How to Calculate Customer Churn Rate for Your SaaS Business
As a SaaS business, gaining and retaining your customers is crucial to growing your company’s revenue stream. A common metric you will hear when analyzing your effectiveness in keeping customers happy is the Customer Churn Rate (CCR).
What is Customer Churn Rate?
Customer churn rate (CCR) is the number of customers or subscribers who cut ties with your service or company during a given time period. These customers have “churned.”
How to Calculate Customer Churn Rate?
Take the number of customers that you lost last month and divide that by the number of customers that you started with last month. The resulting percentage is your churn rate. For example, a company that started last month with 100 customers and lost 3 over the course of the month would have a churn rate of 3%.
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. It’s almost always cheaper and easier to retain customers than it is to go through the process of acquiring new ones. Monitoring churn is the first step in understanding how good you are at retaining customers and identifying what actions might result in a higher retention rate.
Why is Customer Churn Rate Important?
Churn is a growth decelerator. Here’s an example to think through the impact of your churn rate today on your business over the next two years:
Let’s say that today you have monthly recurring revenue of $15,000 and that every month you add another $2,000. However, you have a churn rate of 3%. If all of that persists for the next two years, you’ll end up generating almost $748,000. Not too shabby. Now let’s say you’re able to decrease your churn rate to 2%. This would give you an extra $66,000 dollars in revenue. If you’re able to reduce your churn by 50%, that’s even better. Your revenue goes up to $851,000 dollars! Reducing your churn rate dramatically accelerates your revenue growth.
If you have only focused on overall growth and not on customer churn rate, you may be under the false assumption that everything is moving in the right direction. In reality, there may be a severe underlying problem that is causing a large portion of your customers to quit using your product or service.
Keep in mind it is completely normal for some customers to leave every now and then, but it’s important to make sure you are looking at the trends that reveal sustainability.
Originally published at https://samkawtharani.com on December 13, 2017.
