SaaS Churn Rate: What it is & why it matters

There's one metric that often keeps SaaS entrepreneurs up at night, and for good reason: churn rate. 

Whether you call it attrition, defection, or turnover, it's the percentage of customers who stop using your service over a period, directly reflecting your business' health.

If customers are leaving faster than you can acquire them, it means there's a critical issue with your brand.

But don't worry, it's definitely solvable and you're not alone. According to Paddle's B2B SaaS Market Report, SaaS churn rate soared in December 2023, marking a 7% increase from 2022 and a 25% jump from 2021.

These numbers are sobering, but they also highlight an opportunity.

In a landscape where customer retention is becoming increasingly challenging, understanding and managing the reasons behind their defection can give your organization a significant competitive edge.

Join us as we explore the world of SaaS churn. You'll learn what constitutes a "good" rate across different industries, how to calculate it accurately, and, most importantly, some actionable strategies to tackle this problem head-on.

What is SaaS churn rate?

SaaS churn rate is the percentage of customers who cancel their subscription to a service within a specific timeframe.

It's a crucial metric for service-based businesses as it directly impacts revenue and customer lifetime value (CLTV).

A high client turnover rate is a red flag for any SaaS company. It can lead to decreased revenue, increased customer acquisition costs, and damage brand reputation.

Contrastingly, a low rate signifies customer satisfaction and loyalty, which are essential for long-term growth.

Understanding why your customers are leaving is the first step to reducing it.

By identifying the underlying causes and actively focusing on enhancing end-to-end user experience, you can improve customer retention and boost your bottom line.

Factors that influence the churn rate for SaaS businesses

Now that you know what churn is and why it's a big deal, let's talk about why customers actually leave. Here are some of the most common reasons:

• Product issues: this could be anything from bugs and glitches to missing features or a poor user experience.

• Pricing concerns: customers might feel the product or service is overpriced or that they're not getting enough value for their money.

• Customer service failures: poor support and delayed resolutions can drive customers away faster than a speeding bullet.

• Competition: your competitors might offer a better deal or a more appealing product. It's one of the major reasons behind customer attrition, especially if your SaaS business caters to small and medium businesses.

• Lack of product-market fit: sometimes, your product just isn't the right fit for your target market. It's like trying to force a square peg into a round hole.
  

Our tip: Churn reduction is a holistic effort. Keep a pulse on your customers' expectations, and you'll be well-positioned to retain them and thrive in the competitive SaaS landscape.

Types of churn rates in SaaS

Before diving into the specific churn rates, it's essential to understand the difference between voluntary and involuntary churn:

• Voluntary churn: this occurs when customers actively choose to cancel their subscriptions. Reasons can include dissatisfaction with the product, finding a better alternative, or changing needs.

• Involuntary churn: this happens when customers leave because of circumstances beyond their control, such as payment failures, expired credit cards, or technical issues.

That settled, let's inspect the four primary types of churn rates that businesses commonly measure to understand customer retention and revenue dynamics:

Type 1. Customer churn rate

This is the classic—percentage of customers who cancel their subscriptions within a specific time frame. It's calculated by dividing the number of customers lost during that period by the total number of customers at the beginning of the period. This metric helps gauge customer satisfaction and loyalty.

Type 2. Revenue churn rate

It measures the percentage of recurring revenue that vanishes because of cancelations or downgrades. This metric offers a clearer snapshot of your SaaS venture's fiscal health. For example, if a client reduces their subscription tier without completely abandoning the service, it will still impact your overall profitability.

Type 3. Gross churn rate

This one focuses on the total monthly recurring revenue (MRR) lost from existing customers. It disregards any additional revenue generated from upgrades or new clientele. This metric provides a baseline understanding of attrition's negative impact on your organization, offering a pessimistic yet crucial perspective.

Type 4. Net churn rate

The net churn rate offers a more comprehensive view by factoring in lost income from customer cancellations and downgrades, as well as revenue from upgrades or new customers. 

It paints a more accurate picture of your organization's overall trajectory. For instance, if this value is negative, it means that your business is growing despite customers leaving your brand.

Our tip: each of these numbers gives you a unique perspective of your operational model. By tracking all of them, you can better understand your business health and pinpoint areas for improvement.

Take a peek at how social commerce startup Love and Pebble used our revenue-based financing to establish itself as an eCommerce giant. Learn the secrets here.

Why does SaaS churn rate matter?

You might think, "Okay, people leave. It's part of business." While some customer defection is inevitable, an excessively high value can be catastrophic for your SaaS organization. 

Keeping your user base stable is crucial for the health and longevity of your subscription model. 

Here's why:

Indicator of customer satisfaction

User retention serves as a direct indicator of customer satisfaction (CSAT). A high turnover rate implies dissatisfaction with your product or service, stemming from issues like poor user experience, perceived lack of value, or subpar support. Monitoring these factors helps pinpoint areas for improvement.

Impact on revenue growth

Customer loyalty directly impacts your bottom line. When subscribers leave, you lose more than just their fees—you miss out on potential upsells, cross-sells, and referrals. Consistent losses can lead to significant revenue dips over time, stunting overall business growth.

Sustainability of business model

For SaaS businesses, maintaining a low churn rate is essential for sustainable growth. High attrition can lead to unstable revenue streams and make it difficult to predict financial performance. If the problem persists, it will eventually lead to cashflow problems.

Competitive advantage

In a crowded market, keeping customers is as crucial as acquiring new ones. Lower attrition rates can give you a leg up by fostering a loyal user base that is less likely to jump ship. You can cultivate this loyalty through effective customer success strategies and continuous product enhancements.

Strategic decision-making

Understanding why users stay or leave allows for informed decision-making. By analyzing both attrition and retention data, you can spot trends, grasp user behavior, and fine-tune your offerings. This proactive approach leads to better product-market fit and stronger retention strategies.

Resource allocation

High customer defections may signal the need for increased investment in success initiatives, product development, or marketing strategies. Recognizing the factors behind churn helps allocate resources more effectively to areas that add value to your customer success initiatives.

Besides these, your customer attrition rate also has a ripple effect on other key performance indicators (KPIs), such as:

• Customer Lifetime Value (CLTV): it directly impacts CLTV, as customers contribute less over time.  

• Customer Acquisition Cost (CAC): you'll need to spend more on acquiring new customers to replace lost ones.

• Monthly Recurring Revenue (MRR): lost customers mean less recurring income, which eventually hurts your bottom line. 

• Burn rate: it can trigger cashflow problems, causing operational issues and hindering growth.

In essence, monitoring the churn rate and grasping its implications is vital for maintaining a healthy, competitive SaaS brand.

Cashflow problems are quite common in the startup world. Learn how you can prevent it from happening to your SaaS brand with our in-depth resource.

What's a good churn rate for Saas?

Although there's no definitive answer to this, Paddle's market survey shows that a good SaaS churn rate is 3% or less monthly. This makes sense when you consider Recurly's report—the average monthly value usually hovers around 4.8%.

Then again, the definition of "good" varies a lot. That's because there are several factors at play here. These values can fluctuate significantly based on aspects like industry, company size, business model, and economic conditions. 

Let's talk about the average SaaS churn rate by industry. It's fascinating stuff, really. 

Kalungi's report threw some interesting numbers our way. If you're catering to enterprise clients, you might see turnover rates as low as 1% monthly. But if your SaaS is more focused on small and medium businesses (SMBs) and you're billing monthly, brace yourself. You could be looking at attrition rates between 3% and 7%. 

Why the jump? Well, smaller organizations can be a bit more fickle—they have lower switching costs and their needs can change rapidly.

Our tip: the ideal churn rate for your SaaS brand depends on your specific circumstances. Hence, we suggest you track this value over time and identify trends rather than simply comparing yourself to industry averages.

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Customer expectations are constantly changing. Here's your free guide to the emerging trends in eCommerce.

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How to calculate the churn rate for a SaaS business

You can measure your SaaS brand's churn rate by first dividing lost customers by total customers for a specific period. Then, you'll need to multiply the result by 100 for the percentage value. The standard formula is:

Churn Rate = (Total Customers at Start of Period / Number of Customers Lost​)×100

For instance, if your SaaS company starts the month with 500 customers and loses 50 customers during that month, the churn rate will be (500/50​ )×100=10%.

Return on equity (ROE) is another popular metric for SaaS companies. Do you know what it means and how to calculate it? Read more about ROE here.

How to reduce churn in SaaS business

To combat churn, you need to focus on customer success. You must look beyond just selling your product or service. Your core aim should be helping customers get the most out of your offerings. The reason is simple: a happy customer is less likely to leave.

Truth be told, there are countless strategies to reduce customer attrition. Here are some of the most effective tactics you can use:

1. Offer proactive support and guidance. Be there for your customers before they even need you.

2. Make sure new customers feel welcomed and supported. A smooth onboarding process sets the stage for a long-term relationship.

3. Listen to your customers. Use surveys, feedback forms, and analytics to understand their needs and pain points.

4. Empower your customers with knowledge. Offer tutorials, webinars, and other resources to help them get the most out of your product.

5. Implement omnichannel support options to meet customers where they are. Ensure quick response times and effective problem-solving.

6. Go beyond the core product. Offer additional services or features to increase customer satisfaction.

7. Assign dedicated customer success managers to high-value accounts. They can provide personalized attention and ensure the success of your most important clients.

8. Optimize your pricing strategy. Ensure your pricing aligns with the value you provide. Consider offering flexible plans to accommodate different customer needs.

9. Create a strong community around your product. Foster user groups, forums, or events where customers can connect and share best practices.

10. Use data analytics to identify at-risk customers. Implement predictive churn models—artificial intelligence (AI) and machine learning (ML)-powered tools—to flag accounts that may be at risk of leaving, allowing for timely intervention.

11. Keep your product relevant and valuable. Regularly update and enhance your offering based on customer needs and market trends.

12. Offer incentives for long-term commitments. Consider providing discounts or additional features for customers who commit to longer contracts.

13. Personalize the user experience. Use data to tailor the product experience to individual needs and preferences.

14. Highlight customer wins and how your product contributed to their success. This reinforces the value of your offering.

Irrespective of the tactics you implement, the bottom line is obvious—reducing churn in your SaaS business is an ongoing process. It requires a combination of product excellence, exceptional customer support, and a deep understanding of your customers' needs.

From churn to earn: fuel your SaaS business with Stenn

In the fast-paced world of SaaS, managing churn is only half the battle.

To truly thrive, you need the financial muscle to invest in growth, innovation, and customer success.

That's where we come in.

At Stenn, we understand the unique challenges and opportunities of digital businesses.

Traditional funding sources often fall short, constrained by outdated metrics and slow processes. That's why we offer a fresh approach—alternative financing. 

With us, you get:

• Up to 150% of your monthly revenue: because your potential shouldn't be limited by last month's bank statement.

• Flexible terms: tailored to your business needs, not a one-size-fits-all approach.

• Fixed fee of 6% to 9.5% per transaction: transparent pricing without hidden surprises.

• Non-dilutive financing: keep full control of your business while fueling its growth.

Our subscription financing is based on all your revenue streams, including transactional revenue. This holistic view allows us to offer more competitive terms that align with your business model.

Don't let cashflow constraints hold back your churn-reduction strategies. Whether you're investing in customer success, enhancing your product, or scaling your support team, we are here to provide the financial firepower you need.

‍Apply for Stenn financing today and give your business the boost it deserves.