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You might have seen net revenue churn figures in your accounting software, and you might already present this metric at meetings—but are you sure what exactly this number shows and how to calculate it?
A basic churn definition for SaaS businesses will tell you that it’s a reflection of subscription cancellations. Some level of churn is inevitable, but a high churn rate indicates low or even negative business growth. However, there are four main ways to measure SaaS churn that provide different insights for your business. In this article, we’ll provide you with an understanding of the basic SaaS churn calculations for each type of churn, what they reveal, and when to use each type.
3 Useful Ways To Measure SaaS Churn
There are two main factors to consider when tracking SaaS churn: You can measure either gross or net churn by revenue or by customer, or measure either customer or revenue churn.
Gross Churn Vs. Net Churn
Gross churn reflects the subscription value lost in a given period.
Net churn reflects the subscription value lost overall in a given period after factoring in upgrades and expansions.
Gross churn makes it easy to compare the subscriptions lost each month to determine why you're losing revenue or customers. You can analyze correlations between the gross churn and company activities to establish what causes changes to the churn rate. By tracking gross churn for different customer cohorts—for example, according to subscription type or geographical locations—you can also identify customer demographics with the highest average customer lifetime value (LTV).
Net churn is useful for building top-level financial projections and models: It allows you to predict the difference in revenue your business will see each month and the rate the business is growing (or shrinking).
Customer Churn Vs. Revenue Churn
Customer churn shows the number of customer accounts lost without distinguishing the value of each account.
Revenue churn shows the amount of revenue lost without distinguishing the number of customers that make up this revenue. When SaaS businesses track revenue churn, they often look specifically at the amount of monthly recurring revenue (MRR) or annual recurring revenue (ARR) lost in a given period. Understanding how to calculate annual recurring revenue and monthly recurring revenue is crucial in this process, as it helps pinpoint exactly where revenue is being lost.
Read more: Everything SaaS Startups Need To Know About Calculating ARR And MRR
For example, a business might have five customers with monthly subscriptions of $100 and five customers with monthly subscriptions of $1,000. In January, the business loses three customers who pay $100, and in February, the business loses one customer who pays $1,000.
Customer churn doesn’t reflect whether the three customers who churned had subscriptions of $100 or $1,000: It only shows that you lost three customers in January and one customer in February. Revenue churn, on the other hand, shows that you lost $300 of MRR to churn in January and $1,000 of MRR to churn in February. To gain a complete picture, you should compare both customer and revenue churn.
3 Most Used Formulas to Calculate SaaS Churn
Based on the factors discussed above — gross vs. net churn and customer vs. revenue churn — there are four types of churn for SaaS companies to measure as a starting point.
In the table below, we outline what each type shows and the SaaS churn formulas to calculate them.
To calculate your SaaS startup’s monthly or annual churn rate, apply your data from that given period of time to the above formulas.
For example, a simple monthly churn rate calculation would be:
Number of customers who left in January (3) / Total number of customers at the start of January (100) = Monthly gross customer churn rate for January (0.03)
Many businesses choose to express their churn rate as a percentage—in the example above, this would be 3%.
What Is Considered A Good SasS Churn Rate?
Many SaaS startups ask: What is a good or average churn rate for a company like mine?
A commonly cited good SaaS churn rate is between 5-7% annual churn, depending on whether it’s measured by customer or revenue. Churn rate is typically expressed as a rate (percentage) rather than a set value so it can be understood and applied to any business, regardless of additional context you may or may not have. (For example, if a business were to report losing three customers, and you do not know how many total customers they have, this number is more or less meaningless.)
The real answer is: There is no broadly recognized industry average or benchmark for SaaS churn rates. It truly varies from business to business; end user (e.g. consumer vs B2B/enterprise vs small businesses), pricing models (including opportunities for upsells or expansion revenue), contract length (e.g. monthly vs annual contracts). average revenue per user (ARPU), and other variables related to the SaaS business model must be considered in order to establish a “good” churn rate benchmark for your startup.
To explore this question further, check out this blog post from Profitwell with thoughtful analysis of the various figures and methodologies regarding SaaS churn rates.
The Most Effective Way To Keep Track Of SaaS KPIs—Including Churn
Zeni is a modern, full-service finance firm that can handle all your bookkeeping, accounting, and CFO service needs. Zeni helps startups and SaaS founders accurately calculate and track KPIs, including revenue churn and SaaS metrics such as burn rate, runway, gross margin, and more.
You’ll get 24/7 self-service access to many key metrics in the Zeni Dashboard, so you always have up-to-date figures at your fingertips. Zeni can also help you track customer churn in a customized way that makes sense for your business. Plus, we won’t just present you with the data: Our team of experts helps you unlock the value of these numbers with financial analysis, business insights, financial models, forecasts, and cash flow projections.
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