SaaS Churn Rate

The rate at which customers cancel their subscriptions is a critical indicator of a software company’s performance. Calculating the SaaS churn rate tells company leaders and investors whether or not customers are willing to keep using their product.

What is SaaS Churn Rate?

In the broadest sense, the SaaS churn rate is the percentage rate at which customers stop subscribing to a company’s service.

Understanding the rate that customers churn helps software companies forecast future revenue, calculate customer lifetime value (CLV), plan marketing campaigns, and improve their products.

There are several reasons behind customer churn, and most companies face more than one:

• Customer satisfaction
• The ability of the product to meet the customer’s needs
• Pricing and value for money
• Competition from other services
• Quality of customer service
• Product-market fit
• Ability to upsell other services

Customer churn is normal—every SaaS company can expect some customers to cancel their subscriptions over time. But a high churn rate could spell trouble for the company’s long-term success.

The average monthly customer churn rate for SaaS companies is between 3% and 8%. That figure is considerably higher (32% to 50%) when zooming out to an annual rate.

Synonyms

• Average churn rate: The average amount of customers that stop subscribing to a service over a predetermined time period (typically monthly or annually)
• Monthly churn: The number of customers that cancel their monthly plans, calculated as an average over several months.
• Annual churn: The number of customers that cancel subscriptions, calculated either as a percentage at the end of the year or an average over several years.
• MRR churn: The amount of lost monthly recurring revenue (MRR) due to customer churn.
• Customer attrition: The gradual decline in customers, either voluntarily or involuntarily, based on factors both in and out of the company’s control.
• Annual customer churn rate: A measure of the number of customers that discontinue service subscriptions over a period of one year.

Calculating SaaS Churn Rate

SaaS companies calculate their churn rates similar to other companies using the subscription business model: by dividing the number of customers who canceled their subscriptions in a given time period by the total number of customers at the start of that period.

The SaaS customer churn calculation is as follows:

Churn Rate (%) = (Number of Canceled Accounts / Number of Accounts at the Start of Period) x 100

For example, if a company had 10 customers in January and two canceled their subscriptions in February, the monthly churn rate for January to February would be 20%.

It’s important to note that this calculation does not consider new customers that joined during the period—only those who canceled.

KPIs Related to SaaS Churn Rate

To accurately evaluate company’s success using the SaaS churn rate, they need to break it down into five main subcategories: voluntary churn, involuntary churn, retention rate, average revenue per user (ARPU), and average revenue per churned subscription (ARPCS).

Voluntary Churn

When customers voluntarily churn, they’re actively choosing to stop using the service. 

There are several reasons a customer would voluntarily leave:

• Dissatisfaction with the company or its products
• Unresolved customer service issues
• High subscription costs
• Lack of transparency in the billing process
• Finding a better alternative from a competitor
• Inability to correctly use the product
• Difficulty integrating the product with their workflow or tech stack

Retrospectively, companies often realize they could have reduced (or prevented) voluntary churn by addressing customer issues earlier in the process.

Involuntary Churn

Involuntary churn describes when customers cannot use the product or service anymore due to changes in their circumstances. 

This typically occurs for one of the following reasons:

• Failed payments
• Account suspension due to fraud or misuse of services
• A customer forgets to renew their subscription
• Organizational changes or restructuring
• Changes in customer needs (or a lack thereof)

Involuntary churn accounts for between 20% and 40% of all customer churn. Organizations can prevent it by streamlining their subscription management processes to make sure customers don’t miss payments or fall behind on renewals.

Retention Rate

Customer retention describes a company’s ability to keep customers using a product or service for a longer period of time.

The customer retention rate is the percentage at which existing customers stay subscribed to a service.

Retention rate is calculated as follows:

Retention Rate (%) = (Number of Accounts at End of Period / Number of Accounts at Start of Period) x 100

For example, if a company had 10 customers in January and 8 were still using their service at the end of February, their monthly retention rate would be 80%.

When an organization increases its retention rate, it effectively decrease its churn rate (as long as the number of new customers remains constant).

Average Revenue Per User (ARPU)

Average revenue per user (ARPU) is the average amount of money a company receives from each user for its services.

The ARPU calculation is straightforward:

ARPU = Total Revenue / Number of Monthly Active Users

For example, if a company earns $1,000 in revenue and has 100 monthly active users, its ARPU would be $10.

ARPU helps companies define an acceptable churn rate. If a company expects greater revenue generation from each user, it will take a bigger hit every time a customer churns and should focus more heavily on retention.

Average Revenue Per Churned Subscription (ARPCS)

Average revenue per churned subscription (ARPCS) describes how much money a company loses when someone cancels their service.

The ARPCS calculation is as follows:

ARPCS = Churned Revenue / Number of Churns

For example, if a company earns $1,000 in revenue from 10 customers who churned, its ARPCS would be $100.

Companies use ARPCS to understand the true cost of customer attrition and make more strategic decisions about their retention strategies.

Used together, ARPCS and ARPU help companies identify the most profitable point at which to keep customers subscribing.

Causes of High Saas Churn Rate

A high SaaS churn rate could be the result of numerous factors. Some of the most common causes include:

Poor Customer Experience and Support Service

The B2B customer experience is significantly different from that of direct-to-consumer brands.

Customers that purchase software subscription services implement them companywide, meaning technology decisions affect hundreds or thousands of workers.

Specifically, elements of the customer experience that influence retention and churn rates include:

• Slow response times
• High wait times on hold
• Confusing user interfaces
• Poor or nonexistent onboarding processes
• Insufficient product education materials

When hundreds or thousands of employees can’t use a product correctly, the customer experience suffers.

And if they can’t get fast, personalized service, they’ll eventually cancel.

Payment Failures and Involuntary Churns

If a company doesn’t accept payment from a customer, it won’t receive any money. And if it can’t charge customers for services, its revenue decreases.

Payment failures and involuntary cancellations are two of the most common causes of SaaS churn rate.

On a macro level, they cost the economy almost $120 billion annually.

Sometimes, they aren’t preventable. For instance, a customer’s credit card may have expired, or the payment gateway might encounter technical difficulties.

Still, companies can take proactive measures to avoid these problems in plenty of scenarios.

Pricing Model, Contracts, and Plans

Companies with complex pricing models have a harder time retaining customers. When the customer experience gets muddled in an awkward structure, it confuses potential buyers.

The same goes for companies that offer too many plans and pricing options. SaaS companies with extensive product catalogs (e.g., those built on microservices for enterprise customers) need to customize their buyers’ subscriptions if they want to ensure long-term success for each of them.

Shorter contracts also tend to yield higher churn rates—locking customers in for longer periods guarantees more consistent revenue streams.

Low Perceived Value

Regardless of what a customer pays for the software products they need, they need to know they are getting their money’s worth to continue paying month after month.

While he worked at Moz, email marketing veteran Christoph Engelhardt reduced the company’s monthly churn rate by 40% by sending an email highlighting the value Moz provided to its customers during the first thirty days.

This success underscores a critical truth of SaaS customer retention: Customers won’t automatically understand the value of a product or service.

Lack of Customer Engagement

Follow-up marketing messages and customer engagement initiatives should be part of any SaaS retention strategy.

If customers don’t feel connected to a service, they may not see the value in renewing or upgrading their subscription plans.  Email marketing campaigns can help, as can personalization efforts like targeting discounts for specific customers or offering them special deals when their contracts are about

Impact of High SaaS Churn Rate 

High SaaS churn rates make long-term survival difficult. Companies with high churn rates can’t build sustainable customer relationships, so they struggle to scale their products.

Loss in Revenue and Expansion Opportunities

The ultimate goal of every company is to serve as many customers in its ideal customer profile (ICP) as possible.

If customer churn outpaces recurring revenue, it affects a company’s ability to expand.

When a company has to spend all its leftover resources on customer acquisition, it won’t have the expansion revenue needed to break into new markets, develop products that serve new customer segments, or hire more employees.

When revenue growth slows or stagnates, investors tend to lose interest. Most of the time, founders with this problem end up accepting unfavorable (i.e., dilutive) investments to extend their cash runway.

Negative Impact on Customer Retention Strategies

In addition to revenue, churn rates negatively impact current customer retention efforts.

62% of customers say they share their bad experiences with others, according to Salesforce research.

When past customers churn, the momentum they create through online reviews and word-of-mouth can be damaging—not only for their experience but also for a company’s long-term prospects.

• Customer loyalty programs lose their efficacy if current customers no longer perceive a product’s value as the same.
• Customer feedback mechanisms, like surveys and reviews, don’t provide accurate data if customers continue to leave.
• Annual plans only prolong the inevitable if more customers plan to switch at the end of their contracts.
• Rising customer acquisition costs place increased stress on the business to retain customers at a time it has the most difficulty doing so.

A few customer retention strategies can still be effective, though. Personalizing the customer journey and providing existing customers with valuable product information and tutorials can turn poor customer retention rates around.

Strategies to Reduce Customer Churn Rate in Saas Companies

To reduce SaaS customer churn, companies often don’t need to do much. With process automation and a few changes to existing strategies, most organizations can make significant progress.

Utilize Data Analytics to Analyze Customer Behavior Trends

Data truly is king. In a 2023 survey from APMdigest, 70% of respondents indicated the use of a centralized data platform—83% of which reported significant money savings from doing so.

• Product development teams use customer data to identify usage patterns and make product improvements that better solve their pain points.
• Marketing and sales teams need it to communicate the product’s value to potential customers.
• Customer success teams use it to quickly resolve inquiries, standardize the process, and relay commonalities back to sales, marketing, and product development.
• Executives look at the bigger picture, using it to measure company health, make forecasts, and show progress to investors.

Depending on an organization’s exact structure, data comes from some or all of the following sources:

• The product itself
• CRM software
• Sentiment analysis and social listening tools
• Customer support calls and help desk software
• Marketing automation and email segmentation tools
• Billing software

Not all the data from these sources are connected to customer churn, but it can be used to build an overall picture of customer behavior that contributes to churn.

Optimize the Pricing Model with Competitive Prices and Discounts

Price optimization is a tricky equation.

Companies have to charge enough to make a profit. But overcharging drives customers away.

Different pricing strategies work for different organizations, but a few rules of thumb usually apply.

Base competitive pricing on customer data.

Comparing products’ features and value to similar products on the market is a good start.

But they won’t get a complete picture of the market unless they look at their customers’ perceived value of the product.

Through interviews, surveys, and A/B testing, they can determine the best way to bundle products and services at different price points.

Offer discounts for long-term contracts.

Annual recurring revenue (ARR) is the holy grail for SaaS companies.

Monthly contracts carry an inherent risk with them: They result in immediate cash flow, but they also enable customers to leave at any time.

It’s often worthwhile to offer discounts to customers who commit to an annual contract and stick with them.

For happy customers, longer-term contracts increase customer loyalty and help a company make better financial projections for the upcoming year.

Use tiered pricing to match a product’s price to its value per customer.

When customers have varied team sizes, they achieve different levels of value using a product.

Tiered pricing is an easy fix for complicated pricing models.

It allows companies to segment their customers and tailor their prices according to their needs.

The tiered approach is a win-win scenario: Customers get more value from the product while companies receive an increased revenue stream.

Scale pricing based on users or seats.

Since software licenses can span entire organizations, customers generally feel more comfortable paying for what they use.

This approach also helps companies retarget customers with offers to add new users or products as their organizations grow.

Enhance the Quality of Customer Support Services

76% of consumers say they would quit doing business after just one bad experience.

In B2B, it’s unlikely that one unsolved support issue would result in a companywide reevaluation of a vendor partnership.

But one bad experience can still damage relationships, and a failure to fix them results in churn down the line.

• The best way to avoid that is through proactive customer support. Investing in tech-enabled customer service solutions like help desk software and chatbot automation allows companies to communicate with customers more effectively, track their satisfaction over time, and provide quick resolutions for issues.
• Customers typically prefer self-service options when available. They offer the convenience of not having to wait for someone to help them solve their problem. Self-service portals give customers access to product documentation, tutorial videos, and FAQs without waiting for a rep.

Implement Subscription Management and Billing Solutions

Subscription management and automated billing save SaaS companies from dozens of issues that result in voluntary and involuntary churn.

The most essential benefits of subscription management and billing solutions include:

• Automating the payment process to ensure customer accounts are up-to-date
• Setting up flexible payment plans, including installment payments, pay-as-you-go contracts, and more
• Allowing customers to upgrade or downgrade their subscriptions with ease
• Accepting multiple payment methods so failed transactions don’t result in churn
• Automating billing notifications to reduce the time and cost of dunning management
• Dynamic discounting to offer personalized incentives
• Collecting customer payment data to show organizations which customers are most valuable

The end result of each of these benefits is improved monthly and annual churn rates, especially considering the large percentage of which directly result from billing and payment processing errors.

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