Before we begin, let’s recap what churn is and why SaaS businesses need to be measuring it.
Churn rate is the percentage of customers and/or revenue lost over a period of time, based on customers not renewing or cancelling their subscriptions to your SaaS product.
Why is this important?
By understanding your churn rate, you will have a much clearer picture of the health of your SaaS business. You will be able to spot trends of growth or shrinkage and the reasons behind it, enabling you to either improve or optimise particular areas of your business for scalable growth.
Why do customers churn?
There are a number of factors that lead to a customer deciding to not renew or cancel their subscription with you. For example:
Your pricing is no longer affordable for the business.
Your product has not provided enough perceived value.
Your product is great, but customer service has let the client down.
The customer has moved to a competitor’s product.
Your product didn’t live up to the expectations that were set during the sales process.
The customer’s business has gone through a change which means your service is no longer needed.
Some of which are under your control, while a few can’t be avoided.
Out of the examples above, you may spot some reasons that sound familiar. If you are getting feedback from clients who still have the need for your service but can no longer subscribe to your product, it’s time to really dig into what you as a business can do to turn these pain points around to help you achieve negative churn and ultimately grow your SaaS business year-on-year.
One of the first ways to calculate this is to take a time period that will give you a clear picture of your churn rate. For example, if your subscription model is monthly, you will want to measure monthly. If you only work to annual subscriptions, take a look over a 12-month period, and so on.
Once you have decided on a relevant time period, work out the total number of customers during this time and the total number of customers who churned (didn’t renew or cancelled their subscription). Now, take the total number of churned customers and divide it by the total number of customers and times this by 100 to get your churn rate.
However, if you have a range of pricing options for your SaaS solution, then this figure doesn’t really give you a true picture of your company’s robustness and potential growth. This is where revenue churn comes in.
Instead of focusing on the customer figures, it is more important to look at the monthly revenue figures to see how these losses are actually affecting your bottom line. If you have been making changes to your business which means you have moved away from smaller pricing packages, it is natural to see some of these smaller subscriptions drop off. That’s not a problem as long as you are seeing the larger subscriptions come in to replace them!
To calculate revenue churn, work out how much revenue you have lost in the given time period, divide this by the last period’s total revenue, and multiply by 100. This will give you the percentage of your Monthly Recurring Revenue (MMR) that has churned.
To see growth in the business, you will be aiming for a negative churn, where new subscriptions have replaced any lost customers. Most SaaS businesses look to achieve this through the following strategies:
Expansion: having a pricing model that increases the subscription price based on usage growth.
Upselling: customers upgrading their subscription to access a higher level of features and/or features
Cross-selling: customers purchase additional products or services alongside their original subscription (such as training).
Even if your monthly revenue figure is in the millions, if your typical customer churns before you have even had a chance to recoup the average customer acquisition cost, you could be in big trouble. If you haven’t already run through these calculations today and if you have a churn problem, here’s our top tips to help reduce churn.