SaaS churn rate: How to calculate and improve customer retention

What is SaaS churn rate?

SaaS churn rate is the percentage of customers who decide to stop using your service over a specific period, whether it's a month, a quarter, or a year. It’s like a leaky bucket that slowly drains your customer base. 

Keeping your SaaS customers happy and engaged is key to building a thriving business. In this article, we'll explore the ins and outs of the SaaS churn rate, arming you with the knowledge and tools needed to calculate and reduce it.

You'll also learn:

• The difference between customer and revenue churn
• Common reasons why customers leave
• Actionable strategies to improve customer retention
• How Orb can help you optimize your pricing and reduce churn

Why should you care about SaaS churn? 

For starters, it's a key indicator of your SaaS business's health. A high churn rate can signal underlying issues. Think poor customer satisfaction, a lack of product-market fit, or even aggressive competition. 

Losing customers also means losing money, which directly impacts your profitability and growth.

What’s the difference between customer churn and revenue churn?

Churn isn't just about counting lost customers. It's also crucial to understand the difference between customer churn and revenue churn. Here’s a quick explanation:

• Logo churn focuses on the number of users who jump ship. It gives you a sense of how well you're retaining your overall user base.
• Revenue churn, on the other hand, looks at the financial impact of those departing customers. It tells you how much recurring revenue you're losing due to churn.

For example, losing a few high-paying customers can have a much larger impact on your bottom line than losing a larger number of low-paying customers. 

Keeping a close eye on both customer and revenue churn gives you a more complete picture of your business's performance. It also helps you identify areas for improvement so your SaaS churn rate drops.

What's the average churn rate for SaaS?

Generally, a "good" annual churn rate for established SaaS companies is around 5-7%. However, for early-stage companies or those targeting small businesses, monthly churn rates of 3-5% are not uncommon. Do keep in mind that rates can vary across different industries and company sizes.

How to calculate SaaS churn rate

Calculating your SaaS churn rate might seem intimidating, but it's actually a pretty straightforward process. Let's break it down into manageable chunks:

Customer churn rate formula

This formula tells you the percentage of customers you've lost over a certain period. Here's the equation:

(Customers lost during a period ÷ total customers at the beginning of the period) × 100 = customer churn rate 

Let's see it in action:

Imagine you started January with 500 customers, and by the end of the month, 20 decided to cancel their subscriptions. So, your numbers would be:

• Customers lost = 20
• Total customers at the start = 500

After plugging these numbers into the formula, it should look like this:

(20 ÷ 500) × 100 = 4% customer churn rate

Result: In January, you lost 4% of your customer base.

Revenue churn rate formula

While customer churn tracks the number of users you lose, revenue churn focuses on the financial impact of those losses. It's calculated as follows:

(MRR lost from churn ÷ MRR at the beginning of the period) × 100 = revenue churn rate 

Note: MRR stands for Monthly Recurring Revenue

Here's an example calculation:

Let's say your MRR at the start of February was $100,000. During February, you lost $5,000 in MRR due to customers canceling. In this example, your numbers would look like this:

• MRR lost = $5,000
• MRR at the start = $100,000

By applying the formula, this is how the numbers above would fit:

($5,000 ÷ $100,000) × 100 = 5% revenue churn rate

Result: You lost 5% of your recurring revenue in February due to churn.

Gross vs. net churn

When analyzing churn, it's important to distinguish between gross churn and net churn. Here’s a simple explanation of what these two mean:

• Gross churn simply looks at the raw numbers — the revenue or customers lost. It doesn't take into account any new revenue generated from existing customers.
• Net churn provides a more holistic view. It factors in expansion revenue. This type of revenue includes the extra money earned from upsells, cross-sells, or upgrades to existing customers. 

Why is net churn more insightful? 

It’s more insightful because it shows the overall impact of churn on your growth. A negative net churn rate, where expansion revenue outweighs revenue lost from churn, is a sign of a truly healthy SaaS business.

Remember: By tracking both gross and net churn, you can gain a deeper understanding of your customer dynamics. As a result, you’re able to make more informed decisions to drive sustainable growth.

Why reducing churn rate is crucial for SaaS success

In the SaaS industry, recurring revenue is king. That’s why a high churn rate can be a real thorn in your side. Reducing churn is about saving money, but it’s also a cornerstone of long-term growth and sustainability. 

Here's why:

Impact on growth

High churn rates can significantly hinder your growth trajectory. It's like trying to run a marathon while dragging a heavy anchor. Even if you're attracting new customers, a high churn rate means you're losing ground and struggling to gain momentum.   

Acquisition costs

Acquiring new customers is expensive, often far more so than retaining existing ones. 

So, why spend a fortune chasing new clients when you can focus on keeping the ones you already have happy? Reducing churn helps you maximize your ROI and allocate resources more effectively.  

Customer Lifetime Value (CLTV)

Churn has a direct impact on CLTV. This metric is the total revenue you expect to generate from a customer throughout their relationship with your company. 

The longer a customer stays with you, the higher their CLTV. Reducing churn, therefore, boosts CLTV and contributes to greater profitability.  

Predictable revenue

A lower churn rate translates to a more predictable and stable revenue stream. This predictability allows you to forecast your finances more accurately. It also helps make informed business decisions and invest in future growth initiatives.    

Ultimately, reducing churn is about building a loyal customer base that sticks with you for the long haul. It's about creating a product and an experience that customers love and can't imagine living without. 

Common reasons for SaaS customer churn

Customer churn is a reality for any SaaS business, but understanding the reasons behind it can help you plug the leaks in your customer bucket. Here's a closer look at some of the most common culprits:

Reason 1: A poor onboarding experience

Imagine signing up for a new service and feeling completely lost. You don't know where to start; the features seem confusing; and you can't figure out how to achieve your goals. That's exactly what a poor onboarding experience can feel like for your customers.

Why it happens:

• Lack of clear guidance: Customers need a helping hand to navigate your product, especially in the initial stages. Without clear tutorials, documentation, or responsive support, they might give up and leave.
• Failing to demonstrate value quickly: Customers want to see results, and they want to see them fast. If your onboarding process doesn't showcase the core value proposition of your product early on, they might question their investment and churn.
• Overly complex setup: A cumbersome setup process with too many steps or technical jargon can discourage users from fully engaging with your product.

Pro tip: Think of onboarding as the first impression your product makes. Make it count.

Reason 2: Lack of product-market fit

Sometimes, churn happens because your product simply isn't the right fit for your customers' needs. This issue often boils down to a lack of product-market fit, where your solution doesn't address the pain points of your target audience.

Why it happens:

• Targeting the wrong audience: Your product might be fantastic, but if it's marketed to the wrong people, it won't gain traction. It's vital to identify your ideal customer profile and tailor your messaging accordingly.
• Weak value proposition: Customers are constantly evaluating the value they get from your product. If they don't perceive it as a worthwhile investment that solves their problems effectively, they'll likely churn.
• Ignoring customer feedback: Failing to listen to customer feedback and incorporate it into your product roadmap can lead to a disconnect between your offering and your customers' evolving needs.

Reason 3: Bad customer support

In such a customer-centric industry like SaaS, providing excellent support is a must. Slow, unhelpful, or impersonal support interactions can leave customers feeling frustrated and undervalued, pushing them toward the exit door.

Why it happens:

• Long response times: Nobody likes to wait around for help. Slow response times can make customers feel ignored and unimportant.
• Ineffective solutions: Providing generic or unhelpful answers can exacerbate customer frustration. Support teams should be equipped to provide personalized solutions and go the extra mile to resolve issues.
• Lack of empathy: Customers want to feel heard and understood. A lack of empathy from support agents can damage relationships and contribute to churn.

Pro tip: Invest in building a responsive and empathetic support team that truly cares about customer success.

Reason 4: Product complexity or lack of usability

A SaaS product with a steep learning curve can be a major turn-off for users. If your product is too complex or lacks intuitive design, customers might struggle to use it effectively and eventually abandon it altogether.

Why it happens:

• Overly complex features: A feature-rich product can be appealing. However, overloading it with complex functionalities can overwhelm users. As a consequence, you’d be preventing them from achieving their goals with your solution.
• Unclear workflows: Confusing navigation, poorly designed menus, or a lack of clear instructions can make it difficult for users to find what they need and perform basic tasks.
• Lack of user feedback in design: Failing to incorporate user feedback in the design process can lead to a product that doesn't align with how customers actually use it.

Pro tip: Strive for simplicity and user-friendliness. A well-designed product should be intuitive and easy to use, even for non-technical users.

Reason 5: Unclear pricing or unexpected fees

Pricing is a sensitive issue for customers. Unclear pricing models, hidden fees, or unexpected charges can create a sense of distrust and lead to churn.

Why it happens:

• Complex pricing tiers: Having too many pricing tiers with confusing features and limitations can make it difficult for customers to choose the right plan.
• Lack of transparency: Hidden fees or unexpected price increases can erode customer trust and lead to frustration.
• Poor communication: Failing to clearly communicate pricing changes or billing details can create confusion and frustration.

Pro tip: Be upfront and transparent about your pricing. Offer clear explanations of your pricing model and ensure customers understand what they're paying for.

Reason 6: Competitor alternatives

The SaaS market is fiercely competitive, and customers are always on the lookout for better solutions. If your competitors offer more compelling features, better pricing, or superior support, you might lose customers to them.

Why it happens:

• Lack of differentiation: If your product doesn't offer unique features or benefits that set it apart from the competition, customers might be swayed by alternative offerings.
• Falling behind on innovation: The SaaS landscape is constantly evolving. Failing to keep up with the latest trends and innovations can make your product seem outdated and less appealing.
• Poor competitive analysis: Not keeping tabs on your competitors' offerings and strategies can leave you vulnerable to losing customers to more innovative rivals.

Pro tip: Stay ahead of the curve by continuously innovating. You should always monitor your competitors and provide a compelling reason for customers to choose you over others. 

Strategies to reduce SaaS churn rate

Here are some proven strategies to help you keep your SaaS churn rate low:

1. Improve onboarding and customer education

First impressions matter, especially in the SaaS industry. A smooth and engaging onboarding experience can set the stage for long-term customer success.

How to do it:

• Provide in-app tutorials: Guide users through your product's key features and functionalities with interactive tutorials that appear contextually within the app.
• Personalize the onboarding journey: Tailor the onboarding experience to different user segments based on their needs and goals.
• Offer educational resources: Create a knowledge base with helpful articles, videos, and FAQs so users can learn at their own pace.
• Track user behavior: Use analytics to spot friction points in the onboarding process and make data-driven improvements.

2. Enhance customer support

A positive support experience can turn a frustrated customer into a loyal advocate. When customers encounter roadblocks, they need quick and effective support to get back on track. 

How to do it:

• Offer multi-channel support: Provide support through various channels like chat, email, and phone to cater to different preferences.
• Respond promptly: Aim for quick response times to show customers you value their time and are committed to resolving their issues.
• Empower your support team: Equip your agents with the knowledge and tools they need to provide personalized and effective solutions.

3. Build strong customer relationships

Building strong customer relationships goes beyond simply resolving their issues. It's about fostering a sense of community and showing them that you genuinely care about their success.

How to do it:

• Regular check-ins: Schedule regular check-in calls or emails to gather feedback, address concerns, and provide updates.
• Customer success teams: Dedicated customer success managers can provide personalized guidance and support to ensure users are achieving their goals with your product.
• Community building: Create online forums or communities where customers can connect, share best practices, and learn from each other.

4. Optimize product usability and feature set

Your product is the heart of your SaaS business. Continuously improving its usability and ensuring it meets your customers' evolving needs is crucial for reducing churn.

How to do it:

• Gather customer feedback: Regularly collect feedback through surveys, interviews, or in-app feedback forms. Doing so will help you understand how customers are using your product and find areas for improvement.
• Analyze usage data: Track how customers interact with your product to identify pain points and unused features. 
• Focus on core value: Make sure your product delivers on its core value proposition and effectively solves the problems it's designed to address.

5. Refine pricing strategies

Pricing can be a major factor in customer churn. Aligning your pricing with the value you provide and offering flexible options can help you retain more customers.

How to do it:

• Offer tiered pricing: Provide different pricing tiers with varying features and usage limits to cater to different customer segments.
• Consider usage-based pricing: Charge customers based on their actual product usage, which can be more appealing for businesses with fluctuating needs.
• Be transparent: Clearly communicate your pricing model and avoid hidden fees or unexpected price increases that might surprise or frustrate users.

6. Leverage data to predict and prevent churn

You can use customer data to identify churn risks and take proactive steps to prevent them. Tools like Orb's billing platform can be invaluable in this effort.

How to do it:

• Track customer behavior: Use data to identify actions associated with churn, such as reduced product usage or an increase in support tickets related to specific features. Orb provides granular insights into usage patterns and billing activity.
• Predict churn risk: Implement predictive analytics to identify at-risk customers based on their engagement patterns. Orb's platform allows you to monitor real-time usage data and configure alerts for specific activity thresholds.
• Personalize interventions: Proactively reach out to customers showing signs of churn. Do it with targeted offers, helpful resources, or personalized support to address their concerns and encourage them to keep using your solution.

How Orb’s flexible pricing models help reduce churn

Building a successful SaaS business demands a pricing strategy that aligns with customer needs and encourages long-term engagement. 

This is where Orb shines. 

Orb's done-for-you billing platform helps you create flexible pricing models that reduce churn and drive sustainable growth. Product leaders at industry-leading companies like Perplexity and Vercel rely on Orb to build a billing engine that supports their growth ambitions.

With Orb, you can:

• Align pricing with value: Implement usage-based pricing so customers only pay for what they consume, reducing the risk of churn due to perceived overpricing. We also support hybrid models for those who need a more refined billing engine. 
• Adapt to customer needs: Offer flexible pricing models that scale with your customers' businesses, preventing churn during slow periods or as their needs evolve. We adapt your pricing models so you’re always maximizing profits from your solution. 
• Proactively engage at-risk customers: Leverage Orb's real-time usage tracking. This feature helps you identify early signs of churn and take steps to re-engage customers before they leave.

Ready to take control of your SaaS churn rate and boost your growth? Discover how Orb can help you achieve scalable growth. Check out our free demo and test out Orb yourself. Remember to check our flexible pricing options and find one that fits your needs and budget.