{"id":2591,"date":"2015-10-21T11:40:38","date_gmt":"2015-10-21T09:40:38","guid":{"rendered":"https:\/\/chartmogul.com\/blog\/?p=2591"},"modified":"2023-08-09T21:01:36","modified_gmt":"2023-08-09T19:01:36","slug":"actionable-saas-metrics-customer-churn-rate","status":"publish","type":"post","link":"https:\/\/chartmogul.com\/blog\/actionable-saas-metrics-customer-churn-rate\/","title":{"rendered":"Actionable SaaS Metrics: Customer Churn Rate"},"content":{"rendered":"

Customer Churn. Everyone loves talking about how to calculate it<\/a>, how to reduce it<\/a>, and how bad it is<\/a> (us included!). But isn’t it time to sit down and figure out how we can actually influence it, and what actions we can actually take, given certain characteristics?<\/p>\n

What to do if your Customer Churn Rate is…<\/h2>\n

1. Low<\/h2>\n

Well, you’re sitting in a pretty good position that a lot of businesses would \u00a0be envious of – well done you<\/em>. But just before you pop the champagne and log off for the day, we should be sure that the numbers you’re looking at actually make sense.<\/p>\n

How to measure Customer Churn Rate<\/h3>\n

Let’s just remind ourselves of the basic formula for Customer Churn Rate:<\/p>\n

\"churn-formula1\"<\/p>\n

It’s important to make sure you’re only measuring paying\u00a0customers<\/strong>\u00a0<\/b>in this formula – free trial customers should be excluded, as well as those on a free plan (if you use a freemium model).<\/p>\n

There is also an alternative churn rate\u00a0calculation\u00a0suggested by Shopify<\/a>, which simplifies to the following, more iterative formula which sums up the customer churn from each day in the period:<\/p>\n

\"churn-formula2\"<\/p>\n

What counts as ‘low’ Customer Churn Rate?<\/h3>\n

Many SaaS companies at\u00a0a growth stage report monthly churn rate of around 2-5%. Remember that this level of\u00a0monthly\u00a0<\/em>churn rate still equates to losing a significant amount of your customer base in the longer term – A cohort of customers acquired in a single month would\u00a0half\u00a0<\/em>in size over the period of a year!<\/p>\n

The other thing to remember is that we’re talking about\u00a0customer\u00a0<\/em>churn rate – not\u00a0MRR\u00a0<\/em>churn rate. It’s okay to lose customers, if they’re not the customers contributing a large proportion of your MRR. Consequently, a high MRR Churn Rate can be much more destructive to the growth of a SaaS business.<\/p>\n

Actions to take<\/h3>\n
    \n
  • Make sure you’re measuring Customer Churn\u00a0correctly<\/li>\n
  • Continue to invest in customer success and lowering churn – what you see may just be a temporary characteristic of your business at this point – i.e. maybe nobody has reached the “critical” churn risk period yet.<\/li>\n
  • Pat yourself on the back. You’re doing okay so far!<\/li>\n<\/ul>\n

    2. High<\/h2>\n

    High Churn Rate\u00a0is the Achilles’ Heel of any growing business. Tomasz Tunguz (Redpoint Ventures) illustrates this perfectly in this\u00a0post<\/a>:<\/p>\n

    \"churn_graph\"
    source: https:\/\/tomtunguz.com\/negative-churn\/<\/a><\/figcaption><\/figure>\n

    Because churn compounds (just like recurring revenue), a 5% churn rate over time can severely limit the growth of a business.<\/p>\n

    What is ‘high’ Customer Churn Rate?<\/h3>\n

    Anything over 3-5% should be sending warning signals. Although some businesses by design are more tolerant of higher churn levels – i.e. B2C businesses with a large number of customers paying a tiny amount will always exhibit a higher customer churn rate. For this reason, it’s often better to look at MRR Churn Rate (which will account for this).<\/p>\n

    Actions to take<\/h3>\n
      \n
    • First, segment your churn into Cohorts – look at a Cohort Analysis<\/a>. You can use a platform\u00a0such as ChartMogul for this. Identify any specific months of high churn in the customer lifetime.<\/li>\n
    • Find out why customers are churning, particularly in those high-churn months you just identified. Talk to them! Or perhaps implement an exit survey when people cancel.<\/li>\n
    • Implement a framework for customer success<\/a> in your business, aimed at helping customers achieve their goals within your product.<\/li>\n<\/ul>\n

      3. Unstable<\/h2>\n

      This might seem like a strange one, but it’s entirely plausible that your calculated Customer Churn Rate would jump around from one month to the next – it’s actually quite a common symptom, particularly in smaller SaaS startups with just a few customers.<\/p>\n

      It may seem obvious, but if you have just a handful of customers and you lose one of them, that’s a BIG percentage churn for you. Conversely, a large enterprise with thousands of customers requires a much larger number of cancellations to have an impact on the overall churn rate.<\/p>\n

      Actions to take<\/h3>\n
        \n
      • Make sure that\u00a0you’re calculating Customer Churn Rate correctly and consistently. Check The Ultimate Churn Cheat Sheet<\/a> for more detailed examples.<\/li>\n
      • If your number of customers is fairly small (less than 100 customers), consider removing\u00a0focus\u00a0from the\u00a0Customer Churn Rate metric at this point – an unstable number will not help you make consistent, positive decisions about your business. Instead, why not focus on talking to your customer base to\u00a0understand\u00a0their experience and needs from\u00a0your product?<\/li>\n<\/ul>\n

        Share & Follow<\/h2>\n
        \n

        NEW on @ChartMogul<\/a> – Actionable SaaS Metrics: Customer Churn Rate https:\/\/t.co\/DofL54ZlHd<\/a> #SaaS<\/a> #Churn<\/a> pic.twitter.com\/nFBMnurRMg<\/a><\/p>\n

        \u2014 ChartMogul (@ChartMogul) October 21, 2015<\/a><\/p><\/blockquote>\n