What is Churn Rate?
Churn Rate is the percentage of subscribers to a service who discontinue their subscriptions within a given time period.
For a SaaS business, churn rate is the measure of the number of individuals or items moving out of a collective group over a specific period. It is often used in the context of customer attrition. For example, if a SaaS company starts with 100 customers and loses 5 over a month, the churn rate for that month is 5%.
Why It Matters?
A high churn rate could indicate customer dissatisfaction, cheaper and/or better offers from competitors, more successful sales and marketing by competitors, or simply failure to successfully onboard new customers. It provides a clear picture of the company’s customer retention status, which can be used to strategize and implement measures to reduce the churn rate. Furthermore, understanding churn rate can help in optimizing the Customer Acquisition Cost (CAC) by providing insights into the recurring revenue generated by the customers.
Churn rate is not merely the opposite of growth rate. While growth rate accounts for new customers, churn rate only looks at existing customers who leave. It’s possible for a company to have a high growth rate and a high churn rate simultaneously.
Frequently Asked Questions
1. How is churn rate calculated in SaaS companies?
Churn rate is calculated by dividing the number of customers lost during a certain period by the number of customers you started with during that period.
2. What is a good churn rate for a SaaS company?
A “good” churn rate varies by industry and company maturity, but generally, a lower churn rate is desirable. Many consider 5-7% annual churn rate to be acceptable for SaaS companies.