As a SaaS entrepreneur, there are countless numbers, statistics, and metrics that you need to track and calculate to assess the health of your business, but the sheer number of acronyms can be overwhelming. In this six-part series on key SaaS metrics, we’ll walk you through the most common—and helpful—metrics you need to know to successfully run and grow your SaaS business. 

SaaS businesses rely heavily on gaining and keeping their customers to grow their recurring revenue stream. An important metric when analyzing how effectively you’re keeping your customers happy and coming back each month is the customer churn rate (CCR).

 

What is customer churn rate?

The customer churn rate is the percentage of customers that cancel their subscriptions in a given time period.

 

Why customer churn rate is important

Customer churn rate offers important insights into how well you’re meeting your customers’ needs. In the early stages, when you’re first reaching out to your potential customer base, your revenues and total number of customers can be growing while you are still hemorrhaging a large percentage of existing customers every month. To tell if there’s an underlying problem with customer satisfaction, you need to step away from overall revenue and total number of customers and look at the customer churn rate.

If founders are only focused on overall growth and not on customer churn rate, they might believe everything is moving in the right direction when in reality there is a severe underlying problem that’s causing a large portion of their customers to quit using their service or product. When new customer sign-ups drop off, the company’s revenue stream will rapidly decline.

Below is a chart showing an example of how total customers can be deceptive.

 

 

How to calculate customer churn rate

The basic formula for the customer churn rate is as follows:

Customer Churn Rate = Number of preexisting customers who left during a given period / Total customers at the start of that period.

For example, if your company had 50 customers at the beginning of the month and during that month 12 customers left, you would have a monthly customer churn rate of 24% (12/50 = 0.24).

Mathematically, this means churn is the inverse of customer retention.

It’s worth noting that this ratio doesn’t account for the gross customer accounts at the end of the period or the value you’re getting from each of the lost customers.

Ideally, a company’s customer churn rate would be well under 10%, but this figure can vary depending on industry competition and how mature your product or service is. If you’re analyzing a business with a high customer churn rate, it’s important to understand why customers are leaving. This will help you take measures to stem the flow as quickly as possible. It’s inevitable for some customers to leave now and again, but it’s important to make sure you’re looking at the trends that reveal sustainability.

Want more metrics?

Download our guide, The 8 SaaS Metrics that Matter, to learn more about calculating metrics and using them to quantify your company’s successes for investors.

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