.png)
Estd 4.22.2023
In the competitive SaaS landscape, understanding and managing churn is critical for sustainable growth. While acquiring new customers is important, retaining existing ones is equally—if not more—valuable. Studies show that increasing customer retention by just 5% can boost profits by 25-95%. This is why tracking churn metrics has become a cornerstone practice for successful SaaS executives.
But not all churn measurements are created equal. Today, we'll explore the two primary churn metrics every SaaS leader should monitor: customer churn and revenue churn. We'll examine how they differ, why they matter, and how to track them effectively to drive business decisions.
Understanding the Fundamentals of Churn
Before diving into specific metrics, let's establish what we mean by "churn." At its core, churn represents the rate at which customers or revenue is lost over a specific period. It's the inverse of retention and serves as a critical health indicator for subscription-based businesses.
Customer Churn vs. Revenue Churn: What's the Difference?
Customer Churn measures the percentage of customers who stop using your service during a given timeframe. It's a straightforward calculation that counts lost customers regardless of their value to your business.
Revenue Churn tracks the percentage of revenue lost during the same period. This metric accounts for the varying monetary value of different customers, providing insight into the financial impact of churned accounts.
Calculating Customer Churn Rate
The formula for customer churn rate is:
Customer Churn Rate = (Customers lost during period ÷ Total customers at start of period) × 100For example, if you started January with 500 customers and lost 25 by the end of the month, your monthly customer churn rate would be:
(25 ÷ 500) × 100 = 5%When to Use Customer Churn
Customer churn is particularly valuable when:
- Your pricing is relatively uniform across customers
- You're evaluating overall product-market fit
- You want to understand general customer satisfaction
- You need a quick, easy-to-communicate metric
According to a study by ProfitWell, the median annual customer churn rate for B2B SaaS companies ranges from 3-8%, depending on target market and price point. Companies serving enterprise clients typically experience lower customer churn rates compared to those focused on SMBs or individual users.
Calculating Revenue Churn Rate
The formula for revenue churn rate is:
Revenue Churn Rate = (MRR lost during period ÷ Total MRR at start of period) × 100MRR stands for Monthly Recurring Revenue. For example, if your company started February with $100,000 in MRR and lost $7,000 in MRR from churned customers by month-end, your revenue churn rate would be:
($7,000 ÷ $100,000) × 100 = 7%When to Use Revenue Churn
Revenue churn becomes especially important when:
- You have tiered pricing or significant price variations among customers
- Your business has a mix of small and large accounts
- You're evaluating financial health and forecasting
- You want to understand the impact of churn on your bottom line
Net Revenue Churn: The Advanced Metric
For a more comprehensive view, many SaaS executives track net revenue churn, which factors in expansion revenue from existing customers:
Net Revenue Churn = ((MRR lost - Expansion MRR) ÷ Total MRR at start of period) × 100If this number turns negative, congratulations! Your expansion revenue is outpacing your losses—a scenario known as "negative churn," which is highly desirable for sustained growth.
Why Track Both Metrics?
Examining a case study from HubSpot reveals why tracking both metrics is crucial. In their early growth phase, they discovered their customer churn rate was 8%, which seemed concerning. However, their revenue churn was significantly lower at 3%. This discrepancy highlighted that while they were losing numerous smaller accounts, their higher-value customers remained loyal. This insight led to strategic adjustments in their customer success approach for different customer segments.
Consider another scenario: If your customer churn is low (2%) but your revenue churn is high (10%), you might be retaining smaller customers while losing your most valuable ones—a serious warning sign requiring immediate attention.
Best Practices for Tracking Churn
1. Establish a Consistent Measurement Period
Whether monthly, quarterly, or annually, consistency is key. Most SaaS companies track churn monthly while analyzing quarterly and annual trends for strategic planning.
2. Segment Your Churn Data
Break down churn by:
- Customer size/tier
- Industry vertical
- Sales channel
- Customer lifetime
- Product usage patterns
According to Gainsight, companies that segment their churn analysis are 2.5× more likely to reduce churn year-over-year compared to those using aggregate metrics only.
3. Implement Cohort Analysis
Tracking churn by customer cohorts (groups acquired in the same period) reveals how retention evolves throughout the customer lifecycle and helps identify whether recent changes are affecting retention rates.
4. Set Appropriate Benchmarks
While industry benchmarks are useful reference points, your company's growth stage and business model will influence what constitutes "good" churn rates for your specific situation. Generally:
- Early-stage SaaS targeting SMBs: 3-7% monthly customer churn is common
- Established SaaS with enterprise customers: <1% monthly customer churn is achievable
- Net revenue churn should ideally be negative (indicating expansion)
5. Use the Right Tools
Several platforms can help automate churn tracking:
- ChartMogul or ProfitWell for financial metrics
- Mixpanel or Amplitude for user behavior
- Customer success platforms like Gainsight or ClientSuccess
- Custom dashboards in Tableau or PowerBI
From Tracking to Action
The ultimate goal of measuring churn isn't just to collect data—it's to drive action. According to research by Bain & Company, companies that excel at customer experience grow revenues 4-8% above their market average.
When you notice concerning churn patterns:
- Conduct exit interviews with churned customers to identify root causes
- Analyze product usage patterns preceding churn to spot early warning signs
- Review customer onboarding processes to ensure customers achieve value quickly
- Evaluate customer success touchpoints to identify improvement opportunities
- Reassess your ideal customer profile if certain segments consistently churn at higher rates
Conclusion
Tracking both customer and revenue churn provides a comprehensive view of your business's health that neither metric alone can offer. While customer churn helps evaluate broad satisfaction and product-market fit, revenue churn reveals the financial impact of retention issues and highlights which customer segments truly drive your business.
The most successful SaaS companies don't just measure these metrics—they build a culture around understanding and improving them. By establishing rigorous tracking protocols and acting on the insights they provide, you can significantly enhance customer retention, increase lifetime value, and drive sustainable growth.
Remember that churn isn't just a lagging indicator of past problems—when properly analyzed, it becomes a leading indicator of future opportunities. In the words of management consultant Peter Drucker, "What gets measured gets managed." By measuring the right churn metrics, you're taking the first crucial step toward managing one of the most important aspects of your SaaS business's long-term success.