Understanding and managing churn rates in the SaaS industry is critical for sustaining growth and ensuring user retention.

Unlike traditional businesses, SaaS companies face unique challenges in retaining customers due to the subscription-based model.

This article will explore the intricacies of SaaS churn rates, providing benchmarks and actionable strategies to reduce churn and improve retention.

You'll learn:

• What the average churn rate is
• How to calculate different types of churn rate
• Factors influencing churn rates
• Strategies to reduce churn
• The role of email marketing in churn reduction

By the end of this article, you'll have a comprehensive understanding of churn rates and how to manage them effectively. Let's get started.

What is the average churn rate for SaaS companies ?

In the SaaS industry, churn rate is a critical metric that measures the percentage of customers who cancel their subscriptions within a given period. This metric is essential for understanding user retention and the overall health of a SaaS business.

A high churn rate indicates that many customers are leaving, which can harm revenue and growth. Conversely, a low churn rate suggests that a company effectively retains its customers. It’s crucial to differentiate between monthly and annual churn rates to benchmark and improve retention, as these provide insights into short-term and long-term customer behaviors.

Monthly churn rate

The monthly churn rate is a metric that calculates the percentage of customers who cancel their subscriptions each month. It is a vital indicator of the short-term stability of a SaaS business. To calculate the monthly churn rate, use the following formula :

For instance, if a SaaS company starts the month with 1,000 customers and ends with 950, the monthly churn is :

💡 A typical monthly churn rate for SaaS companies ranges from 3% to 8%, though this can vary based on factors like market segment and customer demographics. Monitoring this rate monthly helps identify immediate customer satisfaction or product value issues, enabling swift corrective actions to reduce churn.

Annual churn rate

The annual churn rate provides a broader perspective on customer retention by calculating the percentage of customers who cancel their subscriptions over a year. This metric is particularly useful for understanding long-term trends and the overall effectiveness of user retention strategies. The formula for the annual churn rate is similar to the monthly calculation but extended over a 12-month period :

For example, if a SaaS company begins the year with 1,000 customers and ends with 850, the annual churn rate is :

💡 An annual churn rate between 20% and 30% is standard in the SaaS industry, although lower rates are always preferable. This metric helps SaaS companies assess the long-term value they provide customers and the effectiveness of their retention efforts.

How to calculate different types of churn

Customer churn rate

This is the one we've just seen together. Customer churn rate measures the percentage of customers who stop using a SaaS service over a specific period. It's calculated using the (simplified) formula:

For instance, if a company loses 50 customers out of 1,000 over a month, the customer churn rate is :

This rate helps businesses understand how well they retain customers, indicating the need for improving customer satisfaction and retention strategies.

Net logo churn

Net logo churn, or net customer churn, accounts for both customer losses and gains during a period. It's calculated as:

For example, if a company loses 50 customers but gains 20 new ones out of an initial 1,000, the net customer churn is :

This metric provides a more comprehensive view of customer base changes, highlighting the balance between retention efforts and new customer acquisition.

Revenue churn rate

The revenue churn rate focuses on the percentage of revenue lost due to cancellations and downgrades, offering insights into the financial impact of churn. The formula is:

If a company starts with a Monthly Recurring Revenue (MRR) of $100,000 and loses $5,000 due to churn, the revenue churn rate is :

Tracking revenue churn helps businesses understand the monetary loss from churn and identify which customer segments or products contribute most to revenue decline, enabling targeted interventions to reduce revenue churn.

Recurring revenue

Not really a churn metric but so important in this context that I wanted to mention it. Recurring revenue is the consistent income generated from customers subscribing to a service over time. Key metrics include Monthly Recurring Revenue (MRR) and Annual Recurring Revenue (ARR). To calculate MRR, sum up all monthly subscription fees customers pay. For example, if a SaaS company has 200 customers, each paying $50 monthly, the MRR is 200 x 50 = $10,000. ARR is simply MRR multiplied by 12.

These metrics can help you forecast revenue, measure growth, and assess the impact of churn on overall financial health, guiding strategic decisions to enhance stability and growth.

5 factors that explain why average churn numbers vary so much

1. Average churn rates vary across industries

💡 SaaS churn rates can differ significantly between industries due to varying customer behaviors and market dynamics. For example, B2B SaaS companies generally have lower churn rates than B2C companies. B2B clients often integrate software more deeply into their operations, making it more challenging to switch providers. On the other hand, B2C customers tend to have more choices and lower switching costs, leading to bigger churn rates.

Additionally, niche industries with specialized solutions might see reduced churn rates than more competitive, broad-market SaaS offerings.

Understanding industry-specific benchmarks is crucial for contextualizing your churn rate and setting realistic retention goals.

2. Higher ARPU correlates to less churn

Average Revenue Per User (ARPU) is a key customer value and engagement indicator. SaaS companies with higher ARPU often experience reduced churn rates because high-value customers are more invested in the product and its ecosystem.

These customers typically receive more personalized support and account management, which enhances their overall satisfaction and loyalty. Higher ARPU customers are also more likely to have custom integrations and tailored solutions that increase switching costs.

Therefore, increasing ARPU through upselling and cross-selling can help bring down churn by fostering deeper relationships with your most valuable customers. We'll see how to do that using email marketing below.

3. Longer contracts diminish churn

The duration of customer contracts significantly impacts churn rates. SaaS companies that offer and successfully sell longer-term contracts generally experience reduced churn rates. Annual or multi-year contracts lock in customers for extended periods, reducing the frequency of decision points where a customer might consider canceling.

These longer contracts often come with incentives such as discounted rates, further encouraging customer retention. Additionally, the commitment to sign a long-term contract indicates higher customer satisfaction and confidence in the product, contributing to reduced churn.

💡 Encouraging customers to switch from monthly to annual plans can be an effective strategy to enhance retention.

4. Older companies experience less churn

SaaS businesses that have been in business longer tend to have lower churn rates than newer entrants. Established companies benefit from a mature product, refined processes, and a more stable user base.

They have had more time to optimize customer success strategies, improve onboarding experiences, and build strong client relationships. Additionally, older companies often have more brand recognition and trust, making it less likely for customers to switch to newer, less proven competitors.

The accumulated experience and data allow these companies to predict and mitigate churn risks better, leading to a more loyal customer base.

5. Funded companies have higher churn rates

Interestingly, SaaS companies that receive substantial funding often face bigger churn rates. This can be attributed to the rapid growth and aggressive customer acquisition strategies post-funding. While these strategies help scale the user base quickly, they might attract less ideal customers who are not as committed or acquired through heavy discounts and promotions.

The pressure to show quick results can lead to less focus on customer loyalty. As a result, funded companies might experience higher churn rates as they balance the challenges of scaling operations and maintaining high-quality customer relationships.

Is there such a thing as a good churn rate ?

Whether a churn rate is "good" depends on various factors, including industry trends, company maturity, and specific business models. While it’s challenging to pinpoint a universally "good" churn rate, several guidelines can help assess whether your churn rate is within a healthy range for your SaaS company.

Industry benchmarks

As we've seen, different industries have different standards for acceptable churn rates. For instance, B2B SaaS companies typically experience lower churn rates than B2C SaaS companies.

According to industry data, a monthly churn rate of 3% to 5% is average for B2B SaaS, while B2C SaaS might see monthly churn rates of 5% to 7%. Understanding your industry's benchmarks provides a useful reference point for evaluating your company's churn rate.

Company maturity and customer segment

Younger companies often face higher churn rates as they refine their products and services to meet customer needs better. Churn rates typically decrease as the company matures and gains a more stable customer base.

Additionally, customer segments play a significant role. Due to higher switching costs and deeper integrations with their systems, high-value enterprise clients from larger companies may have lower churn rates than small businesses or individual consumers.

Business model considerations

Subscription business models also influence what constitutes a good churn rate. For instance, companies that typically bill monthly might experience higher churn rates than those with annual contracts, as the commitment level is lower.

Businesses that invest in customer success teams and offer strong onboarding processes tend to have lower churn rates as they ensure customers derive ongoing value from their services.

Striving for negative churn

A particularly strong indicator of a healthy SaaS is achieving negative churn, where the expansion revenue from existing customers (through upsells, cross-sells, and add-ons) exceeds the revenue lost from churned customers.

This means the company is growing its revenue base even if some customers leave, highlighting effective user retention and expansion strategies.

Six actionable strategies to reduce your SaaS churn rate

1. Understand what’s driving churn

To effectively bring down churn, it’s crucial to understand why customers churn. Regular surveys and exit interviews should be conducted to gather feedback from departing customers. Analyze this data to identify common pain points and reasons for cancellation.

Key investigation areas include product usability, customer support, pricing, and competitive offerings. Additionally, leverage customer usage data to detect patterns that precede churn.

Understanding these drivers enables you to address specific issues, improve your product, and enhance customer satisfaction, reducing the likelihood of future churn.

2. Identify and address churn indicators quickly

Early detection of churn indicators allows you to intervene before customers leave. Monitor key metrics such as login frequency, feature usage, and support ticket volume to identify at-risk customers.

Implement automated alerts for these indicators and develop standardized response protocols. For instance, an automated email should nudge the user back on your platform if a customer's usage drops significantly.

By promptly identifying and addressing potential churn signals, you can take corrective actions to re-engage customers and prevent them from canceling their subscriptions.

3. Personalize your cancellation offers to reduce your churn rate

When customers initiate the cancellation process, personalized offers can persuade them to stay. Develop a cancellation flow that presents tailored offers based on customer data, such as discounts, extended trials, or access to premium features.

Additionally, this opportunity will gather feedback on why the customer wants to leave and address their concerns directly. Personalization demonstrates that you value the customer’s business and are willing to accommodate their needs, increasing the likelihood of retaining them.

This approach can reduce your average SaaS churn rate by providing incentives and solutions that align with individual customer preferences.

4. Increase your proportion of annual contracts

Encouraging customers to switch from monthly billing to annual contracts can significantly bring down churn. Annual contracts provide longer-term revenue stability and decrease the frequency of decision points where customers might consider canceling.

Offer incentives such as discounts, exclusive features, or added support to entice customers to commit to an annual plan. Highlight the benefits of an annual contract, including cost savings and uninterrupted service.

Increasing the proportion of annual contracts can enhance user retention and reduce churn rates, as customers are less likely to cancel once they have made a long-term commitment.

5. Bring down your payment failure rate

Payment failures are a common but preventable cause of involuntary churn. Implement strategies to reduce payment failures, such as using dunning management tools to retry failed payments and automatically send reminders to customers.

Offer multiple payment options and keep customers’ payment information up to date by prompting them to update their details before their cards expire. Additionally, analyze payment failure data to identify and address recurring issues proactively.

Minimizing payment failures can reduce involuntary churn and ensure a smoother customer billing process.

6. Tackle each of the four sides to churn

Addressing churn requires a holistic approach considering all four sides: voluntary churn, involuntary churn, expansion churn, and contraction churn.

• Voluntary churn can be mitigated through customer satisfaction and engagement efforts.
• Involuntary churn, often due to payment failures, can be reduced with robust billing systems.
• Expansion churn involves upselling and cross-selling to existing customers
• Contraction churn requires addressing downgrades and cancellations.

By developing targeted strategies for each type of churn, you can comprehensively manage and reduce overall churn rates, ensuring sustained growth and customer retention.

How can email marketing help you reduce churn

Onboarding and gamifying flows

Effective onboarding is crucial for user retention, and email marketing can significantly enhance this process. Create automated onboarding email sequences that guide new users through your product's features and benefits.

Include interactive elements such as tutorials, quizzes, and milestone celebrations to gamify the experience, making it engaging and rewarding. By ensuring customers quickly realize the value of your product, you can increase their satisfaction and reduce early-stage churn. Personalized onboarding emails help new users feel supported and confident, fostering long-term loyalty.

Abandoned payment flow

Payment failures commonly cause involuntary churn, but automated abandoned payment flows can help mitigate this issue. Set up email sequences that trigger when a payment fails, reminding customers to update their payment information.

Include clear instructions and multiple payment options to make the process smooth. Additionally, offer assistance through customer support links or chat options. You can significantly reduce involuntary churn and retain more customers by promptly addressing payment issues and facilitating quick resolutions.

Annual upgrade flow

💡 Encouraging customers to switch from monthly to annual billing can improve retention rates, and email marketing is an effective tool for promoting this transition. Design an annual upgrade email flow highlighting the benefits of annual plans, such as cost savings, added features, and exclusive support.

Use personalized messages and limited-time offers to create urgency. Regularly communicating these advantages and simplifying the upgrade process, you can increase the proportion of annual contracts and reduce churn associated with frequent billing cycles.

Churn prevention flow

Churn prevention flows target customers who show signs of disengagement or dissatisfaction. Set up automated email sequences that re-engage these at-risk customers by offering solutions to their problems, exclusive discounts, or invitations to provide feedback.

Personalize the content based on their usage patterns and interactions with your product. By proactively addressing their concerns and demonstrating your commitment to their success, you can rebuild trust and loyalty, reducing their likelihood of leaving.

Cancellation flow

When customers initiate the cancellation process, a well-designed email flow can help retain them. Send automated emails acknowledging their decision and offering tailored incentives to stay, such as discounted rates, feature upgrades, or extended trials.

Additionally, feedback should be collected to understand their reasons for leaving and address those concerns directly. By providing personalized offers and showing a willingness to accommodate their needs, you can often persuade customers to reconsider and continue their subscription.

Ready to improve customer retention ?

Reducing churn is crucial for the sustained growth of any SaaS. You can proactively enhance customer engagement, address issues, and encourage long-term loyalty by implementing targeted email marketing strategies. Email marketing offers powerful tools to keep your customers satisfied and committed, from onboarding and payment flows to upgrade and churn prevention campaigns.

If you're looking to improve your SaaS retention rates through effective email marketing, Digi Storms can help. Our tailored email marketing solutions are designed to activate and retain your users, driving growth and reducing churn. Contact us today to learn more and get started.