Growth Metrics Defined: Churn Rate

For your company to succeed, you must retain and expand your client base and your revenue stream. 

Churn is the rate at which your customers discontinue their relationship with your company’s products or services. Revenue churn is the rate at which recurring revenue is being lost due to churn or cutbacks in services.

Decreasing churn can boost profits fast. Bain & Company estimates that increasing customer retention rate by as little as 5% can raise profit margins as much as 25%.

It is time-consuming and expensive to acquire clients. It is also hard to serve them profitably and keep them happy. Ultimately, they have to pay and stay for your company to thrive. 

This is why churn rate is so important to monitor.

Don’t Let Logo Churn and Revenue Churn Destroy Your Business

If your churn rate is rising, you are losing customers faster. Your expenses to replace them with new ones will probably need to rise. Onboarding costs will rise as well. Not a good sign.

If churn falls, that means more customers are paying and staying. They are likely to refer you to others. These are signs that your clients like what you are serving up, your company is getting more efficient and your investors will be very happy.

The Churn Formula:

To calculate churn for your B2B business, use the following formula:

CUSTOMER CHURN RATE DEFINED

Churn Rate = (Number of Customers Lost / Number of Customers Before) x 100

To compute the Churn Rate formula, you’ll need to know the following performance numbers from your customer success team:

  • Period of Measurement: Decide on the dates you’ll measure. Usually an annual figure, but you can also look at 1 month, 3 month and 6 months.
  • Number of Customers Lost (during the period of measurement): Tally the number of customers or clients who discontinued a subscription, canceled a service, or ended a business relationship with your B2B company during the specified time period.
  • Total Number of Customers (at the beginning of the period of measurement): To calculate the initial customer base before any churn occurred, total the total number of customers or clients for your service subscription at the start of the specified time period. 

You should also track your revenue churn rate closely. It is not uncommon to have the overall number of customers stay level, but find that the actual revenue they generate goes down because there’s been a pull back in their service consumption.

REVENUE CHURN RATE DEFINED

Revenue Churn Rate = (Recurring Revenue at beginning of a period / Recurring Revenue at period end) x 100

To compute the Revenue Churn Rate formula, you’ll need to know the following performance numbers from your customer success team:

  • Recurring Revenue at beginning of the period of measurement: Compute your ARR or MRR at the beginning of the specified time period.
  • Recurring Revenue at end of the period of measurement): Calculate the ARR or MRR at the end of the measurement period. Remove any additional revenue or upgrades that existing customers have added, since this metric is about lost revenue only.

Lastly, you might consider Net Logo Churn as well to see the net new customers that are coming into your B2B business:

NET LOGO CHURN RATE DEFINED

Net Logo Churn Rate = ((Total Customers Churned in a period – New Customers Gained in a period) / Total Customers at the beginning of a period) x 100

Using Net Logo Churn with Revenue Churn can be a good combination to see revenue impact of churned customers.

How do I calculate Customer Churn Rate?

Here’s an example of how to calculate customer churn rate using a fictional company in Minneapolis called GoodCompany. GoodCompany makes fancy paper products and packaging for baking shops and retailers.

Here’s the facts:

  • GoodCompany had 150 B2B customers at the end of June.
  • In the second half of the year, an economic downturn hit bakery sales by 25%, reducing demand for GoodCompany products.
  • By the end of December, GoodCompany had 100 B2B customers left.

Customer Churn Rate for Last 6 Months:
(50 / 150) x 100 = 33%

That is a pretty high rate of churn that could spell trouble quickly for GoodCompany unless they can turn that around. In the meantime, GoodCompany is reducing expenses and sales team headcount while investing research time in products that work well in leaner times.

EXAMPLE 2

Here’s a second example of how to calculate customer churn rate for a fictional SaaS company in Minneapolis also owned by GoodCompany. GoodCompany SaaS sells AI software for inventory management and recipe creation for baking shops and retailers.

Here’s the facts:

  • GoodCompany SaaS had 340 B2B customers at the end of June.
  • In the second half of the year, an economic downturn hit bakery sales by 25%, reducing demand for GoodCompany SaaS.
  • By the end of December, GoodCompany had 315 B2B customers left.

Customer Churn Rate for Last 6 Months:
(25 / 340) x 100 = 7.4%

In this example, GoodCompany will need to decide for itself if 7.4% is a good sign for their business. In general, that would be in line with common averages. In this case, they may feel it is acceptable temporarily in view of market conditions. However, there are always ways to dig in and improve on churn, regardless of economic conditions.

EXAMPLE 3

Here’s a second example of how to calculate revenue churn rate for another fictional SaaS company in Minneapolis also owned by GoodCompany. GoodCompany SaaS sells robotics software for baking robots used in fancy baking shops and high end retailers.

Here’s the facts:

  • GoodCompany SaaS had 56 B2B customers at the end of last year providing a total of $23.5M in ARR.
  • Over the summer, an economic downturn hit bakery sales hard.
  • By the end of December, GoodCompany had 62 B2B customers but only $23.1M in ARR.

Revenue Churn Rate for Last Year:
($400,000 / $23,500,000) x 100 = 1.7%

This is an example of how gaining customers doesn’t always mean a raise in revenue, especially if your customers pay based on resource usage. GoodCompany will need to consider how to increase usage by these existing happy customers and add more value. Still, the increase in customers in the face of the bad economy is a great sign that this company is going to be fine in the long term.

What Is A Good Customer Churn Rate?

Overall, the goal is to see your churn rate fall rather than rise. It sounds simplistic, but it is a compelling challenge.

According to the KBCM Technology Group Private Company SaaS Survey of 2022:

  • The median gross dollar churn (which describes how much revenue is lost YoY) for private SaaS companies is 14%
  • The annual median logo churn (which describes how many customers are lost YoY) is 13%.
  • The median annual non-renewal rate is 10%.

A good average to shoot for would be less than a 5% annual churn rate. Lower is much better. Here’s some suggestions from good sources:

  • ”Once the product-market fit is obtained, I think 4.5% to 5% is a number that you should aim for,” says Forbes.
  • ”To have a good SaaS churn rate, you should aim for under 3% — though there’s more to this metric than meets the eye,” says Gong.
  • “To grow sustainably, SaaS companies should avoid logo churn rates of over 8% and ideally keep monthly churn to around 3%,” says Fullview.
  • Churnkey has detailed information on average churn rates:
    • Logo Churn Rate: 3-7% for smaller companies and 1-2% for larger companies
    • Net Revenue Churn Rate: 10-15% for smaller companies and 5-7% for larger companies
    • Gross MRR: 2%-2.5% for smaller companies and 1% for larger companies
    • Net MRR: 2% for most companies.

Generally, the larger the SaaS company, the more sustainable a higher churn rate can be. 

How Can I Reduce My Company’s Customer Churn?

Regular, transparent communication with clients is essential. Keeping clients informed about product updates, improvements, and industry insights can foster a sense of partnership and loyalty.

A fractional CMO can help your business dig in on ways to reduce churn and use those findings to also attract new customers too.

I recommend several strategies for B2B companies to reduce and hopefully prevent churn:

  1. Provide excellent customer support
  2. Address customer concerns promptly
  3. Offer product enhancements
  4. Maintain strong relationships with clients.

The buildup period to renewal is always a key time to lean in on the customer. Have their needs changed since the last renewal? 

Trust your CRM to Give Your Clues to Potential Churn

Lean on the features of your CRM system to tell you when customers are more likely to churn. That way, you can get ahead of it.

Customer Relationship Management (CRM) systems can track customer interactions, see when customers are losing engagement, identify potential issues, and proactively engage with clients to prevent churn.

Keep Track of Your NPS 

B2B companies use customer health scores to assess various indicators such as usage patterns, support interactions, and overall satisfaction. Net Promoter Scores are clean, clear indicators as well… because if your customer won’t recommend you to someone else, that is a bad sign. 

A fractional CMO can help your business dig in on ways to reduce churn and use those findings to also attract new customers too.

It is wise to constantly monitor the overall health of your customer relationships and stay proactive to keep churn at bay.

FURTHER READING:
• How to Calculate Churn Rate in 5 Easy Steps [Definition + Formula] at Hubspot
Churn rates explained: B2B & B2C SaaS company success
• The B2B Guide to Churn Rate: Definition, Formulas, FAQs, and More