This article is a part of our series: Key SaaS Metrics
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 percent 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, your company has 50 customers at the beginning of the month. During that month, 12 customers left. That would mean you had 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 what the underlying drivers of the fleeing customer base are—and to 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.
Our first post in this series discussed Monthly Recurring Revenue (MRR). To learn more about other key SaaS metrics, check out our third post in this series next week.