Complete guide to understanding and managing churn for SaaS and subscription businesses

Updated On: November 11, 2019

Customer churn is the silent killer of the subscription business. With rising customer acquisition costs (CAC) over the past five years and more market competition than ever, anything you can do to keep customers around longer is vital to your business.

So why aren’t more companies doubling down in their fight against churn? Because the solution isn’t intuitive. You have to understand the underlying issues that contribute to churn, predict how churn will impact your business, and find ways to combat it.

To help you reduce churn at your business, we put together this guide. We’ll walk through how you can identify, measure, and resolve churn so you’re able to retain more customers and keep your SaaS company healthy.

What is customer churn?

Churn refers to customers no longer using a company’s services or products. Understanding how the term can vary across businesses and industries will help you combat the issue with more precision.

types of churn

The various causes of churn for subscription businesses.

Understanding SaaS and subscription churn

Customer churn is more disastrous for subscription companies than any other type of business. Revenue is tied directly to recurring relationships in the subscription model, which makes reducing churn especially important. Customer acquisition cost (CAC) is especially high for subscription businesses, so it’s important that they focus on retention. Relying solely on acquisition isn’t necessary when there are monetization opportunities in their existing customer relationships.

Learn more here: The comprehensive guide to reducing subscription churn

MRR churn

Monthly recurring revenue (MRR) is the lifeblood of the subscription business. Without predictable sources of revenue, it’s impossible to sustain your business over the long-term. On the flip side, it’s critical to track churned MRR to assess how lost customers affect your revenue. If you’re losing customers too quickly, it can seriously hurt your ability to grow.

Learn more here: MRR churn: Calculating and reducing MRR churn rate for SaaS

B2B vs. B2C Churn

Churn impacts B2B and B2C companies in different ways. For B2C companies, the biggest issues are competition and the potential for individual credit card failures. For B2B companies, it’s a reliance on employee output and a high-touch customer service experience. Resolving these issues requires different types of strategies, as covered in the article below.

Learn more here: How B2B and B2C companies solve churn differently

What are the common types of churn?

Customers churn for a number of different reasons. Whether it’s voluntary (where customers actively choose to leave your service) or involuntary (where they leave due to a failure that is outside of their control), understanding why customers churn is the first step to resolving it.

Analyzing your customer churn

If you’re not sure how and why customers leave your service, you’ll never be able to retain them. That’s why analysis needs to be at the core of your churn-prevention process. Knowing the primary drivers of churn helps you prioritize a plan of attack that is efficient as well as effective.

Learn more here: Customer churn analysis: Why analyzing churn is so important

Voluntary vs. involuntary and delinquent churn

Voluntary churn happens when your customer chooses to leave the service on their own, whether it’s due to a poor experience or a better competing offer. Combating this type of churn starts with understanding how to keep your customers happy.

Involuntary, or delinquent, churn is what happens when customers leave your service without actively choosing to do so. It’s the most common type of churn in SaaS, but it’s much more easily avoided than voluntary churn. As a mostly mechanical failure of your tools, delinquent churn is easy to fix by using the right tools.

Learn more here: How involuntary churn is killing business

Modeling customer churn

Calculating the basic formula for churn is simple: you take the number of customers you lost over a specific period and divide it by your total customer count. This formula, however, doesn’t give you the whole picture. To truly understand how churn impacts your business, you must create a model for it.

How to calculate churn

There are a number of different ways to calculate churn, from formulas to more in-depth statistical analysis. By looking at these results together, you’re able to build a comprehensive picture of both your historical churn and a prediction of the impact churn may have in the future. Deciding on which results to use for your subscription business depends on the size of your company, your customer sample size, and your goals.

Learn more here: How to calculate churn rate: The best churn rate formula for Saas

Predictive churn modeling

Once you’ve done a basic churn calculation, it’s a good idea to build a predictive churn model as well. It will help you anticipate customers leaving your service, so you can put a plan in place to stop them from leaving. This model also helps you predict future revenue by accounting for MRR that will likely be lost to churn.

Learn more here: Customer churn prediction models: Lowering CAC, increasing retention

How to manage customer churn

Combating customer churn is only possible when you have a solid retention process in place. Building this plan starts with recognizing what drives churn for your subscription business, as we covered earlier in this guide. Once you understand these reasons, you’re able to find tactics that directly address those issues.

Strategies for preventing churn

For most types of churn, there are strategies you can put in place to prevent customers from leaving. Prevention tactics are especially effective for decreasing involuntary churn, which is more solvable than voluntary churn. In the article linked below, we cover six ways to build your own churn prevention strategy.

Learn more here: Churn prevention: Stopping churn before it happens

Achieving a negative churn rate

Negative churn refers to your MRR being greater than the revenue lost to churn. In other words, you’re earning more than you’re losing. Maintaining a negative churn rate skyrockets company growth. Our research shows that businesses with a 5% negative churn are able to grow more efficiently than those battling positive churn rates.

negative churn

Churn-prediction growth rates when you’re able to predict churn long-term.

Learn more here: How to achieve net negative churn for SaaS

Be aware of churn-rate benchmarks

The average churn rate for subscription companies is between 2% and 8%, which is a fairly wide range. A “good” churn rate is relative to the size and maturity of your business, but of course, lower is always better. To help you understand what healthy churn looks like for your company, we’ve put together a churn benchmarks report below.

Learn more here: Churn benchmarks report

Customer churn is dangerous, but you can fight it

Don’t let churn be the silent killer of your subscription company. When you understand the drivers of churn for your business and have a retention process in place to combat those issues, you can drastically decrease your churn rate over time.

Learn more about how churn impacts your business and what you can do to stop it with Retain, ProfitWell’s churn-prevention software.

Tags: pricing

Join Over 50k Subscription Operators Getting These Insights Weekly