Churn rate is a metric that indicates the number of people who have discontinued their relationship with a business in a given time period. Churn rate provides businesses with insight into customer retention and satisfaction and is particularly useful for subscription businesses. High churn rates may signal underlying issues with the product or service, customer service, or overall customer satisfaction, while low churn rates may indicate that the business is maintaining its customer base effectively.

It’s not always simple to figure out what constitutes a “good” churn rate. Benchmarks vary by industry—business-to-business (B2B) companies tend to experience lower customer churn rates than direct-to-consumer (DTC) subscription businesses, for example—and even within the same industry, there can be a large amount of variation. It’s important to know how to calculate your churn rate, how to minimize it, and how to factor it into business decisions. Here’s what you should know.

What’s in this article?

• How is average churn rate calculated?
  
• Industry-specific churn rates
  
• An overview of SaaS metrics
  
• Why average churn rate is important for subscription businesses
  
• How businesses can use their average churn rate
  
• Limitations with using churn rate as a metric
  
• How to improve average churn rate
  

How is average churn rate calculated?

Here’s how to calculate average churn rate for a given time frame.

• Calculate the churn rate for each period: First, calculate the churn rate for each period within the time frame you’re examining. For example, if you’re calculating the average monthly churn rate over one year, you would first calculate the monthly churn rate for each month. You can calculate churn rate by dividing the number of customers lost during the given time period by the number of customers at the beginning of the given time period, then multiplying that figure by 100 to get a percentage.

• Sum the churn rates: Add up all the churn rates you’ve calculated for each period. If you’re calculating the average monthly churn rate over a year, you’ll add the churn rates for each of the 12 months.

• Divide by the number of periods: Divide the sum of the churn rates by the number of periods you’re considering. To assess the average monthly churn rate over a year, you’ll take the sum of the 12 different churn rates and divide it by 12.

Calculating average churn rate—rather than monthly or quarterly churn rate—gives you a better sense of the typical customer loss rate over time, smoothing out fluctuations that may occur in any single period. Different types of churn rate calculations may measure factors other than total customer losses. For example, they may look at the number of contracts expected to renew, known as the expected renewal rate, or examine the churn rates of different pricing tiers to see if there’s a higher churn at certain price points. A more granular look at churn rate might involve segmenting customers into cohorts based on when they signed up, their contract terms, or their pricing tiers, and then calculating the churn rate for each cohort separately to understand how different factors influence churn.

Here’s a more detailed look at different types of churn rate calculations.

Calculating churn rate by contract renewal

Formula: Churn Rate = (Number of Contracts Not Renewed / Total Number of Active Contracts at the Start) × 100

Example: If you start with 100 annual contracts and 20 do not renew at the end of the year, your annual churn rate is (20/100) × 100 = 20%.

Calculating expected renewal rate

Formula: Expected Renewal Rate = (Total Number of Active Contracts / Number of Contracts Expected to Renew) × 100

Example: If you have 100 contracts and expect 80 to renew, the expected renewal rate is (80/100) × 100 = 80%. The churn rate would be 100% - 80% = 20%.

Industry-specific churn rates

Benchmarks around churn rate vary by industry. Here’s a look at some industry-specific average churn rates (as of April 2024):

An overview of SaaS metrics

For SaaS businesses, churn rate is only one of many important metrics. While the average churn rate gives direct insight into customer retention and loyalty, comparing it with other SaaS metrics—such as customer acquisition cost (CAC), lifetime value (LTV), monthly recurring revenue (MRR), customer satisfaction, net promoter score (NPS), and expansion revenue—gives a more comprehensive view of a business’s health and growth prospects. Here’s a rundown of other important SaaS metrics and how they relate to churn rate.

Average churn rate

Average churn rate is the percentage of customers who cancel their subscription within a certain time frame. To calculate it, divide the number of customers who churned during a specific period by the total number of customers at the beginning of the period, and multiply that figure by 100. For example, if a SaaS company begins the month with 100 customers and loses 5 by the end of the month, the monthly churn rate would be (5/100) x 100 = 5%.

Churn rate indicates a business’s ability to retain customers, and high churn rates can be a warning sign of underlying issues with the product or service.

Customer acquisition cost (CAC)

CAC measures the total cost of acquiring a new customer, including marketing and sales expenses. CAC focuses on the initial acquisition, while churn rate measures retention. If churn is high, the return on investment for acquisition costs decreases. For overall financial health, businesses must balance acquiring new customers with retaining existing ones.

Lifetime value (LTV)

LTV is the total revenue a business can expect from a single customer account throughout the customer’s relationship with the service. High churn rates reduce the average customer lifespan, thereby decreasing the LTV, while lower churn rates potentially indicate increased LTV.

Monthly recurring revenue (MRR)

MRR is the predictable revenue a SaaS business can expect to receive from its customers every month. Churn directly impacts MRR, since lost customers lead to a reduction in recurring monthly revenue. Tracking MRR alongside churn can offer specific insights into how losing customers affects revenue.

Customer satisfaction and net promoter score (NPS)

Customer satisfaction and NPS gauge customer satisfaction and loyalty. NPS measures the likelihood that customers will recommend the service to others. These metrics can serve as early indicators of potential churn: dissatisfied customers or a low NPS can predict higher churn rates, since unhappy customers are more likely to leave.

Expansion revenue

Expansion revenue tracks any additional revenue from existing customers, from upsells, cross-sells, or upgrades. Expansion revenue can offset churn by increasing the revenue from remaining customers, demonstrating how a focus on growing existing accounts can help mitigate the impact of churn.

Why average churn rate is important for subscription businesses

Average churn rate is particularly important for subscription-based businesses because it directly impacts their revenue and long-term viability. Churn rate helps businesses identify underlying issues, whether they’re related to the product, customer service, pricing, or market fit, and make strategic adjustments to improve customer retention—and business performance.

Churn rate affects the following aspects of business operations.

• Revenue predictability: Subscription businesses rely on predictable, recurring revenue streams. Churn rate affects this predictability because a higher churn rate means less stable revenue, making it challenging for businesses to plan for future investments or expenses.

• Customer retention costs: Acquiring new customers is usually more expensive than retaining existing ones. A high churn rate indicates that a business is losing customers faster than it’s gaining new customers, leading to increased customer acquisition costs to maintain revenue levels.

• Profitability: The profitability of subscription businesses often hinges on long-term customer relationships. The longer a customer uses the service, the more profitable they become, as the initial cost of acquisition is spread over a more extended period. High churn rates shorten the average customer lifespan, affecting overall profitability.

• Growth metrics: For subscription businesses, growth is a balance between adding new customers and keeping existing ones. High churn rates can negate the effects of new customer acquisitions, resulting in stagnant or even declining growth.

• Customer satisfaction insights: Churn rate can serve as a proxy for customer satisfaction. If many customers are leaving, it could indicate issues with the product or service such as lack of value, poor customer support, or unmet customer expectations.

• Business valuation: For investors and stakeholders, churn rate is a key indicator of a business’s health and long-term prospects. A low churn rate suggests a sustainable business model, which can be appealing to investments and partnerships.

How businesses can use their average churn rate

Here’s an in-depth look at how businesses can use their average churn rate strategically.

• Segmented churn analysis: Instead of looking at churn as a single metric, businesses should dissect it by customer segments, product lines, or geographies. This approach can reveal patterns or trends that are not visible at the aggregate level. For instance, a higher churn rate in a specific segment could indicate a misalignment between product offerings and customer expectations or reveal market-specific challenges.

• Predictive churn modeling: Businesses can predict potential churn at an individual customer level by integrating churn rate data with advanced analytics and machine learning models. This predictive insight allows for proactive engagement strategies, targeting at-risk customers with personalized retention initiatives before they decide to leave.

• Product development signaling: High churn rates can be symptomatic of deeper product or service issues. Businesses can use churn rate insights to prioritize product development or enhancement efforts, designing product roadmaps to directly address the underlying causes of customer dissatisfaction.

• CLTV optimization: Understanding the relationship between churn rate and customer lifetime value (CLTV) can lead to more nuanced financial modeling and strategic planning. Businesses can segment customers by profitability as well as by their propensity to churn, tailoring strategies to maximize the CLTV of different segments.

• Customer success data: Businesses should view churn rate as part of a broader set of customer success metrics. By correlating churn with metrics such as net promoter score (NPS), customer satisfaction score (CSAT), or customer effort score (CES), businesses can gain a multidimensional view of customer health and predict churn with greater accuracy.

• Strategic account management: For B2B SaaS businesses, churn rate insights can help identify accounts with a high risk of churn and develop customized engagement plans to retain them, focusing on demonstrating value and helping the customer meet their goals.

• Churn rate and market positioning: High churn rates can also signal competitive pressures or market shifts. Analyzing churn in the context of market dynamics can inform strategic decisions about positioning, pricing, and value proposition refinement.

• Feedback loop integration: Churn rate analysis should feed directly into a feedback loop that tracks insights from exiting customers and incorporates them into continuous improvement processes across product development, marketing, sales, and customer service.

• Investor relations: For publicly traded or venture-backed SaaS companies, managing and communicating about churn rate effectively can influence investor perceptions and company valuation. Transparently addressing churn and outlining strategies for improvement can build investor confidence.

• Regulatory compliance and data security: In certain industries, a high churn rate could reflect concerns about data security or compliance with industry regulations. Acknowledging and addressing these concerns can both reduce churn and enhance the business’s reputation and trustworthiness.

Limitations with using churn rate as a metric

While churn rate is an important metric for SaaS businesses, it comes with inherent limitations. Here’s a brief look at the constraints of relying solely on churn rate.

• Lack of contextual depth: Churn rate provides a snapshot of one area of business operations but lacks the depth to explain why customers are leaving. Without knowing the underlying reasons, businesses might struggle to implement effective strategies to reduce churn.

• Aggregate vs. segment-specific insights: An overall churn rate can mask variations across different customer segments, product lines, or geographic regions. This aggregation can lead businesses to make misinformed decisions if it isn’t dissected into more granular segments.

• Timing sensitivity: Churn rates can fluctuate due to seasonal factors, market conditions, or singular events. Short-term variations can lead to impromptu reactions unless the metric is contextualized within a broader framework.

• Customer lifecycle: Churn rate does not differentiate between new customers and long-term customers. Losing long-term customers might have a different business implication compared to losing newer customers.

• Volume vs. value distinction: Churn rate typically counts customers without considering the value that each customer brings. While losing a high-value customer will have more impact than losing a lower-value one, churn rate alone does not capture this nuance.

• Negative focus: Focusing too much on churn can lead businesses to overly prioritize retention over acquisition or expansion, stifling growth initiatives.

• Operational silos: Churn rate might be owned by a specific team (such as customer success), leading to siloed interpretations and actions. For churn insights to be effectively operationalized, they need to be integrated across departments, influencing everything from product development to marketing strategies.

• Feedback delays: Churn rate is a lagging indicator. By the time it reflects an issue, the business may have already lost numerous customers. Relying solely on churn for feedback can result in delayed responses to emerging problems or market shifts.

• Customer engagement levels: Churn rate doesn’t differentiate between engaged and unengaged customers prior to churn. Understanding the engagement level can offer more nuanced insights into potential churn risks and opportunities for intervention.

• Risk aversion: An excessive focus on reducing churn can sometimes lead businesses to become overly risk-averse, which could hamper innovation. Businesses might hesitate to make necessary changes or introduce new features that could benefit them in the long term because they fear short-term increases in churn.

To overcome these limitations, businesses should integrate churn rate insights with other metrics, qualitative feedback, and market analysis. This holistic approach allows for more informed and nuanced business strategies.

How to improve average churn rate

Get to know your customers

Learn why different types of customers use your product, and tailor your services to meet their specific needs. If a customer decides to leave, ask them about their experience to understand what you might need to change.

How to do this:

• Conduct interviews to learn about customer needs and preferences.
  
• Segment your customers based on their behavior or usage patterns to design more personalized services or products.
  
• When customers cancel their subscription, provide a simple, optional survey where they can share their reasons.
  
• Analyze exit feedback to identify patterns or recurring issues.
  

Identify at-risk customers

Use your data to spot signs that a customer might be thinking of leaving. Reach out to these customers to see how you can improve their experience.

How to do this:

• Monitor usage patterns and flag accounts with declining activity.
  
• Set up alerts to notify your team when a customer’s product interaction drops.
  

Help customers succeed

Make sure customers are getting what they want from your product. This might mean offering guidance or training so they can get the most out of your product.

How to do this:

• Create tutorials, guides, or webinars for your customers.
  
• Provide a help desk or customer support where they can go for quick answers to problems.
  

Improve your product

Update and refine your product regularly, based on how customers use your service and the feedback they provide you. When customers give feedback, take it seriously and use their suggestions to make your product better.

How to do this:

• Implement a simple feedback loop where customers can easily share their thoughts on your product or service.
  
• Regularly review feedback and take actionable steps to address common concerns and emerging customer needs.
  
• Consider adding frequently requested features.
  
• Test new features with a small group of customers before a full rollout to ensure they add value.
  

Be flexible with pricing

If possible, include different pricing options so customers can choose what works best for them.

How to do this:

• Provide different pricing tiers or packages that cater to different customer needs or sizes.
  
• Consider discounts or special offers for long-term commitments to encourage customer retention.
  

Work as a team

Make sure everyone in your business—not just the sales or customer service teams—grasps the importance of keeping customers happy.

How to do this:

• Ensure all team members understand their role in customer retention.
  
• Encourage departments to share insights and collaborate on strategies to reduce churn.
  

Keep innovating

Always look for ways to make your product better and more relevant to your customers’ evolving needs.

How to do this:

• Stay updated on industry trends and anticipate changes that could affect customer preferences.
  
• Encourage a culture of innovation where employees are motivated to suggest and develop new ideas.
  

Choose the right customers

Focus on attracting customers who really need what you’re offering. Customers who don’t fully benefit from your product are more likely to leave.

How to do this:

• Develop a clear customer profile that you target in your marketing efforts.
  
• Tailor your sales process to attract customers who will benefit from and value your product.
  

Encourage happy customers to share

If your customers love your product, encourage them to tell others. Positive word-of-mouth can attract new customers who will stick around.

How to do this:

• Create a referral program that rewards customers for bringing in others who sign up.
  
• Feature customer testimonials or case studies on your website and in your marketing materials.