Churn is unavoidable in any SaaS business. That’s why understanding your B2B SaaS churn rate is essential for evaluating marketing effectiveness, improving your bottom line, and doubling down on your customer retention strategies.
Scott Hurff
What is a good churn rate? What is a healthy SaaS churn rate that keeps your subscription model sustainable and healthy?
Churn is unavoidable in any SaaS business. That’s why understanding your B2B SaaS churn rate is essential for evaluating marketing effectiveness, improving your bottom line, and doubling down on your customer retention strategies.
One useful exercise is to imagine an investor asking for your business’ churn rate. What will you present to them? Are you aware of the metrics they’re interested in and which indicators are important in the evaluation?
Let’s dive into everything you need to know about B2B churn rates for SaaS. As churn experts at Churnkey—we help you understand why your customers cancel their subscriptions and help you retain them with personalized offboarding experiences—buckle up for a collection of tips, benchmarks, and suggestions to improve your churn rates.
First, let’s define what we mean by “churn rate.”
Churn rate calculates the number of customers who cancelled their subscription within a specific time period. It can be used to measure revenue lost from churned customers.
SaaS churn rate is crucial for a company’s long-term survival and overall performance.
Customer churn rate focuses on the number of customers that quit your services monthly or annually. To calculate customer churn, you need to divide the total number of churned customers via the total number of customers:
For example, if your business has a total of 100 customers and 8 of them ended their subscription last month, your customer churn rate is 8%. Customer churn is also known as “logo churn.”
To get an even more precise calculation, there’s the net logo churn metric which takes into consideration the number of new customers your business acquired over a given period.
To calculate it, you need to divide the total number of churned customers minus the new customers acquired over a period via the total number of customers.
For example, if your business has 100 customers, 8 of which ended their subscription last month, while your business acquired 2 new customers, your net logo churn would be 6%.
Customer retention is a great overall metric to keep track of your customer base and product experience. However, since it doesn’t provide actual insights into the revenue impacted by the churned customers, it’s often combined with the revenue churn rate.
The revenue churn rate measures the percentage of lost revenue due to downgrades, cancellations, payment failures, and other reasons. To calculate it, you need to divide the total churned revenue over a period via the total revenue at the beginning of that period.
For example, if your total business revenue is $1,000 and your churned revenue is $150, your revenue churn rate is 15%. What makes revenue churn special is that it takes into consideration the different pricing tiers you set for your subscription models, which are not measured by the customer churn.
There is also the net revenue churn which measures the revenue generated from expansion, such as upsells, add-ons, or tier upgrades. This gives you more precise insights into the actual revenue lost and gained. To calculate it, you need to divide the total churned revenue minus the expansion revenue via the total revenue at the beginning of the period.
For example, if your business generated $1000 and your churned revenue is $150, but you also generated an additional $80 from expansion, your net revenue churn will be 7%.
If your business is operating monthly, another critical metric to calculate is the Monthly Recurring Revenue (MRR) Churn. To calculate it, you’ll need to divide the total churned MRR minus the expanded MRR via the total MRR at the beginning of the month.
Similarly, you can find your Annual Recurring Revenue (ARR) churn if your business operates on an annual basis. Again, you will need to divide the total churned revenue minus the expanded revenue via the total ARR at the beginning of the year.
If you want to estimate retention, you can calculate Gross retention, Net retention, or Logo retention. Retention allows you to track how efficiently you keep existing customers happy and generate revenue from them.
For example, you might be able to maintain all your customers for over a year, but if they’ve all downgraded to lower pricing tiers, this can significantly impact your revenue. That’s why it’s essential to track your retention as well.
In contrast to B2C businesses that cater more to individuals and prosumers (e.g., freelancers paying for professional tools), B2B businesses don’t lose individual users but entire teams of users when they churn. Think of B2B SaaS as a tool for companies to do their work better. This dynamic introduces new challenges for customer retention:
Churn is a part of life for every subscription business. That’s why it’s essential to benchmark churn rate ranges so you’re realistic about the health of your business. We’ve had a number of conversations, for example, with teams who want to settle their churn rate to around 10%. While that’s a nice, round number, it essentially means that your business will be changing out their customer base every 10 months.
Here are the average churn rates annually:
Benchmarking is not a business panacea, although it helps look to your industry so you can improve performance and adapt procedures for optimal results.
Now that we’re on the same page about churn rate and the different ways to calculate it, let’s dive into the different B2B SaaS churn rate benchmarks. While the average churn rate varies by industry, general patterns are collected from data that help review your growth path.
SaaS benchmarking is vital as a way to compare performance and measure success.
However, it can quickly turn into a curse if B2B businesses lose sight of the right metrics to track and get drowned in the data. That’s why SaaS tools need to focus on set metrics that are relevant to their growth and focus towards improving them.
Here are some factors that could impact a churn rate since there’s no one-size-fits-all.
to quit a SaaS service or downgrade to lower packages for different reasons, such as poor customer support, low-quality products, or high pricing tiers. Involuntary churn is when a customer didn’t intend to cancel their subscription but churned anyway, usually due to payment issues. Voluntary and involuntary churn rates should be examined separately.
Naturally, there’s no magic wand you can wave, and suddenly your churn rates vanish. As we said before, churn is unavoidable, so you might as well learn to live with it and invest in strategies that can help reduce it.
There are some concrete steps you can take to reduce your B2B SaaS churn:
The easiest way to tackle churn is using Churnkey to get real insights on why your churn occurs. Once you find actionable solutions to reduce cancellations, you’re on the path to achieve more sustainable and healthy churn rates.
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