Curious about churn rate? This blog is your go-to resource for demystifying churn rate, including its calculation, significance for SaaS businesses, and answers to all your burning questions. Dive in and gain a clear understanding in easy-to-understand language!
What is churn rate?
Churn rate simply means percentage of lost customers or lost revenue in a certain time period.
It’s sad to lose hard earned revenue and customers. But you can’t ignore. However, you may get rid of freeloaders or low spenders.
Types of churn rate and churn rate formula
User churn rate
How much % of paying customers you are losing every month is your user churn rate or customer churn rate.
As of today, a 10% customer churn rate implies, 10% of the total active paying customers you had 30 days ago have canceled within the last 30 days.
Revenue churn rate
How much % of the revenue you are losing every month is your revenue churn rate.
As of today, a 10% revenue churn rate implies, you lost 10 % of your MRR within the last 30 days to the MRR it stood 30 days ago.
What causes churn
Churn isn’t straightforward and simple. A lot of factors come into play and for each set of users it differs. Here is a list of common sources of churn.
- Poor user interface or user experience
- Poor onboarding experience
- Competitor products
- Lack of features
- Lost value perception of the app
- Poor product/market fit
The good news?
There is always a room for improvement. You can simply look over the causes by considering the user’s feedback and gathering it to see the friction points. With this, Putler provides you all the metrics which will help you to analyse and combat the problems and bloom your business again.
2 major causes of churn
The two main reasons that causes churn are:
Downgrades are due to customers migrating to the lower plans citing high pricing or they may be happy with the features in the lower plan.
Customers cancel their subscription if the product doesn’t work properly, the customer finds a better alternative or is unhappy due to poor customer service.
Be it any case, churn is bad.
A smarter way to reduce churn
High churn rate is a deceleration of growth. So, can you fix it?
But only using a good strategy and that too based on the right data.
Using data to understand reasons for why users leave, your website can be optimized. Putler understands this problem, that is why it gives you the right data to reduce your churn and improve retention.
Why churn is so hard to understand
That looks simply straightforward, but (a) how exactly do we define those numbers can greatly impact the output and (b) External factors of business-development confuse us on our understanding of numbers that will come out.
Counting customers is bit complicated
Due to new sign-ups and cancellations, the total number of customers in a specific period of time may vary.
Say, for any given month, there are three kinds of customers:
- Customers that signed up prior to, lets say, a month. In current month, these customers might come up for renewal.
- New customers in that month.
- Newly churned customers in that month.
Consider your new signups is large in proportion to the existing customer base, so let’s see how this can affect your churn rate calculations:
- The number used in “total number of customers” in the denominator is different on day 1 than on the last day of the month. It means that whichever number is used for “total number of customers”, it will either be quite distant from day 1 number or the day 30 number or both.
- New customers usually churn at a higher rate when compared to the existing customer base.
The moment of churn has multiple definitions
We can define moment of churn in two ways:
- End of subscription followed by non-renewal, or
- The moment of cancellation.
Customers do not churn until their subscription period ends. They don’t renew because they have paid up before hand until their subscription. In case they have already canceled then you still have a chance to before the end of their subscription.
Few mention the moment of cancellation as churn because they are able to have the most current churn number as possible. The main thing is that churn is a lagging indicator fundamentally and should not be necessarily looked at in real-time.
Time frames paint different pictures
The customer churn can be looked over varied time frames such as a year, quarter, month or week.
As time frames paint a different picture so your calculations will be impacted as you might shift from a month to a year.
The customer segments churn differently
Different plans have different churn rates. Hence, different segments have different churn rates.
An aggregated number incorporates the differences between your customers. That might lead you to misunderstand your churn number. In simpler terms, in a higher churn customer segment, growth might be mistaken for overall increased churn which inturn, might lead you down the incorrect path of trying to fix the churn problem which is non-existent.
Seasonality impacts churn
In case you have business that varies seasonally then, your churn churn will correspond to the seasonal changes accordingly which might be confusing to but eventually you will know the pace as you’ll go through different cycles.
How does user churn affect other SaaS metrics?
Churn rate is like an indicator of your product or services. In order to decrease the churn rate, there should be a regular optimisation and customisation of your service. Let us understand the interlinked factors more deeply:
- Monthly recurring revenue: customers and revenues are affected together. In SaaS, MRR is the lifeblood of a company with this, it is also a long-term viability indicator. User churn decreases revenue directly that is why so it’s important to keep it at bay.
- Customer lifetime value: The Customer lifetime value (CLTV) also indicates the longevity and profitability of your SaaS company. Churn lowers CLTV because as users leave then the revenue or value decreases.
- Customer acquisition costs: Consider a case where you spend to acquire new customers and they churn even before those costs are made back. This shows that you are running a rough deficit. Churn increases your average Customer acquisition cost. If you reduce churn at every chance, then you can surely secure your customer acquisition cost back.
- Net Negative MRR Churn: Net negative MRR churn is considered as one of the powerful ways to construct a growth engine in SaaS. When you have, say, net negative churn so the additional revenue generated from your existing customers outpaces the revenue you are losing through downgrades and cancellations. This simple relation is; lower the user churn, easier the net negative MRR churn is achieved.
How to calculate churn rate? (churn rate examples included)
Based on the simplified churn rate definition at the start, we will apply the formula and see how to derive churn rate.
How to calculate user churn rate?
Let’s say, as of 1st July 2018 you have total 100 paying customers and when you close the month on 31st July 2018 you observe only 95 from that customers paid you. It means you have lost 5 customers in the month of July. Now, we will calculate the churn rate for the month of July.
Remember, even though the percentage of the churn rate varies from business to business, a 5% monthly churn rate equals to losing a substantial number of users in a year. Therefore it needs to be lowered.
How to calculate revenue churn rate?
Let’s say, as of 1st July 2018 you have total 100 customers each paying you $100. So your MRR becomes $10000. At the end of the month on 31st July 2018, you observed 5 customers downgraded to the $80 plan and 5 customers canceled their subscription.
This means you lost $100 (20*5) due to downgrades and $500 (100*5) due to cancellations.
MRR as on 1st July
100 x $100 = $10,000
MRR as on 31st July
10000 – (100 + 500) = $9,400
Now, we will calculate the churn rate for the month of July.
How to calculate annual churn rate?
Let’s take an example Company X had 52,000 customers up for renewal in 2020, with 3,000 customers churning during this period. In addition, they had a total revenue figure of £501,000, with £44,408 revenue cancelled during this period. To calculate the annual churn rate of Company A, you simply divide the number of churned customers by the total number of customers, before multiplying by 100 to discover the customer churn rate:
3000 / 52000 = 0.05769 x 100 = 5.76%
Then, to work out the annual revenue churn rate, you divide the canceled revenue by the total revenue, before once again multiplying by 100:
44408 / 501000 = 0.08863 x 100 = 8.86%
As you can see, revenue churn is slightly higher than customer churn. This may mean that you have difficulty maintaining subscriptions from customers at a higher price-point, so re-evaluating your pricing structure may help to reduce revenue churn.
How to calculate probability churn rate?
To calculate your probable monthly churn, start with the number of users who churn that month. Then divide by the total number of user days that month to get the number of churns per user day. Then multiply by the number of days in the month to get your resulting monthly churn rate.
How will you handle complex churn cases
The above example of revenue churn showed a simple calculation.
But you will add customers, lose customers, see customers migrate from one plan to another frequently.
Moreover, there will be a lot of free or unwanted users who may convert or leave the service.
You would also have customers on annual or quarterly plans.
Hence as the business grows, calculating churn rate will become a nightmare for you.
So, how would you arrive at the accurate churn rate considering all cases?
Don’t worry, we have a solution – click here.
Reasons to make it easier for yourself
When churn calculation complexity is reduced, you get many benefits:
- It is easily understandable – Anyone in your company is able to understand that number effortlessly. This is absolutely essential for a key metric. No one can actually act on your number unless and until they understand it.
- It is easily comparable – Do not add complexity as it will be harder for you to compare your churn calculations. Just create consistency by taking straightforward and simple paths. Hence, it will be easily compared then.
- For deeper analysis, it is a starting point- you are able to comprehend things such as; what your number accounts for or what it doesn’t and at which place you’re needed to dig in more to learn. Along with complex calculations, the first step of yours will remind you how to calculate it.
We kept it simple, your time can be spent in churn analysis of the number, taking a deeper dive on churn by cohort, etc. you won’t be spending your time calculating how you arrived at your number. This method did work for many of our customers and it will also work for B2B SaaS companies or your subscription business as well.
Get accurate churn rate for your business
Putler provides a total of 15 subscription metrics including your user churn rate for Stripe, PayPal, WooCommerce and Authorize.Net.
Simply connect your payment gateways, e-commerce systems and Putler will take care of all calculations and cases. However complex data your business deals with, Putler will handle that efficiently.
Along with subscription metrics, you also get:
- Sales and transactions data
- In-depth customer profiles
- Product metrics and performances
- Visitor analytics
and a lot more…
Thousands of e-commerce and SaaS businesses rely on Putler daily to monitor and grow their business.
User churn rate v/s revenue churn rate – which one to focus more?
Interesting! But both user and revenue churn is equally important.
If you have multiple pricing plans, focus more on the revenue churn.
Losing customers is bad if you lose out on loyal ones. But if you are getting rid of free users or non-paying customers, it’s beneficial.
7 best tactics to reduce high churn rate
Let’s brainstorm some quick actions that can bring your churn rate down to a great extent.
Encourage annual contracts
If you convert more monthly subscriptions to yearly subscriptions, you will reduce your monthly churn rate to great extent. List down the behavior of your monthly users, where, how, when do they engage with your product and services.
Grab their attention with their interest and provide them an irresistible offer which can make them move from monthly plan to yearly plan.
Reduce the delinquency rate
Delinquency is related to credit card payment failures. There are many reasons why credit card payments fail so try and get your online payment mechanism work seamlessly. It will boost a great user experience as well which is one of the best practices for reducing the churn rate.
Be it sending a welcome email to the customer or addressing any grievance, keep all channels of communication open to him. Make sure to sympathize in case of a trouble and always be courteous in the conversation.
Prompt customer service
Customer service is about promptness, transparency, and action. Adhere to the timeline to get back, be transparent in policies, never hide anything from the customer and make sure to get his issue resolved ASAP with the help of teams.
Identify market needs and innovate
Often your competitor introduces better features and service before you do and this can lead your customers to switch to your competitor. Be innovative and always find out the market needs which keep changing. Observing your competitor’s move constantly can help you to be in the league.
Incentivise loyal customers
Appreciate customers’ loyalty towards you and never disappoint them. You can offer them exclusive deals, special discounts or upgrades which can motivate them to a greater extent and retain for a longer time.
Create tailored approach
Create different strategies for loyal customers, for newly signed up customers and for free users if they seem to be opting out of your product.
Going further, we will see average churn rates across industries and understand a short case study on Netflix’s churn rate. These would help us in reflecting on our learning on churn.
FAQs on churn rate
Churn is quite a tricky subject that is why we get lots of the same questions on it again and again. So, Here are the frequently asked questions on churn with our answers.
What’s a good churn rate?
Average churn rates vary between 2% – 8% (of MRR), according to our churn studies. Hence, low churn rate i.e. 2% would be considered good. Yet it depends on the company’s age too; for 10+ year old companies 2-4% churn and for younger companies 4% – 24%.
What’s the negative churn rate?
Negative churn rate is considered to occur when added revenue generated from new customers surpasses lost revenue generated from churned customers. It is generally caused by: add-ons, service options, upgrades, etc.
Does churn rate impact retention?
As churn rate is the inverse of retention so we can say that it does affect retention. The customers that are not retained are churn by default.
Churn rate by industry
There are various factors that affect the churn rate and every industry is also different in its approach in tackling the churn issue. The chart below is populated by Recurly.com where you will find that roughly 6% to 12% yearly churn rate seems normal across different industries.
Case Study: How did Netflix manage to keep its churn rate low?
Netflix captured 52% of the broadband households in the US, while Amazon Prime 24% at the end of 2015.
In case of Netflix, 9% of customers canceled their subscription including those who were on trial period, while in the case of Hulu and Amazon Prime, its competitors, the churn rate was 14% and 19% respectively.
Netflix planned heavy investment in 600 hours of original, quality content in 2016.
From the above data, we could easily transcend one assumption that subscribers were more loyal towards Netflix due to its high engagement in the original content and therefore it continued to invest heavily in feature films, kids show, documentaries and stand-up comedy shows.
Why churn rate matters?
Because churn rate suppresses growth.
consider it like a bucket that’s leaking. Users drip out of it and you struggle to refill it with new users. With this, it gets expensive really fast.
Then too, it’s not all,
Churn rate plays a major role in informing metrics like CLTV and customer retention rate.
Together all these numbers will help you to build more accurate forecasts for revenue, growth and scaling efforts.
Churn is bad! You constantly need to improve your product, user experience, customer service and be active in the market. Still, there will be some who won’t like you and it is ok. You have to observe your customer’s behavior constantly and act upon it to sustain them.
And to observe your customer’s behavior and keep a check on your churn rate, use Putler.