Churn Rate: How to Calculate, Analyze, and Reduce Customer Churn
Churn is the silent killer of SaaS businesses.
A 5% monthly churn rate sounds small. But it means losing 46% of your customers every year. At that rate, you're constantly running uphill.
What is Churn Rate?
Churn rate measures the percentage of customers or revenue lost over a given period.
There are two types that measure different things:
Customer Churn Rate
Percentage of customers who cancel.
Customer Churn Rate = (Customers Lost / Starting Customers) × 100
Example:
- Started month with 1,000 customers
- 30 customers cancelled
- Customer Churn Rate = 30 / 1,000 = 3%
Revenue Churn Rate (MRR Churn)
Percentage of recurring revenue lost.
Revenue Churn Rate = (MRR Lost / Starting MRR) × 100
Example:
- Started month with $100,000 MRR
- Lost $4,000 MRR to cancellations
- Revenue Churn Rate = $4,000 / $100,000 = 4%
Gross vs Net Churn
Gross Revenue Churn
Total revenue lost, ignoring expansion.
Gross Churn = (Churned MRR + Contraction MRR) / Starting MRR
Net Revenue Churn
Revenue lost minus expansion from existing customers.
Net Revenue Churn = (Churned MRR + Contraction MRR - Expansion MRR) / Starting MRR
Net negative churn means expansion exceeds losses. This is the holy grail.
| Net Revenue Churn | Assessment | |-------------------|------------| | > 5% | Critical problem | | 2-5% | Needs work | | 0-2% | Acceptable | | < 0% (negative) | Excellent |
Monthly vs Annual Churn
Don't confuse them. Monthly compounds.
| Monthly Churn | Annual Equivalent | |---------------|-------------------| | 1% | 11.4% | | 2% | 21.5% | | 3% | 30.6% | | 5% | 46.0% | | 10% | 71.8% |
Annual Churn = 1 - (1 - Monthly Churn)^12
That "small" 3% monthly churn means replacing nearly a third of your customer base every year.
Churn Cohort Analysis
Raw churn rates hide important patterns. Cohort analysis reveals them.
Time-Based Cohorts
Track churn by signup month:
| Cohort | Month 1 | Month 3 | Month 6 | Month 12 | |--------|---------|---------|---------|----------| | Jan 2024 | 8% | 15% | 22% | 35% | | Feb 2024 | 6% | 12% | 18% | - | | Mar 2024 | 5% | 10% | - | - |
Improving cohorts indicate product/onboarding improvements are working.
Segment-Based Analysis
Churn often varies dramatically by:
| Segment | Monthly Churn | |---------|---------------| | SMB ($50/mo) | 6% | | Mid-market ($500/mo) | 2% | | Enterprise ($5000/mo) | 0.5% |
This explains why moving upmarket reduces churn.
Why Customers Churn
1. Failed to Realize Value
Biggest reason. Customer never got the promised outcome.
Fix: Better onboarding, faster time-to-value, success metrics.
2. Poor Product-Market Fit
Product doesn't solve their problem well enough.
Fix: Customer development, feature prioritization based on retention data.
3. Bad Customer Experience
Bugs, slow support, confusing UX.
Fix: Improve product quality, support responsiveness.
4. Price Sensitivity
Found cheaper alternative or budget cuts.
Fix: Deliver more value, offer annual discounts, demonstrate ROI.
5. Natural End of Need
Project ended, company closed, use case changed.
Fix: Often unavoidable, but can expand to adjacent use cases.
6. Involuntary Churn
Failed payments (credit card expired, insufficient funds).
Fix: Dunning emails, card update reminders, retry logic.
Churn Prediction Signals
Track these leading indicators:
| Signal | Risk Level | |--------|------------| | Login frequency dropping | High | | Feature usage declining | High | | Support tickets increasing | Medium | | NPS score dropping | Medium | | Payment failures | High | | Admin user left company | Critical |
Strategies to Reduce Churn
1. Nail Onboarding
First 30 days determine everything. Ensure customers:
- Complete key setup steps
- Experience core value quickly
- Connect with success/support team
2. Track Engagement Metrics
Define product-specific engagement:
- Daily/weekly active users
- Core feature usage
- Depth of integration
Reach out when engagement drops.
3. Build Switching Costs
Make your product sticky:
- Data lives in your system
- Integrations with their tools
- Workflows built around you
- Training/certification
Not lock-in for lock-in's sake—genuine value accumulation.
4. Customer Success Investment
For high-ACV customers:
- Dedicated CSM
- Regular check-ins
- Business reviews
- Success plans
5. Fix Involuntary Churn
Involuntary churn is often 20-40% of total churn:
- Send payment failure emails
- Retry failed cards automatically
- Make it easy to update payment info
- Consider grace periods
6. Exit Surveys
When customers cancel, ask why:
- Multiple choice + free text
- Make it easy (not a barrier to cancelling)
- Actually read and categorize responses
- Feed back to product team
Churn Benchmarks by Business Type
| Business Type | Good Monthly Churn | |--------------|-------------------| | Consumer | < 5% | | SMB SaaS | < 3% | | Mid-market SaaS | < 2% | | Enterprise SaaS | < 1% |
Enterprise companies sign annual contracts, so monthly churn looks artificially low.
Churn's Impact on Growth
The math is brutal. To grow, you need:
New MRR > Churned MRR
| Starting MRR | Monthly Churn | Churn $ | New MRR Needed to Grow 5% | |--------------|---------------|---------|---------------------------| | $100K | 3% | $3K | $8K | | $500K | 3% | $15K | $40K | | $1M | 3% | $30K | $80K |
At $1M MRR with 3% churn, you need to add $80K in new MRR monthly just to grow 5%.
Calculate Your Unit Economics
Churn directly affects LTV. Use our calculators:
- Unit Economics Calculator - See how churn impacts LTV:CAC
- Runway Calculator - Model growth with different churn rates
- Viral Coefficient Calculator - Factor in referral vs churn
Key Takeaways
- Track both customer and revenue churn - they tell different stories
- Monthly churn compounds - 3% monthly = 31% annual
- Net negative churn is the goal - expansion exceeds losses
- Cohort analysis reveals patterns - raw averages hide the truth
- Fixing churn > acquiring customers - it's almost always more efficient
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