Churn Rate 101. Understanding How Customer Loss Impacts Your Business

Discover how you can utilize SaaS churn calculation to its fullest potential.

A crucial indicator for all subscription-based organizations is the churn rate. No matter how significant your recurring revenue is, a high churn rate will prevent you from recouping your client acquisition costs.

The churn rate is a metric used to measure the rate at which customers cancel their subscriptions. Lower churn rates indicate higher customer loyalty and satisfaction, which, in turn, leads to a higher retention rate and eventually more revenue for the business. According to Investopedia, “For a company to expand its clientele, its growth rate (measured by the number of new customers) must exceed its churn rate.”

To help reduce churn rates, many companies have adopted retention platforms that allow them to better monitor user behavior and provide an enhanced customer experience. These retention platforms can also be used to analyze data to uncover insights about customer satisfaction and discover what drives them to renew or cancel their subscriptions. Ultimately, the key to any successful business is understanding the client.

Read this article to find out more about the types of churn you should track and how to use them to improve your business’ health.

Types of churn and how to measure them

‍‍Too often, SaaS businesses fail to accurately calculate their churn rate - or even consider it at all. We will tell you how to calculate churn correctly, how critical the metric is for your business, and how to reduce it.

Let’s answer the first question: how is Churn calculated? The answer is: it depends. There are 4 types of churn in Saas: Customer, Revenue, Gross, and Net churn rates.

Customer churn

It measures the number of customers or subscribers who stop using your product or service over a given period, usually expressed as the percentage of your total customer base.

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The customer churn rate is calculated by dividing the number of lost customers by the number present at the beginning of a period and multiplying the result by 100. By regularly tracking customer churn, companies can get a better understanding of the impact of their strategy and adjust accordingly. This can help to retain more customers and increase revenue, which is essential for the long-term success of the company.

Revenue churn

You can calculate your revenue churn rate, also called MRR (Monthly Recurring Revenue) churn, by dividing the number of customers who downgrade by the total number of customers.

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Revenue churn is a metric that measures the percentage of lost revenue due to customer churn over a given period of time. It considers business losses from existing customers including users downgrading their plans. It is calculated by dividing the total amount of revenue lost due to churn by the total amount of revenue generated during the period.

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For example, if a SaaS company generated $100,000 in revenue during a month, and lost $10,000 in revenue due to customers churning during the same period, the revenue churn rate for that month would be 10%. This is calculated by dividing $10,000 (the total amount of revenue lost due to churn) by $100,000 (the total amount of revenue generated during the month), resulting in a revenue churn rate of 10%.

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Revenue churn is an important metric for SaaS companies, providing a more detailed and nuanced view of customer retention than gross or net churn rate. 

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Gross churn

Gross churn, also known as gross MRR churn, is a metric that measures the percentage of customers who cancel their subscription to a service over a given period of time. It is calculated by dividing the number of customers who churned during the period by the total number of customers at the beginning of the period.

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For example, if a SaaS company had 100 customers at the beginning of the month, and 10 of those customers canceled their subscriptions during the month, the gross churn rate for that month would be 10%. This is calculated by dividing 10 (the number of customers who churned) by 100 (the total number of customers at the beginning of the month), resulting in a gross churn rate of 10%.

Gross churn is a useful metric for SaaS companies, as it provides a quick and easy way to measure the effectiveness of customer retention efforts.

Net churn

Net churn rate is a metric that measures the percentage of customers who cancel their subscription to a service over a given period of time, after taking into account any new customers who joined during the same period. It is calculated by dividing the number of customers who churned during the period by the average number of customers at that moment.

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For example, if a SaaS company had 100 customers at the beginning of the month, and 10 of those customers canceled their subscriptions during the month, but the company also gained 15 new customers during the month, the net churn rate for that month would be 6.7%. This is calculated by dividing 10 (the number of customers who churned) by 115 (the average number of customers during the month, which is calculated by adding the number of customers at the beginning of the month and the number of new customers gained during the month and dividing by 2), resulting in a net churn rate of 6.7%.

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Why you should keep an eye on your churn

Churn rates offer an overview of your business because they provide clear insights about sales, marketing, product, and customer service.

It is well known that acquiring new clients is more expensive than maintaining existing ones. From this perspective, churn rates can become great allies in helping you refocus your strategy. 

A profound analysis of churn data will be vital in defining your KPIs and goals including customer engagement and usage, customer behavioral patterns, and customer segmentation. 

Conclusion

Are you tired of losing valuable customers? Trackey can help you to create personalized onboarding and offboarding flows and make it easy to either gain or retain customers at scale.

With our platform, you can create tailored flows for your customer audiences, based on their individual needs and preferences. This allows you to provide a personalized experience that is designed to engage your customers and when churn cases, prevent them from canceling their subscription to your SaaS product.

Our platform also makes it easy to track customer insights such as churn and identify trends and patterns. You can also take advantage of a range of features to help you retain your customers, including customizable email templates, in-app messaging, and automated follow-up reminders.

Don't let your customers slip away – Implement Trackey and start retaining more of your valuable customers.