There is much talk about how to calculate churn, how to reduce it, and how bad it is. But let's look at how we can actually manage it, and what actions we can take given certain metrics.
What to do if your Customer Churn Rate is…
Low Churn Rate
While your churn rate may seem low, and great if it is, it is still important to ensure that the numbers you're looking at actually make sense.
The basic formula for calculating the customer churn rate is:
It's important to make sure you're only measuring paying customers in this formula – free trial customers should be excluded, as well as those on a free plan (if you use a freemium model).
What is a 'low' Customer Churn Rate?
Many SaaS companies at a growth stage report monthly churn rate of around 2-5%. Remember that this level of monthly churn rate still equates to losing a significant amount of your customer base – A group of customers acquired in a single month would half in size over the period of a year!
One thing to remember is that we are talking about customer churn rate – not monthly recurring revenue (MRR) churn rate. It's kind of okay to lose customers if they're not the customers contributing to a large proportion of your MRR. A high MRR Churn Rate can be much more destructive to the growth of a SaaS business.
Actions to take
- Make sure you're measuring Customer Churn correctly
- Continue to invest in customer success and lowering churn
- Enjoy the fact that you are doing things right !
High Churn Rate
High Churn Rate is the enemy of any subscription business.
Because churn compounds (just like recurring revenue), a 5% churn rate over time can severely limit the growth of a business.
What is 'high' customer churn rate?
Although some businesses by design are more tolerant of higher churn levels for example, B2C businesses with a large number of customers paying a tiny amount, anything over 3-5% should illicit immediate action. For this reason, it's often better to look at MRR Churn Rate which will account for high volume / low value customers.
Actions to take
- First, segment your churn into cohorts and identify any specific months of high churn in the customer lifetime.
- Find out why customers are churning, particularly in those high-churn months you just identified. Talk to them and implement an exit survey when people cancel.
- Implement a customer success program in your business, aimed at helping customers achieve their goals with your product.
Fluctuating Churn Rate
It is entirely plausible that your calculated customer churn rate could jump around from one month to the next – it's actually quite a common symptom, particularly in smaller SaaS startups with just a few customers.
It may seem obvious, but if you have just a handful of customers and you lose one of them, that's a BIG percentage churn for you. Conversely, a large enterprise with thousands of customers requires a much larger number of cancellations to have an impact on the overall churn rate.
Actions to take
- Make sure that you're calculating customer churn rate correctly and consistently.
- Check to ensure that your customer success teams are not dropping the ball.
- Review your business to identify one off factors are having an effect. These could be things like a new release, staff turnover, a competitor releases more competitive pricing, etc.