Churn rate is the "silent killer" of Software-as-a-Service (SaaS) businesses. It represents the percentage of customers or revenue that your company loses over a specific period. While growth is often the primary focus, maintaining a low churn rate is essential for sustainable long-term profitability.
1. Customer Churn vs. Revenue Churn
There are two primary ways to measure churn in a SaaS model:
Customer Churn: This tracks the number of individual accounts or logos that cancel their subscription. It is a measure of customer satisfaction and product-market fit.
MRR Churn (Revenue Churn): This tracks the dollar amount lost. It is often more important for financial health because losing one enterprise customer paying $5,000/month is more impactful than losing ten "Pro" users paying $50/month.
2. The Power of Negative Churn
Net Revenue Churn accounts for expansion revenue (upsells, cross-sells, or seat additions) from existing customers. If your expansion revenue is higher than the revenue lost from cancellations, you achieve "Negative Churn." This means your existing customer base grows in value every month without you acquiring a single new customer.
3. Formula for Calculation
To calculate basic customer churn, use the following formula:
Churn Rate = (Customers Lost During Period / Total Customers at Start of Period) x 100
Example Scenario
Imagine your SaaS company starts the month with 1,000 customers. During the month, 50 customers cancel their subscriptions. Your starting MRR was $50,000, but you lost $2,500 in churned revenue while gaining $1,000 in expansion revenue from other existing users.
Customer Churn: 5% (50 / 1,000)
Gross MRR Churn: 5% ($2,500 / $50,000)
Net MRR Churn: 3% (($2,500 – $1,000) / $50,000)
What is a "Good" Churn Rate?
Benchmarks vary by target market:
Enterprise SaaS: 0.5% – 1% monthly churn. High-touch support usually keeps these clients longer.
SMB SaaS: 3% – 7% monthly churn. Smaller businesses are more price-sensitive and have higher failure rates.
Consumer SaaS: 5% – 10% monthly churn. Higher volatility is expected in B2C markets.