What is Churn Rate?

We've written before about the importance of KPIs (Key Performance Indicators) in sales for success.

In this article, we'll take a closer look at one of them: churn rate.

Going over what it is, comparing it, and providing examples, we'll demonstrate why companies need to be aware of churn rate, and how it can impact them.

Let's get started!

Churn rate refers to the number of customers that stop using or purchasing your product or service every month. Regardless of the quality of your product or service, every company will lose customers every month and experience churn. In the world of SaaS, this is often focused on how many customers did not renew subscriptions that month.

You want to know this number to understand how effective your service is, and how satisfied your customers are. After all, it is always easier to retain customers and upsell to them or have a constant revenue than it is to find new ones. If you don't know your churn rate, you have no way to tell how your customers perceive you.

To calculate your churn rate over a specific period of time, you can use the following formula:

(# Customers at Start of Period - # Customers at End of Period / Total Customers at Start of Period) x 100 = Churn Rate

What you want is a low churn rate, also known as attrition rate, compared to your growth rate. After all, the lower your churn rate is, the more customers you have retained.

Conversely, the growth rate is how many new customers you've acquired.

As its name suggests, growth rate as a KPI focuses on how much you've grown as a company in a given time period. It is the complete opposite of churn rate, and as a result, you want this number to be high, as high implies good growth and new customers added.

By comparing churn rate to growth rate, a business can determine if there was overall growth or loss during a specific time period. The ideal situation is a low churn rate and a high growth rate, so if a company lost 100 subscribers but gained 110, the net gain is 10. Conversely, if a company added only 100 subscribers and lost 110, the net loss is 10, and there was no growth in that time period, only loss.

As you can imagine, keeping an eye on these sales metrics is absolutely critical for any company interested in succeeding.

Ensuring that the growth rate is higher than the churn rate as much as possible will keep companies afloat, whereas the reverse will result in declining revenue and profit. Keeping track of these KPIs can mean the difference between staying open and closing down the entire organization.

Businesses cannot operate successfully without having these figures, as they help to provide a strategic plan to gain new customers and, to course, correct customer service as needed.

Customer acquisition is also associated with costs as part of the overall process. It should always be noted whether customer churn affects how much you gain from your acquisition costs. If you're not seeing enough coming back, it is time to reconsider the sales process and your spending.

Examples always help us have a clearer understanding of concepts, and the more you have, the more likely you are to find one similar to your situation. Baremetrics, an analytics platform, provides open benchmarks from over 800 small-to-medium SaaS companies, and some of those companies have made their data public over the years.

This helps new Founders determine where they should be, as they can compare with companies in similar revenue or size situations as their own to have a clear picture.

Here are some examples of churn rates for a variety of companies:

According to the Baremetrics report, social media management giant Buffer had a monthly churn of about 5.4%, meaning 48% annual churn, in 2019.

As Buffer was already a well-known, established company at the time, this number was surprising, especially given a prevalent industry narrative that your churn rate should be 5-7% annually.

Time-tracking SaaS company Hubstaff, for the same period as Buffer, had a monthly churn rate of 6.0%, equivalent to a 52% annual churn rate.

This email marketing tool had a monthly churn rate of 5.5%, meaning a 49% annual churn rate, during that same time period.

For more famous companies, we can look at some well-known subscription names:

Music streaming service giant Spotify has a reported 4.8% monthly churn rate.

A low monthly churn rate of 4.3%, given its focus on the exclusivity of its original content and developing original content as time goes on.

Historically, Netflix has had a low churn rate, and this was maintained in 2022, when Netflix's monthly churn rate was 2.5%, thanks to the extensive collection of content available and the ease of use. Of course, given new directions the company is taking, this may continue to shift throughout the year.

Churn rate is an important metric for any company looking to succeed to keep track of.

It is affected by a variety of factors, including customer service, price, sales cycle length, product type, and even sales model.

Being interested in keeping your churn rate low is step one, and then tracking it to learn how it looks for your company and understand how it fits within the wider industry is step two.

But at the end of the day, the key is really in talking to your customers, especially any that are leaving, to discover what you could change to avoid it in the future.