No matter how amazing your SaaS company and product are, there will always be customers that stop using your product. This is a terrifying occurrence called Churn. Basically, it’s the thing that can hinder or even stop your company’s growth. No company likes churn, but by understanding what it is, how to calculate it, and, of course, how to reduce it, you can take steps to deal with it effectively.
Different Shades of Churn
There are a couple different types of customer-churn rates, but the most common ones are Customer Churn and Revenue Churn.
Customer Churn Rate is the percentage or number of customers lost in a given time period divided by the total amount of customers at that time. This is commonly referred to on a monthly basis, such as % of Customers Lost Per Month.
The basic formula to calculate monthly churn is: # of customers lost in one month divided by the total current # of customers. Ex: 50 customers lost in one month out of 1,000 total customers would equal a 5% monthly customer churn rate.
As illustrated by the graph above, if you have 1,000 customers at a 10% customer churn rate, you’ll lose 718 of them over the course of a year if you aren’t bringing in new customers. This proves that, as a SaaS company, if you aren’t growing, you’re dying.
Revenue Churn Rate is arguably more important; it is the percentage or dollar value of revenue lost in a given time period. This is also commonly referred to on a monthly basis, such as % of Revenue Lost Per Month or, more commonly, $$$ Revenue Lost Per Month.
The graph above is of a company with $10,000 MRR (Monthly Recurring Revenue) with a 10% revenue churn. Within one year, if they don’t grow their revenue, they will be left with a demoralizing $2,824 MRR. Yikes!
Let’s imagine you have a churn rate of 5%. This means that in order to grow with a current base of 100 customers, you need to acquire at least 6 new customers that month, at a 6% growth rate. In the same manner, if your MRR is $10,000 and you lose $500 from cancelled subscriptions in a month, your revenue churn rate is 5% ($500/$10,000).
Revenue Churn is arguably more important because it shows you the actual dollar value that you’re losing. A 5% Customer Churn out of 100 customers in a month might not seem that bad, but if those 5 are big customers and represent $2,000 of your $10,000 MRR, then you have a revenue churn of 20% for that month ($2,000/$10,000), which is quite terrifying and should be addressed.
Why Understanding Churn Can Make or Break Your Business
Churn is a grueling part of every SaaS company. You can’t expect 100% of your customers to stay with your company forever, but you can actively work to reduce the amount of customers that leave. Therefore, knowing your company’s churn rate will make it easier to identify the proper steps to take in order to continue growing your company in a healthy way.
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When Should You Take Churn Seriously?
When starting a new SaaS company, churn isn’t as important. With only a few customers (or no customers) and little to no revenue, there’s really not enough data to know your actual churn, nor would such a small sample give you enough quantifiable data to improve upon. Eventually, though, it will catch up with you and start to affect your growth in a bigger way. As you grow and acquire more customers and revenue, you can start to calculate your churn, but realize that it may not yet be completely accurate.
The image below is a representation of a new business that is growing their revenue at a rate of $1,000 per month, but with a massive 30% revenue churn. This is an extreme example, but you can clearly see that in the first few months, churn doesn’t have that big of an effect on growth. You can also see, however, that after those first few months, churn really starts to catch up, and the growth of the company is significantly stunted. This is a great representation of why you need to constantly work to reduce your churn.
The company’s growth is very slightly affected in the first few months. After that, churn starts to take a toll on growth.
Let’s look at a more realistic example of a company that’s been around for a few years and has an MRR of $70,000. Their revenue churn rate is 6%, so in one year, at their current growth rate, they’ll add $15,722 to their MRR.
This company is starting at $70,000 MRR, growing by $6,000 monthly with a 6% churn.
But if they reduce their churn to 4.5% and continue at the same growth rate, you can see a massive difference: in one year, the company will add $26,885 to their MRR. That’s a 58% increase!
Reducing churn just a little can have a huge effect on growth!
While reducing churn from 6% to 4.5% is easier said than done, you can see how big of an impact churn can have on your business.
So, What’s an Ideal Churn Rate?
Technically, the best churn rate is a negative churn rate. This is when your rate of upgrades/expansions/up-sells exceeds the amount of customers or revenue you’re losing. Few SaaS companies, however, ever actually reach a negative churn rate, and it may even be unrealistic for some. Ideally, you should strive to get your churn rate as close to 0% as possible.
So, if your churn rate isn’t negative or 0%, what is an acceptable rate? Well, that depends. There is no simple answer, because it depends on factors such as your target customer and current company size. If you’re a new/smaller company, you will most likely have a higher churn rate in the beginning as your product is lacking in certain areas; a good way to know if you’re on the right path is if your churn rate is consistently going down. Even then, the actual rate at which you churn doesn’t determine your success. As long as you’re adding revenue/customers faster than you’re losing them, you’ll still grow.
You’re in Control
Churn is the antithesis of growth. Leave churn alone, and it can slow or even stop your growth and send your company into a downward spiral. But it doesn’t have to be so scary. It’s still your company and your product. If you understand churn and work with your team to reduce it while also growing more each day, you can put your company in a great position for success.
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Images and Graphs courtesy of Baremetrics