What is Churn?
Okay, so let's break down what churn is. In short, churn means losing customers or subscribers from your service. This metric is often measured as a percentage within a specific period, better known as the churn rate. You calculate the churn rate by dividing the number of customers lost during a specific period by the total number of customers at the start of that period. For example, if you start the month with 1,000 customers and lose 50 by the end, your churn rate for that month is 5%. We will break this down further later in the article.
Churn rate is a key metric for subscription services as it directly impacts your Monthly Recurring Revenue (MRR) and growth rate. Furthermore, your churn rate also highlights customer satisfaction and thereby the value that your service brings to the customer. Some of your customers will eventually stop using your product due to competitors, pricing, a bad experience, and so on. This is also referred to as the 'churn reason.' Ultimately, keeping track of your churn rate is essential for understanding your business and predicting future growth
Churn rate chart example. Learn more about 'What is a good average SaaS churn Rate'.
How to Calculate Churn
Calculating churn might sound complicated; however, it’s actually pretty simple. In order to calculate the churn rate, you will have to decide on the following:
- Set the Time Frame: Decide if you’re looking at churn monthly, quarterly, or yearly.
- Count Starting Customers: Note how many customers you have at the beginning of the period.
- Count Lost Customers: Identify how many customers left during that period.
- Calculate the Churn Rate: Use this formula:
Churn Rate = (Lost Customers) / (Total Customers at the Start of Period) × 100
For example, if your SaaS company starts the month with 1,000 customers and loses 50 by the end, the formular and churn rate would look like this is:
Churn Rate = 50 / 1000 × 100 = 5%
The process of calculating churn rate should be a continuous process within your organization to always keep track of the percentage of customers leaving your service. It is often a good idea to automate this process in order to limit errors and save time. This is often done using a subscription management software or reporting tool. Some popular subscription management tools with reporting include Fenerum, Stripe Billing and Younium.
Churn Meaning in SaaS
The meaning of churn goes beyond just a number. It tells you about your customers' behavior, preferences, and overall happiness with your product. A high churn rate might indicate that your customers are facing issues like usability problems, missing features, or bad customer support.
For SaaS businesses, understanding what churn is and how to manage it well can make a huge difference for your long-term growth. Knowing churn patterns can help your indentify customers who are churn risk and hopefully address the issues to keep customers from churning.
Using a Churn Dashboard
To keep track of churn, businesses use a churn dashboard. This tool shows your churn data visually, making it easier to see trends and patterns. A good churn dashboard can provide insights into:
- Churn compared to MRR
- Monthly or annual churn rates
- Churn rates by customer segment
- Churn Reasons (e.g., product issues, pricing concerns)
Using a churn dashboard can enable you to make smart decisions to reduce churn. For example, you can identify churn patterns by looking at churn compared to Monthly Recurring Revenue (MRR) in a specific period. It is important to track the churn reason as this gives you even more insight into why customers are churning.
Dashboard showing Churn compared to MRR in Fenerum.
How to Reduce Churn
Understanding what churn is and keeping track of it is just the start. Here are some tips on how to reduce churn:
- Optimize Customer Onboarding: Make sure new customers are thoroughly onboarded and know how to use your product. This will help the customers experience value from the get-go.
- Improve Customer Support: Provide quick and effective support to solve any problems customers have. It often provides value to offer support in multiple languages.
- Keep Updating the Product: Continuously improve your product based on customer feedback. It is a good idea to track customer feature requests.
- Stay in Touch with Customers: Maintain regular communication through newsletters, webinars, and personalized offers. This keeps your customers engaged and informed.
Conclusion
To sum it up, understanding what churn is and its impact on your growth is super important for any business, especially in the SaaS industry. By closely monitoring churn rates through a churn dashboard and implementing strategies to reduce churn, you can retain your customers and grow your business. Recognizing the true meaning of churn and fixing the root causes of customer loss will help you build a loyal customer base and drive long-term growth.
