Churn rate vs. retention rate: Key differences and how to measure them

Did you know that only 6% of SaaS companies with over 12,000 subscribers achieve a net revenue retention rate of 100% or more? This startling statistic highlights the importance of understanding and improving your churn and retention rates.

We'll dive deep into the difference between churn rate vs. retention rate in SaaS. We'll explore how these metrics are interconnected and why they're crucial for your business's success.

You'll also learn:

• How to calculate churn rate and retention rate accurately.
• Effective strategies to reduce churn and boost retention.
• Warning signs that a customer might be on the verge of churning.
• Industry benchmarks for churn and retention rates.

Let’s get started by explaining what churn rate actually means.

What is churn rate in SaaS terms?

In SaaS, churn rate refers to the percentage of users who end their subscription within a specific timeframe. Essentially, it's the rate at which your customers decide they no longer need your service.

A high churn rate can be a big problem for SaaS companies, as it directly impacts their recurring revenue.  

Think of it like this: Say you have 100 customers at the start of the month. By the end of the month, 5 of them have canceled their subscriptions. In this case, your monthly churn rate would be 5%. Do keep in mind this is an oversimplification, and we’ll discuss the formula later. 

One thing is certain: Understanding the dynamics of churn vs. retention is vital in SaaS. Churn means customers leaving, but retention focuses on those who stay. Both metrics offer valuable insights into customer satisfaction, product-market fit, and the overall health of your business.  

What is the retention rate?

Retention rate in SaaS is the percentage of existing users who choose to stick around and continue using your product or service within a given time period. 

It's a direct reflection of how well you're keeping your customers happy and engaged. A high retention rate is a powerful indicator of customer satisfaction and a healthy business trajectory.

For instance, if you began the year with 500 customers and ended with 450, while adding 100 new customers throughout the year, your annual retention rate would be 70%.

Let’s break this down using the retention rate formula:

[(Number of customers at the end of a period - Number of new customers acquired during that period) / Number of customers at the beginning of the period] x 100

Plugging in the numbers:

Retention Rate = [(450 - 100) / 500] x 100 = 70%

This means that 70% of your initial customer base stuck with you throughout the year.

Note: We’ll touch upon this formula in more detail in a later section.

Churn rate vs. retention rate 

The interplay of customer retention vs. churn is a constant balancing act for SaaS companies. Because of that, we’ll now dive deeper into the differences between churn rate vs. retention rate:

How are churn and retention rates connected?

Churn rate and retention rate are two sides of the same coin. They both provide valuable insights into customer behavior and the overall health of your SaaS business, but with different perspectives.  

Churn rate, as we discussed, tells you how many customers are leaving. The retention rate reveals how many are staying. Interestingly, you can use the same core metrics to calculate both! This is because they are inherently linked.  

Here's a simple way to visualize their relationship:

Imagine you're running a SaaS company with a subscription-based service. At the beginning of the quarter, you have 1,000 customers. Throughout the quarter, 50 customers decide to cancel their subscriptions (churn). 

However, you also manage to get 100 new customers during the same period. Now, at the end of the quarter, you have 1,050 customers.

While it might seem like you're growing because you have more customers than you started with, the churn rate still plays a crucial role. Those 50 customers who left represent lost revenue and potential for future growth.

This scenario highlights how churn and retention are intertwined. Even with new customer acquisition, a high churn rate can impact your overall growth and profitability. To effectively analyze your business performance, you need to consider both metrics in tandem. 

Why is this important?

• High churn rate: Indicates potential problems with your product, pricing, or customer service. It's a signal to investigate why customers are leaving and address those issues.  
  ‍
• High SaaS retention rate: A strong indicator of customer satisfaction and loyalty. It suggests you're delivering value and meeting customer needs effectively.  

When to focus on each

• Early-stage SaaS companies: They often prioritize acquisition and reducing churn. They need to attract new customers while ensuring the initial experience is positive enough to retain them.
  ‍
• Established SaaS companies: Shift their focus towards maximizing retention. They aim to cultivate long-term customer relationships and increase customer lifetime value.

By carefully monitoring both churn rate vs. retention rate, SaaS companies can make better decisions. Having a pulse on these metrics helps them to improve their product, customer experience, and their bottom line.

How to calculate your SaaS company retention rate

Calculating your SaaS retention rate is a key step in understanding your customer relationships and business health. It provides a clear picture of how well you're keeping your customers engaged and happy. Here's the formula to calculate your customer retention rate we shared earlier:

[(Number of customers at the end of a period - Number of new customers acquired during that period) / Number of customers at the beginning of the period] x 100

Let's break down the elements:

• Number of customers at the end of a period: This is the total number of customers you have at the end of the time period you're measuring (e.g., month, quarter, year).  
  ‍
• Number of new customers acquired during that period: This refers to the number of new customers you gained within that specific time period.
  ‍
• Number of customers at the beginning of the period: This is your starting point – the total number of customers you had at the very beginning of the measurement period.

Please note: This formula isolates retention by excluding new customer acquisitions to provide a clearer view of how well you’re retaining your original customer base. 

Including new customers in the calculation could inflate retention figures, making it harder to identify if existing customers are leaving. By isolating retention, this formula focuses purely on customer loyalty and satisfaction.

Example

Here's an example to illustrate how it works in action:

Let's say you're analyzing your monthly retention rate.

• At the beginning of the month, you had 800 customers.
  ‍
• During the month, you acquired 100 new customers.
  ‍
• At the end of the month, you have a total of 850 customers.

Plugging these numbers into the formula:

[(850 - 100) / 800] x 100 = 93.75%

Your monthly retention rate is 93.75%. This data shows you retained almost 94% of your existing customers that month.

Remember: When considering churn rate vs. retention rate, the goal is to keep your retention rate high and your churn rate low. 

Strategies to improve customer retention

Keeping your customers happy and engaged is key to a thriving SaaS business. Here are some key strategies to improve your retention rate and keep churn low:

• Personalize the customer experience: Tailor your interactions and offerings based on individual user preferences. This could involve personalized onboarding, product recommendations, or even customized communication.  
  ‍
• Smooth out the onboarding process: First impressions matter. Do everything you can to keep your onboarding experience intuitive. It should provide new users with the guidance they need to quickly find value in your product.
  ‍
• Build a strong customer community: You want to foster a sense of belonging. Create a space for customers to connect, share experiences, and learn from each other. Think forums, online communities, or even in-person events.
  ‍
• Offer proactive support: Don't wait for customers to reach out. Anticipate their needs and provide timely support. This support can come in the form of in-app guidance, knowledge bases, or readily available customer service channels.
  ‍
• Implement loyalty programs: Reward your loyal customers. Offer exclusive benefits, discounts, or early access to new features. This is a great way to incentivize continued engagement and loyalty.
  ‍
• Gather and act on feedback: Listen to your customers. Regularly collect feedback through surveys, reviews, or direct interactions. Use this feedback to improve your product, service, and overall customer experience.
  ‍
• Focus on customer success: Go beyond basic support. Provide resources and guidance to help customers achieve their desired outcomes using your solution. You can offer personalized consultations and extra educational content.

How to calculate your churn rate 

Here's the formula to calculate your customer churn rate:

(Number of customers who left during a specific period / Total number of customers at the beginning of that period) x 100

Let's break down the elements:

• Number of customers who left during a specific period: This also refers to those who chose not to renew within the time frame you're analyzing (e.g., month, quarter, year).  
  ‍
• Total number of customers at the beginning of that period: This is your starting point. It’s the total number of customers you had at the very beginning of the measurement period.

Here's an example to see it in action:

Let's say you want to calculate your monthly churn rate.

• At the beginning of the month, you had 1,000 customers.
  ‍
• During the month, 30 customers canceled their subscriptions.

Plugging these numbers into the formula:

(30 / 1,000) x 100 = 3%

Your monthly churn rate is 3%. This means that 3% of your customers churned that month.

Warning signs of potential churn

You can't always predict exactly when a customer might churn. However, there are often telltale signs that indicate a customer may be on their way out. Recognizing these warning signs early is critical. Here are some key red flags to watch out for:

• Decreased product usage: A sudden or gradual decline in how often a customer uses your product can signal disengagement. Have they stopped using key features? This could be a sign that they're finding less value in your service.
  ‍
• Less customer support interactions: It might seem counterintuitive. However, a drop in support requests could indicate a problem. Customers who are actively engaged with your product are more likely to reach out for help when needed. 
  ‍
• Negative feedback: Pay close attention to customer feedback. Remember to always check surveys, reviews, or support interactions. An increase in negative sentiment or complaints could signal potential churn.
  ‍
• Lack of engagement with communications: Are your emails going unopened? Are your customers ignoring your in-app messages? A lack of responsiveness to your communication efforts could indicate disinterest.
  ‍
• Downgrading of subscription plans: Downgrading is not always a direct precursor to churn. However, a customer downgrading their subscription plan could suggest they're exploring alternatives.

What are the ideal churn and retention rates? 

While every SaaS business strives for zero churn and 100% retention, it's important to have realistic benchmarks in mind. Understanding industry standards can help you set goals and track your progress effectively.

According to Cobloom’s meta-analysis of 6 studies, the ideal churn rate for SaaS companies is 5-7% annually. This translates to a monthly churn rate of roughly 0.4%. Conversely, the ideal retention rate falls within the range of 93-95% annually, or 99.6% monthly.

Of course, these are just benchmarks. Your specific goals will depend on various factors, including your industry, company size, and growth stage.

Here are some key considerations when evaluating your churn rate vs. retention rate:

• Industry averages: Research industry-specific benchmarks. This way, you’ll understand how your performance compares to competitors.
  ‍
• Company stage: Early-stage companies often have higher churn rates as they find their market fit. Established companies typically have lower churn and higher retention.
  ‍
• Customer lifetime value (LTV): If your LTV is high, you may be able to tolerate a slightly higher churn rate. However, if your LTV is low, minimizing churn becomes even more crucial.

Orb can help you monitor revenue for better billing

We've explored the key differences between churn rate vs. retention rate. But what about the practical side of keeping those rates in check? The answer is to use a billing and pricing platform. 

Orb is a done-for-you billing platform designed to give you the tools and insights to keep churn low and retention high. Here's how Orb can help:

• Reduce involuntary churn with accurate billing: No more billing errors and frustrated customers. Orb's usage tracking provides accurate invoices every time, minimizing payment failures and involuntary churn.
• Happier users with transparent invoices: Orb provides detailed invoices that foster trust. We help reduce billing disputes and improve customer satisfaction — contributing to higher retention rates.
• Spot at-risk users with usage monitoring: Orb's real-time usage tracking and reporting features allow you to find customers who may be at risk of churning due to decreased product usage. 
• Optimize pricing for customer retention: Orb's flexible pricing models and plan versioning features allow you to experiment with pricing strategies. You can then find the sweet spot that keeps customer lifetime value high and reduces churn.

Ready to take control of your churn and retention rates with a platform that puts your users first? Orb’s usage-based billing solution integrates with your existing tools and processes, secures your consumer data and privacy, accurately tracks customer usage, and enables growth. 

If you’re ready to elevate your billing and pricing operations, get in touch today.