way to reduce churn is great onboarding. MobileAction reduced the time to value 32% and the amount of new features touched by 38% with guided onboarding flows.
Some important parts are:
Today, most scoring models rely on one predictive score, which blends usage, lifespan, engagement, support interactions, and payment history. Automated workflows initiate interventions when health scores drop below threshold level.
Annual premiums reduce churn 20,40% compared to monthly billing. The answer? Keep the available monthly payment options while offering big discounts for paying the entire year up front.
Customers churn more often than not because they forget why they signed up. If you email them regular value realization reports that demonstrate the actual ROI, time saved, or goals met, then they'll remember why your service matters at all.
They stick around 2,3 times longer if they are in active user communities. They are not just buying a product, they are joining a club.
Lesser churn means higher immediate CLV. The relationship is positive and the exact opposite of what you would expect: half churn doubles CLV.
The expense of acquiring new customers goes down when they stick around. Businesses that don't shed customers frequently can afford to pay more to acquire new ones and still be profitable in the long run.
For one, a low churn rate can make revenue streams more predictable, which is useful for planning and investing decisions. Investors love predictability, and the more stable your retention, the more they'll pay for your company.
It is an obvious point, but unit economics improve when customers remain longer. Margins rise as a result of fixed costs being divided over more revenue.
You have customers who stick around and give you feedback all the time, and that makes you better all the time. They're the perfect partners to help you develop your products.
Businesses that don't lose customers very often can then invest more money into new ideas and bringing their markets to even greater scale, providing them with durable competitive edges.
For B2B SaaS, if the churn rate is less than 5% to 7% a year, it's fantastic, a churn rate of 10% or more means the company has huge issues. Business-to-consumer (B2C) subscription services generally enjoy higher rates, for example 20,30% is not uncommon. Context matters a lot, depending on the industries you are serving and the nature of your business.
Yearly contracts are a different story. Do churn at renewal point, not over the course of months. Monitor both customer count and revenue churn, they don't always align with yearly contracts.
Gross churn is how much money is lost to churn directly, in the form of cancellations and downgrades. Net churn siphons money away from your growing customers. Negative net churn as more money is being made from your existing customers than you're losing.
You should NEVER intermingle free and paid users when calculating churn. They don't operate in similar manners. Track free user engagement on its own and concentrate on activation and conversion, not the usual churn numbers.
The churn prediction of today operates with data about how people use a service, how engaged they are and their demographics. Machine learning models can identify 30 to 90 days in advance customers that are likely to leave with 80 to 90 percent accuracy.
LTV = Average Revenue Per User / Churn Rate (so they are in inverse proportion). According to ChartMogul, the formula for LTV actually demonstrates this directly: "Reducing churn in half doubles LTV," ChartMogul writes, meaning there is few things a subscription business can do that are more upside-yielding than cutting churn.
Speed is very important. Customers who indicate that they are leaving often have already made the decision to do so weeks before they do. In most cases, successful interventions occur between 24 and 48 hours after risk signals are observed.
i"In today's competitive subscription economy, understanding churn isn't just about calculating numbers, it's about recognizing that each churned customer represents a failure to deliver ongoing value. The most successful companies I've worked with over two decades treat churn reduction as a strategic imperative that touches every aspect of their customer experience."
— Tessar Napitupulu, CEO of Arfadia & Digital Marketing Expert
Jason Lemkin of SaaStr imparts some crucial advice though:
i"You barely feel high churn on the way up to $2M,$3M ARR. You're just growing so quickly. It begins to impact growth at some point in the $5M+ category. At $10M ARR, high churn begins to acceding growth."
— Jason Lemkin, SaaStr founder
This is why so many startups hit growth walls, simple retention problems were unaddressed because the company was busy growing by the acquisition of new customers. What is the answer? Assign a named success rep to each of your customers.
"You're going to lose a lot of customers as your company tries to get to product market fit. Then you focus on 'what's another group of people that really love our product?' " adds ChurnZero CEO You Mon Tsang.
Technical proficiency: By itself, not a churn-stopper. Customer Retention: The best methods to retain customers are through the combination of advanced analytics and human knowledge. Predict which customers might leave, but when a company intervenes, have actual people do the calling with customized fixes.
There are a few trends impacting how we retain customers as we approach 2024 and beyond:
Artificial intelligence-driven personalization is advancing past item recommendations to forging distinct experiences with users. That journey is unique to each customer because it is continually changing in the moment, based on that person's behavior.
Predictive analytics just are getting better and better at what they do. The most modern can not only tell you who's going to defect, but why and when, and what can most effectively be done about it.
Creating a community is turning into a potent method of retention, after all. Active user community members are 2,3 times more likely to stay with a company.
Convergence is encouraging companies to bundle subscriptions. As cable companies discovered, bundles greatly reduce churn by raising the cost of switching.
Mostly, the dialogue is shifting from retaining customers to enabling their success. The best companies don't obsess about just retention metrics, they obsess about customer outcomes. Retention occurs organically when customers achieve their objectives.
So the path ahead is obvious: invest in understanding what your customers want to achieve, build systems to help them achieve it and watch as better retention transforms the way in which your business operates.
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