Software Growth

Churn rate

Churn rate is the share of customers or revenue you lose in a period, usually a month. It sets the ceiling on how fast a subscription business can grow.

Churn rate tells you how much of your base disappears over a set period. For a subscription product it is the first number to get under control, because every other growth effort is working against it. Skok's SaaS Metrics 2.0 puts it bluntly: fix churn and customer happiness before you push on growth, or you are filling a leaky bucket.

How to calculate churn rate

The customer version divides the customers you lost by the customers you had at the start of the period.

Say you start March with 400 paying customers and 12 cancel during the month. That is 12 / 400 = 3% monthly churn. Customers who signed up in March stay out of both numbers, otherwise you understate churn.

The revenue version works the same way with MRR instead of customer counts. The two numbers differ whenever your big customers behave differently from your small ones, which is covered in customer churn and revenue churn.

Converting monthly to annual churn

Churn compounds, so you cannot multiply by 12. Each month's losses come out of a smaller base.

At 3% monthly, 0.97 to the 12th power is about 0.694, so annual churn is about 30.6%, not 36%. At 5% monthly it is about 46%. At 2% it is about 21.5%. To go the other way:

A product that loses 20% of customers a year is losing about 1.8% a month.

Why churn sets a ceiling on growth

Jason Cohen's Max MRR idea shows the effect clearly. Divide the new MRR you add each month by your monthly churn rate and you get the revenue level where cancellations exactly cancel new sales.

Add $2,000 of new MRR every month at 4% churn and you plateau at $50,000 MRR. Doubling your sales effort only moves the ceiling to $100,000. Cutting churn to 2% does the same thing without extra acquisition spend. Cohen uses Buffer as an example of a company that hit this wall.

What good looks like

There is no single target. It depends on who you sell to. Skok flags monthly churn above roughly 2% as a sign of a deeper problem. Lenny Rachitsky's retention benchmark study shows 6-month user retention of 60% as good and 80% as great for SMB and mid-market SaaS, and 75% and 90% for enterprise. Products sold to consumers and very small businesses churn faster than products sold to teams.

Common mistakes

  • Including trials or free users. Count paying customers, or report trial conversion separately.
  • Multiplying monthly churn by 12 instead of compounding it.
  • Reading a blended number. New customers churn far more than customers who have been with you a year, so look at churn by cohort before deciding it is stable.
  • Letting fast growth hide it. Tomasz Tunguz notes in his quick ratio post that high growth can mask high dollar churn.
  • Mixing voluntary cancellations with failed payments. They have different fixes, see involuntary churn.

For small and bootstrapped SaaS

With a few hundred customers, one cancellation moves the monthly number by a quarter of a point, so look at a trailing three-month figure and at the reasons behind each cancellation. Small teams cannot out-spend a churn problem, so a point of churn removed is usually worth more than a point of conversion added.

Sources

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