It’s the question on every SaaS founder’s lips: Is my churn rate too high?
While it might sound like a simple question on the surface, the answer is anything but. A “good” churn rate for one company might be terrible for another. Worse, comparing average churn rates across different markets and industries will leave you mired in confusing statistics and contradicting studies.
So how do you know what a healthy churn rate is for your SaaS company? Why is it so hard to define an average churn rate—and what does that mean for your subscription business?
Let’s find out.
What is SaaS churn?
SaaS churn measures the number of SaaS customers who cancel their subscription. Since recurring revenue is the lifeblood of a SaaS business, churn is a metric of critical importance to a SaaS company’s long-term viability.
What is the average churn rate?
In SaaS, the average churn rate is around 5%, and a “good” churn rate is considered 3% or less. However, this varies greatly across businesses and industries, so in reality there is no universal “average” churn rate. Churn (aka customer attrition) targets tend to fall all over the map, and everyone has a different idea of what an acceptable churn rate looks like.
The fact that there’s no standard reporting method for churn doesn’t help. Some companies report revenue churn, others only share customer or user churn numbers, and often there’s no distinction between whether churn numbers are annual or monthly.
I mean, just take a look at all these different surveys:
- A 2018 KBCM Technology Group survey reported a median annual revenue churn rate of 13.2% and a logo churn rate of 21% among 162 respondents (although this excluded companies with less than $5m in revenue).
- Zuora’s 2019 Subscription Economy Index reports average customer churn rates across a number of different industries, ranging from Business Services on the low end (16.2% customer churn rate) to Media on the high end (37.1% customer churn rate).
- While the data’s a tad older, Totango’s 2016 SaaS Metrics Report lists a wide band of churn rates across its respondents, with the median annual churn rate falling somewhere in the 5-10% range.
- Nathan Latka interviews founders and publishes their SaaS metrics on his website—the average gross churn rate of the 300 listed companies is 16.8%. While it’s not listed specifically, I assume these are monthly churn numbers.
- Subscription service Recurly reports an average monthly churn rate of 5.6% across a sample of over 1,500 sites. Its churn numbers vary between B2B and B2C, with B2C companies experiencing much higher churn (7.05%) than B2B (5%).
So based on this data, the average churn rate (specifically the average monthly revenue churn rate) could be anywhere from 1% to 17%, with most studies reporting the median monthly churn rate in the 5-10% range.
Why do average churn numbers vary so much?
The reason average churn numbers fall all over the map is that every company is different, and every market is different.
Churn rates for subscription companies vary widely across both external dimensions (like the market you’re in and your target customers’ willingness to pay) and internal dimensions (like your chosen pricing structure, contract lengths, and company age).
Average Churn rates vary across industries
Every industry has different factors that affect churn.
Subscription platform Recurly sampled over 1,500 subscription companies in 2018 from across their customer base using their platform to understand the average churn rate by industry.
Average churn rate by industry. Image via Recurly
The data tells a clear story:
- The average churn rate for SaaS companies landed around 4.8%, with upper and lower quartiles of 8.5% and 2.9%, respectively.
- Media and entertainment services recorded monthly churn of roughly 5.2%.
- Healthcare subscription services came in a little higher at around 7.5%.
- Education services and consumer goods saw identical monthly churn rates of around 9.6%.
- Subscription boxes were the highest of the bunch, with monthly churn of 10.54%.
The biggest variations between average churn rate by industry depend on whether services are sold to businesses or consumers. SaaS, for example, includes a higher proportion of B2B products and services, all of which tend to experience lower churn. Consumer services, like subscription boxes and entertainment services like Netflix and YouTube, have a comparatively higher churn rate since the services aren’t seen as “essential.”
Check out our guide on retention rates by industry for more info.
Higher ARPU correlates to less churn
Churn can also vary widely based on your pricing. Companies with low average revenue per user (ARPU) see much higher churn than those with larger ARPU.
Say your average revenue per user per month is less than $100. You’re likely seeing monthly gross revenue churn rates between 3-16%, with a median between 6-9%. That’s a lot of churn.
Yet, companies with an ARPU more than $500 see significantly less revenue churn, with a range of roughly 2-6% and a median closer to 3-4%.
Of course, this is intuitive. Those higher ARPUs tend to come with more hand-holding, annual contracts, and a deeper relationship with your customer base—all of which are afforded through higher revenues per user. Lower-priced products and B2C services take less consideration before making a purchase—and likewise, less consideration before canceling a subscription.
Longer contracts reduce churn
Existing customers are less likely to churn than new customers. Companies with a higher percentage of customers on annual (or longer) contracts tend to experience lower churn rates and higher lifetime value than companies that primarily offer monthly contracts.
There are two reasons churn goes down for longer contracts. Annual contracts give new customers fewer chances to renew and therefore fewer chances to churn. With an annual contract, there's only one opportunity for a customer to churn out, as opposed to 12 with a monthly contract.
Annual contracts also tend to attract higher-value customers. These customers believe in you—signing a longer contract is a strong sign your customers are willing to commit to your product. If they're willing to make such a big monetary commitment, they're likely more invested in using your product to win and less likely to churn out after a short time period.
Older companies experience less churn
Companies that are less than three years old are seeing a churn range spread from 4% to a whopping 24%, whereas companies 10+ years old are seeing churn in the 2% to 4% range.
Why? As companies age, they get much better at understanding their customers’ needs and positioning their product and business model to meet those needs. Hence, those customers tend to stick with the company longer. There’s also an element of survivorship bias—companies that don’t figure out their high churn problems tend not to survive past a few years.
Funded companies have higher churn rates
Venture money can solve a lot of problems, but churn isn’t always one of them.
Interestingly, venture-funded companies experience notably higher churn than those that didn't take on funding. In fact, churn rates for funded companies tend to be 20-30% higher than their bootstrapped counterparts.
Venture funding creates a false sense of security. Funding masks core problems that simply get bigger as the company gets bigger—in essence, letting you use a sledgehammer when you really should be using a scalpel. Founders are much more likely to spend their way out of growth holes when they’re gambling with someone else’s money.
Meal delivery services like Blue Apron are a prime example of this problem. Its average churn rate ended up being so high, all the customer acquisition spend and product add-ons in the world weren’t enough to offset losing such a high number of customers.
Is there such a thing as a “good” churn rate?
The average churn rate for SaaS companies, then, are all over the map—everywhere from 1-20% of MRR (monthly recurring revenue), per our churn studies. Therefore, a churn rate at the low end (2%) would be considered “good.”
But that doesn’t tell the whole story. Since every company, product, and market is different, it’s impossible to properly compare churn rates across different companies. There are just too many factors in play.
So what benchmarks should subscription companies aim for? What is a good churn rate?
Established companies should aim for steady, low churn
For established companies and enterprise products that have found product-market fit, revenue churn should be low and stay low. Jumping back to our ARPU data from earlier, companies with ARPUs in the $500+ range should have an average churn somewhere in the 2-4% range—but ideally no more than 6%. These numbers are backed up in our company age studies—companies over three years old should be in the same range.
Early-stage companies should aim to improve churn over time
For early-stage companies still searching for product-market fit, though, it depends. Churn in the first year tends to be much higher, often hovering around 10-15% per month (and ranging as high as 24%) as companies figure out their product marketing and pricing strategies to fit their target customers.
As you get better at finding and retaining more ideal customers, that rate should go down over time. Your best benchmark should be your own metrics from last week, last month, or last year.
The best answer I can give is: track your churn and find ways of improving your churn rate over time. Keeping the ship pointed in the right direction is more important than spending your time focusing on your specific churn rate—and certainly more important than comparing it to your competitors.
Practical tips for improving your churn rate
There’s no silver bullet when it comes to improving your average churn rates. Every subscription company struggles with churn for different reasons—what works for one company might not work for yours.
There are, however, a few concrete things every subscription company can improve to bring down a high churn rate.
Increase your proportion of annual contracts
Annual plans are essential when reducing churn, yet KBCM reports that nearly 20% of SaaS companies still have an average contract length of less than one year. There’s no excuse for a SaaS company not to be offering annual contracts—increasing your proportion of annual to monthly plans is one of the fastest ways SaaS companies can reduce churn.
Some tips for encouraging customers to sign annual contracts:
- Email customers and offer a discount for switching to an annual plan.
- Offer a discount over monthly plans (I recommend reducing prices 15-20%).
- Highlight the savings on annual plans on your pricing page.
Bring down your payment failure rate
Credit card delinquencies are another leading churn factor you can easily fix. Up to 20-40% of churn is typically caused by credit card failures, and most companies don’t have a good solution for combating this churn.
The good news? Automated tools like ProfitWell Retain make it easy to win back your customers, leveraging data to automatically reduce lost revenue and churn due to payment failures.
Lower churn and keep your customers
Churn is inevitable. You can’t wave your magic wand and make it disappear entirely.
Improving your average churn rate is a slow and steady process. Stick to the basics—track your churn rate over time, focus on doing better than yesterday, and leverage the right tools whenever possible.
Eventually you’ll end up finding a sustainable churn rate—and a sustainable business.