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What Is A Good Churn Rate For SaaS Businesses?

You are calculating churn for your business and wonder whether you are over- or underperforming vs. competition? Or are you simply building financial projections for your SaaS startup and aren’t sure which churn rate to choose?

In this article we explain what churn is subscription businesses, how to calculate it and what is an industry average churn rate, whether you have a B2C or B2B SaaS startup.

What is churn for subscription businesses?

For any subscription or Software-as-a-Service business, churn usually refers to churn rate: the rate at which it loses customers over time. There are 2 different types of churn, they are:

  • Voluntary churn: a user decides to cancel her or his subscription.
  • Involuntary churn: a user unintentionally loses access to her or his subscription. It can be due to many factors due to the company’s fault (e.g. payment processing issues of instance) or the users’ (debit or credit card expires, bank rejects payment due to low funds, etc.)

Churn is one of the most important metric to track for subscription and SaaS startups. Indeed churn means lost customers, and therefore lost revenue. Moreover, churn is typically used when calculating your average customer lifetime value (LTV) as we compare it to Customer Acquisition Costs to assess your business’ profitability and ROI. That’s why it is paramount to try and reduce churn as much as possible to improve your business’ performance.

SaaS Financial Model

Download an expert-built 5-year Excel financial model for your pitch deck

SaaS Financial Model

Download an expert-built 5-year Excel financial model for your pitch deck

How to calculate churn?

The simple formula

There are multiple approaches to calculate churn depending on your business, and the timeframe you are looking at. The easiest way to calculate churn is to divide the number of lost customers over a given a period by the total number of customers at the start of the period.

Churn = # of customers that churned in period / Total # of customers at the start of the period

Going a little bit deeper: cohort model churn

Whilst the simple formula above is correct, it assumes all your customers are on the same level.

Instead, it makes sense to compare churn evolution for the same cohorts. Indeed your product, onboarding process, pricing, billing cycle, discounts, and a lot of other factors might evolve along the way. This means different cohorts (i.e. different customers subscribing at different times) do not necessarily get the same customer experience.

For instance, you would look at cohort January 2021 and see the evolution of monthly churn throughout the year vs. the same analysis six months later for June 2021. If you can demonstrate both your overall churn (simple formula using total customers) and the churns of the respective cohorts are reducing over time, you are doing a great job.

For more information around cohort analysis for SaaS businesses and what it means for churn, see a great article here.

Annual vs. Monthly Churn

Whilst it may sound obvious to some, be careful when looking at churn rates and clearly identify whether it is monthly or annual. For instance, a 5% monthly churn result in approximately 46% annual churn: assuming you would not onboard any new client for a year, you would lose almost half your customers!

B2C vs. B2B churn rates: industry benchmark

When calculating your business’ churn, it is always very helpful to gauge whether you are under- or over-performing vs. competitors. There is a number of benchmarks and a lot of research available online. Let’s see below what are industry averages for monthly churn rates for B2C and B2B subscription businesses.

As per Recurly, the average monthly churn rate for B2C subscription and B2B SaaS companies is 7.05% and 5.00% respectively.

Churn is typically higher for business-to-consumer (B2C) vs. B2B companies for different reasons:

  • Lower price points mean that consumers tend to subscribe more easily than more expensive subscriptions (e.g. B2B). The easier the sale, the easier it is to cancel as well: consumers that made an impulsive decision are more likely to cancel early vs. B2B customers

Looking at churn rates by Average Revenue per Customer (ARPC) highlights price impact on churn. Higher-priced subscriptions (often B2B) tend to experience less churn vs. lower-priced (primarily B2C).

Churn rate by Average Revenue per Customer (ARPC)
Churn rate by Average Revenue per Customer (ARPC)
  • Switching costs: B2B SaaS solutions often comes with customised and costly integrations to implement. Therefore, unlike B2C subscriptions, B2B customers are more likely to refrain from switching to another supplier / vendor due to expensive switching costs
  • Contract period: B2B tend to have longer contract periods. Also they usually pay annual vs. monthly billing subscriptions. Both result in lower churn rates for B2Bs SaaS
Source: Profitwell
  • Decision making: whilst B2B customers typically need approval from their manager and/or finance department to purchase a subscription, consumers can make impulsive decisions are they are the only decision-maker. As with pricing, the easier it is to onboard a customer, often the easier it is to lose it as well

SaaS Financial Model

Download an expert-built 5-year Excel financial model for your pitch deck

SaaS Financial Model

Download an expert-built 5-year Excel financial model for your pitch deck