Churn is inevitable in SaaS. And it wreaks havoc on your company’s bottom line. Whenever a customer leaves, downgrades, or allows their subscription to lapse, it affects your business’ growth. But since a certain amount of churn is inevitable, it can be hard to assess: is your business experiencing too much churn?
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Churn is inevitable in SaaS. And it wreaks havoc on your company’s bottom line. Whenever a customer leaves, downgrades, or allows their subscription to lapse, it affects your business’ growth.
But since a certain amount of churn is inevitable, it can be hard to assess: is your business experiencing too much churn?
Keep reading to learn more about calculating your SaaS company’s churn, monthly churn benchmarks, and how you can use Churnkey to reduce churn.
Before we talk about the monthly benchmarks for churn, it’s important to make sure we know the different types of churn rates and how to calculate them. After all, we can’t analyze data that we don’t have or understand. Let’s start by talking about a few of the most important churn metrics for SaaS companies.
Essentially, revenue churn measures the percentage of revenue lost over a certain period of time. To calculate your revenue churn rate, divide your total revenue churned in a period by the total revenue from the beginning of your specified period.
Equation: Revenue Churn Rate = (Total Revenue Churned In a Period)/(Total Revenue at the Beginning of a Period) x 100
When you’re calculating revenue churn, it’s also important to look at your net revenue churn. Net revenue churn takes into account your expansion revenue (like upsells, add-ons, or tier upgrades), along with the churned revenue, including things like downgrades, cancellations, payment failures, and other revenue losses.
Equation: Net Revenue Churn = (Total Churned Revenue in a Period - Expansion Revenue in a Period) / (Total Revenue at the Beginning of a Period) x 100
If most of your customers are monthly subscribers, then your MRR churn rate is an important calculation to have for your monthly churn benchmarks. MRR (monthly recurring revenue) churn is basically the measure of the overall erosion of your recurring revenue.
Equation: MRR churn = Sum of MRR Cancellations + Sum of Delinquent MRR
Now that we’ve gotten a handle on which metrics we need to focus on and how to calculate those rates, it’s time to discuss monthly churn benchmarks. This helps you know whether or not your churn rate is alarming, good, or excellent. Keep in mind that every SaaS company is different. However, the following are some good benchmarks that are specific to the SaaS industry that can act as helpful indicators for where your company is at, your potential growth, and what areas could need some attention.
When it comes to overall churn for SaaS companies, industry-wide, a good monthly churn rate benchmark is typically between 3-5%, especially if you’re a startup in the early stages or still a fairly new SaaS company. Anything under 2% net churn would be considered great. For more established SaaS companies, a good net churn benchmark would be less than 1%.
Because most SaaS companies operate on monthly billing, it’s important to look at the averages for monthly churn, both net and gross. For gross MRR churn, a good monthly benchmark would be around 1%. For net churn, your ideal objective should be negative numbers. But, realistically, around 2% is a reasonable benchmark for net MRR churn that’s considered “good.”
Let’s switch gears for a second and talk about the exact inverse of churn — retention. Retention allows you to measure how much revenue or how many customers you retain over a specific period of time.
Equation: Net Revenue Retention Rate = (Revenue at Start of Time Period + Expansion Revenue - Churn Revenue) / (Revenue at the Start of the Period) x 100
The lower your monthly churn rate is, the higher your monthly retention will be. Average retention rates vary when it comes to SaaS companies because they depend strongly on the target market and the size of the company. But an industry median and a good general benchmark for net revenue retention is 100%. Essentially, if your retention rate is higher than 100%, you’ve got an indicator for company growth.
Now that you understand the benchmarks for monthly churn, you might wonder how you can improve these numbers and reduce your monthly churn. The best way is with Churnkey, the only platform that fixes every type of churn for you.
Here at Churnkey, we handle all things retention for you so you can focus on what you do best: product, growth, and customers. Think of Churnkey as your "set it and forget it" magic churn reducer. Just by using Churnkey, you could reduce cancellations up to 42%, recover up to 81% of failed payments, and effortlessly increase customer loyalty.
Find out more with a demo or start combating churn now with a free trial!
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