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What’s a Good Churn Rate for SaaS Companies?

April 15, 2022

If you’re a SaaS company, chances are you’re always looking for ways to improve your churn rate. After all, a high churn rate can eat into your profits and make it difficult to grow your business. But what’s a good churn rate to aim for?

There’s no easy answer as it depends on factors like the type of product you offer and the size of your customer base. However, we’ve compiled some data on monthly and annual SaaS churn rates to give you an idea of what’s a good churn rate for other companies.

What’s a Good Churn Rate?

A churn rate is a measure of how many customers leave your business.

A high churn rate is costly and indicative of poor retention practices, while a low churn rate suggests that a company is doing a good job of retaining its customers.

The Churn Rate Problem

Some studies suggest that a 5% to 10% yearly rate of customer attrition is normal, while others suggest a 5% to 10% monthly turnover.

What’s going on?

1. Company Size

The data set can be split into two categories: those with under $1,000,000 in monthly recurring revenue, and those with over $1,000,000 in monthly recurring revenue.

According to research, the “typical” 5-7% annual churn rate for SaaS companies seems to be accurate, but smaller companies seem to experience much higher turnover.

This is probably because most “large” (and certainly most publicly-traded) software-as-a-service (SaaS) companies are targeting large enterprises, which has a huge effect on customer turnover.

SaaS companies have a much harder time churning their customers than smaller, private ones. This is because annual contracts, higher average customer value (ACV), and longer terms make canceling a more expensive decision.

Larger, more established businesses are also generally more willing to pay higher prices.

Compared to larger businesses, small businesses have a much higher customer turnover.

Small and medium-sized businesses have a far higher rate of customer turnover than larger enterprises due to the ease with which customers can cancel their subscriptions, the relatively low average contract value (ACV), and the higher likelihood of cash flow issues.

2. Industry Specific Price Sensitivity

Just as some types of customers are more likely to leave, some kinds of software products are also more likely to lose users.

When looking at your technology, it’s important to understand which products are more essential to your business and which aren’t. It’s likely, for example, that finance or sales software won’t be as prone to churning as marketing or social media tools. By knowing which of your tools are more at risk, you can take steps to limit their impact.

Some niche tools are harder to switch to another provider. This is because there are fewer providers for these tools, so switching is more difficult. Therefore, your chances of churning will be much lower if you offer these types of tools.

3. Inconsistent Data

There isn’t a lot of data on customer turnover. High customer turnover rates are bad for business, and measuring them monthly is a simple way to stay on top of it.

Few companies are willing to publicly share their exact customer attrition rate, but those that do are bold like Buffer and Hubstaff.

4. Intentional Obfuscation

Because public companies’ stock prices are tied to their earnings, they have an incentive to not release any negative news.

Companies that trade publicly are legally required to disclose their financial information.

Companies that adopt standards like GAAP make it much easier for analysts and researchers to compare and contrast businesses. However, many companies develop proprietary methods of reporting that make it difficult for outsiders to fully understand their financial situation.

There is no law requiring you to report your rate of customer turnover, so most companies don’t. This leads to a confusing array of different methods for calculating your turnover rate.

What is The Ideal Churn Rate for SaaS Companies?

If you’re a large, well-established software company that’s about to go public, your expected customer turnover rate is crystal-clear: you need to hit 5% to 7% annual churn.

Big, successful companies have consistent hallmarks, and we’ve suggested you’ll need to have something similar to reach their lofty height.

But if you’re an early-stage company, things aren’t quite so cut and dry.

Even successful companies like Buffer still battle with 5% monthly churn rates, and if you’re new to the world of product-market fit, there’s reason to believe those churn rates can be higher.

It’s difficult to give an exact benchmark, but the six studies I analyzed all suggest the same thing: a 5% monthly churn rate is pretty typical, and as evidenced by companies like Buffer, Baremetrics, and Convertkit, it’s not necessarily a roadblock to growth.

A good churn rate for a SaaS company targeting small businesses is typically between 3-5% per month. However, if you target larger businesses, your churn rate will have to be lower since the market is smaller. For enterprise-level products, your monthly churn rate should be less than 1%.

For enterprise-level products, the acceptable level of customer turnover should be less than 1% a month.

Most early-stage startups that I’ve worked with have 10-15% churn for the first year as they figure out what their value proposition is.

Churn is inevitable, so it’s important to track your numbers so you can improve them over time.

5% to 7% is a healthy amount of yearly customer turnover – if you’re a mature, established, B2B software company.

If you’re an early-stage startup or you’re selling to small businesses, you should expect your rate of customer turnover to be about 5% a month.

As your startup continues to mature, your customer retention should increase. This is generally a good sign that your business model is working.

Revenue vs Customer Churn

There are two types of churn: revenue churn and customer churn.

Revenue churn measures how much total revenue is lost from your customers in a given period.

Customer churn refers to how many of your customers unsubscribe from your product in any given period. The customer churn metric can be used to calculate the average LTV of a subscriber.

Voluntary vs Involuntary Churn

The churn rate is further divided into the categories of both voluntary and involuntary.

If your customers aren’t satisfied with your service or product, they may just decide to quit and move on to something else. This is called voluntary churn. Reducing your involuntary customer turnover by improving your customer service satisfaction ratings can help.

Involuntary churn is the loss of a customer who hasn’t canceled their subscription but has lost access to the service. This type of attrition can’t be prevented by improving your product or service, as it can happen to even the most satisfied customers. You can prevent this by following up with customers who have been involuntarily lost via e-mail or with certain advertisements. You may also want to send out regular reminders to encourage them to double-check their payment details.

Many businesses focus too much on reducing their customer’s desire to end their subscriptions. According to research by profitwell.com, 20%-40% of customers will cancel their subscription to your service involuntarily.

There are many reasons why customers may cancel their subscription, including:

  • The customer’s credit card got stolen
  • The customer lost his card
  • The customer forgot to update their payment information when their card expires
  • The bank rejects the customer’s payment

Is There a Good Churn?

While it may seem impossible, there is actually good churning. This can occur for one of two primary reasons.

Your clients may only use your product for a defined amount of time or complete a specific task, and then move on. This isn’t because they’ve lost interest in you or have found something superior.

They’ve decided to opt out of receiving your newsletter because they no longer need your services or products.

This is good because happy customers are more likely to return.

By staying in touch with customers through e-mail or other marketing, you will remain on their minds for when they next need your product or service.

Churn can also be good when customers who aren’t a good fit with your product or service choose to opt out. This lets you focus your efforts on those who are actually interested and will benefit from your offering.

While losing customers is never fun, it’s necessary to avoid wasting time and resources on customers who aren’t interested.

This will let you see if a marketing campaign is bringing in customers that you don’t want.

If you see that your churn rate is high for a certain marketing strategy, it may be time to focus your marketing dollars on another strategy that works better. This way, you can save money and bring in customers that are more likely to stay with your company.

Monthly vs. Annual Churn Rates

You might be wondering what is a good churn rate for SaaS. Sometimes you’ll hear that 5% is a good churn rate. That may be true, but be sure to distinguish between monthly and annual churn rates.

The difference between these two types of churn can be critical to the success of a business.

If you have 1,000 customers and a 5% customer attrition rate, then you’ll have 50 fewer paying customers by the end of the year.

That seems really high, but considering that other well-known companies like Buffer have reported annual customer attrition rates of 46%, it doesn’t seem that bad.

Now, compare that to what would happen if the same 1,000-customer base had a 5% monthly customer churn rate. In that situation, you would end up losing 460 customers in 12 months.

That’s nearly half of all your customers! This is why it’s important to keep these differences in mind as you think about the average churn rate for your SaaS business.

By understanding these metrics, you can better understand your client base and make better decisions.

Conclusion

What’s a good churn rate? There’s no easy answer. It depends on factors like the type of product you offer and the size of your customer base. If you’re looking to improve your own company’s churn rate, consider these suggestions and see where you can make changes.

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