SaaS Churn Rate_ What You Need To Know

Are you in the SaaS business and concerned about customer retention and revenue growth? Do you use metrics to guide you in making the appropriate business decisions? Let’s consider the SaaS Churn Rate and What You Need to Know to help you succeed in this competitive SaaS market.

The loss of customers or ‘churn’, otherwise known as “Logo Churn” is as telling a number as is actual revenue generated for the period when it comes to determining the financial health and well-being of your company. As a SaaS entrepreneur, it is important to understand not only the rate at which customers are subscribing to your services, or in other words, new customers, but also the rate at which they are unsubscribing or not renewing their services. This customer turnover could equate to customers not satisfied with the software product in its current version. Retention is key to future growth and the success of your company and understanding the reasons WHY customers may be leaving could be the pivotal point in your future success. In order to ensure retention, customers must continue to see the value in your offerings and services and if they are not renewing, this value may be lost.

Although you may be experiencing tremendous growth in customer acquisition and therefore, revenue, if you are losing customers at a high rate, you may in fact be losing revenue each period. The real test of success is in realizing the lowest possible churn rate, or loss of customers. In reality, the number of new customers must always be greater than the number of lost customers for the period in order to continue growing, but reducing the churn will ensure future success.

Now that you understand the importance of churn rate and how it impacts your business, let’s look at two ways of modeling it:

  1. Churn Rate – using the churn rate is a simple method of calculating your customer loss for the period. It is easily understandable and requires little input, yet its impact is a critical metric in your business decision making.

SaaS Churn Rate Formula

For example, if you begin the month with 500 SaaS customers and yet 50 annual renewals have expired during the month, your churn rate is .1 or 10%. Although the number 50 or even 10% may no

t be significant, in fact, this could translate into a high revenue loss.

What if instead of losing those customers, you had upsold them to a new software version, package or promotion? Not only would you have NOT lost a customer, but you would have increased your revenue as well.

        2. Revenue Churn uses the revenue dollars lost when customers do not renew or unsubscribe their SaaS during the period.

SaaS Churn Rate Formula 2

For example, if your revenue dollars from monthly recurring subscriptions is $20,000 and at the end of the month, you generated revenue of $15,000, your Revenue Churn would be .25 or 25%. Although of course, a 25% drop in revenue is not ideal, this model and calculation is not a good indicator as to the number of customers represented or the possible reason for the lost revenue.

The complexity of your software and package offerings may determine the complexity and definition of the churn rate. For example, how it is calculated and the impact of the data may vary depending upon the terms of usage, number of licenses, pricing and duration of subscription.

The bottom line is that you must use the method that is appropriate for your specific business, using the simplest model with the goal of solving a problem. Ultimately, the purpose of modeling is to determine the buying and usage habits and patterns of your customers to provide the best possible products and services. By utilizing the Churn Rate versus the Revenue Churn method, you can best determine not only the number of lost customers but also then target those customers for upsells and upgrades. Customer retention is as important a use of your time and resources as new customer development and acquisition when you are a SaaS entrepreneur.

To further assist you in determining the appropriate model for your business, you may consider a Introduction to Entrepreneurial Finance (FIN101) or Entrepreneurial Accounting (FIN103). A financial modeling tool will help you to forecast and determine churn rate, and performance and revenue projections.

As difficult as it is to market to, reach and secure your SaaS customers, your goal should be to in fact keep them! Of course, knowledge is king and when it comes to effectively managing your SaaS business, be sure to use Churn Rate as your metrics of choice to assist in your decision making and product development options.

FIN101 Introduction to Entrepreneurial Finance
FIN 105 Take Course