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What Is Customer Churn Rate for SaaS + How to Calculate Yours

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Last updated on
October 4, 2023

A QUICK SUMMARY – FOR THE BUSY ONES

Customer Churn Rate refers to the proportion of users or customers who discontinue the use of a software product within a specific timeframe. It provides insights into whether a product is meeting the expectations of its users. It can also help identify areas for improvement.

A high churn rate can be an indication that the product has problems with usability, functionality, or that users do not perceive enough value to keep using it. This could result from a lack of useful features, poor user experience, or the availability of better alternatives.

On the other hand, a low churn rate means that the product is meeting the expectations of its users, providing value, and satisfying their needs. This is a good sign that the product is on the right track and that users are likely to remain loyal.

TABLE OF CONTENTS

What Is Customer Churn Rate for SaaS + How to Calculate Yours

Introduction

No business is immune to customer churn. But by embracing this reality and using customer churn rate to drive improvement, you create products that customers can't resist.

Let’s explore what customer churn rate is, why it matters, and how to improve it.

What is Customer Churn Rate

Customer Churn Rate is a product metric that measures the percentage of customers who stop using a product or service over a given period of time.

In simpler terms, it's a way of calculating how many customers you're losing and how quickly you're losing them.

In the context of SaaS, customer churn rate refers to the percentage of users or customers who stop using a software product over a given period of time.

The metric is important for software development teams because it can indicate whether a product is meeting the needs of its users or not.

What does it mean?

By tracking customer churn rate, software development teams can identify areas of the product that need improvement, and work to address those issues.

A high churn rate could mean that the product has usability or functionality issues, or that users are not finding the product valuable enough to continue using it.

Reducing customer churn rate is an important goal for software development teams, as it can lead to increased user satisfaction, loyalty, and revenue.

Benefits of reducing Customer Churn Rate for software development teams

Increased user satisfaction

If a software product has a high customer churn rate, it means that users are leaving the product because they're not satisfied with it. By reducing churn rate, software development teams can improve user satisfaction by addressing the issues that are causing users to leave. This can lead to higher user engagement, increased usage of the product, and ultimately, greater user satisfaction.

Increased user loyalty

When users are satisfied with a software product, they're more likely to continue using it over the long term. By reducing churn rate, software development teams can improve user loyalty by retaining more users and creating a base of loyal customers. This can lead to increased word-of-mouth marketing, as satisfied customers recommend the product to others.

Increased revenue

When a software product has a high churn rate, it can have a negative impact on revenue. Users who leave the product are no longer paying customers, and they may be less likely to purchase other products from the company in the future. By reducing churn rate, software development teams can increase revenue by retaining more customers and creating a loyal customer base that is more likely to purchase additional products and services.

Improved product-market fit

By tracking customer churn rate and analyzing the reasons why users are leaving a product, software development teams can gain valuable insights into the needs and preferences of their target market. This can help them to improve the product's features and functionality to better meet the needs of their users, leading to a better product-market fit.

Better decision-making

Customer churn rate can be a useful metric for guiding product development decisions. By understanding which features and functionality are most important to users and which are causing them to leave the product, software development teams can make more informed decisions about what to prioritize in future releases.

Increased efficiency

By focusing on reducing customer churn rate, software development teams can improve the efficiency of their development process. They can prioritize work on the features and functionality that are most important to users and avoid spending time on features that are not valuable to them.

Competitive advantage

Software products with low customer churn rates are more attractive to investors and potential customers. By reducing customer churn rate, software development teams can differentiate their product from competitors and gain a competitive advantage in the market.

Risks connected with focusing on Customer Churn Rate

Overlooking new customers

While reducing churn rate is important, it's also important to focus on acquiring new customers. If a product development team is too focused on reducing churn rate, they may overlook opportunities to acquire new customers and grow the user base.

Focusing on the wrong metrics

While customer churn rate is an important metric, it's not the only metric that matters. Focusing solely on churn rate can lead to a narrow focus on retention, while other important metrics such as customer acquisition cost and lifetime value may be overlooked.

Ignoring feedback from loyal customers

In an effort to reduce churn rate, product development teams may focus too much on the needs of at-risk customers and overlook the feedback and needs of loyal customers. This can lead to a product that doesn't fully meet the needs of its most valuable users.

Ignoring the root cause of churn

If product development teams are only focused on reducing churn rate without understanding the root cause of churn, they may end up making changes to the product that don't actually address the underlying issues. This can lead to a product that continues to experience high churn despite efforts to reduce it.

How can product teams measure customer churn rate?

Product teams can measure customer churn rate by tracking the number of customers who have stopped using their product or service over a given period of time. Here's an example.

Let's say a software company has 1,000 customers at the beginning of the quarter. By the end of the quarter, 50 of those customers have canceled their subscription or stopped using the product. This means that the company has a churn rate of 5% for that quarter (50 divided by 1,000).

Product teams can also track churn rate by cohort, which means looking at the churn rate for a specific group of customers who all started using the product at the same time. For example, a company might track the churn rate of customers who signed up in a specific month, to see if there are any trends or patterns in customer behavior.

It's important to note that churn rate can be calculated in different ways depending on the specific definition of what it means for a customer to "churn." For example, a company might consider a customer to have churned if they cancel their subscription, stop using the product for a certain period of time, or uninstall the product from their device. It's important to define churn in a consistent and clear way in order to accurately measure and track the metric over time.

Customer Churn Rate formula

The formula for calculating customer churn rate is:

Churn Rate = (Number of Customers Lost during a Period / Total Number of Customers at the Start of the Period) x 100%

For example, if a software company had 1,000 customers at the start of the month and lost 50 customers during the month, the churn rate for that month would be:

Churn Rate = (50 / 1,000) x 100% = 5%

This means that 5% of the company's customers churned during that month.

It's important to note that there are different ways to define and measure churn, so the specific formula used may vary depending on the company and the industry. Additionally, some companies may calculate churn rate based on revenue instead of the number of customers. In this case, the formula would be:

Churn Rate = (Lost Revenue during a Period / Total Revenue at the Start of the Period) x 100%

Customer Churn Rate alternatives

Customer Engagement

This metric measures how actively engaged customers are with a company's products or services. It can include factors like how often customers use the product, how long they spend using it, and how they interact with the company. Unlike customer churn rate, which focuses on the number of customers lost, customer engagement provides a more holistic view of how customers are interacting with the product. 

When to choose: 

Companies may choose to use this metric when they want to better understand how customers are using their product and how they can improve the customer experience.

Customer Lifetime Value (CLV)

This metric measures the total amount of revenue a customer is expected to generate over the course of their relationship with a company. Unlike customer churn rate, which focuses on the number of customers lost, CLV takes into account how much value each customer is bringing to the company. This metric can be useful for identifying high-value customers and determining how much a company can afford to spend on customer retention. 

When to choose:

Companies may choose to use this metric when they want to understand the financial impact of losing customers and how much they need to invest to retain them.

Net Promoter Score (NPS)

This metric measures how likely customers are to recommend a company to others. Unlike customer churn rate, which focuses on the number of customers lost, NPS provides a measure of customer satisfaction and loyalty. 

When to choose:

Companies may choose to use this metric when they want to understand how well they are meeting customer needs and whether they are providing a positive customer experience.

Customer Retention Rate

This metric measures the percentage of customers who continue to use a company's products or services over a given period of time. Unlike customer churn rate, which focuses on the number of customers lost, customer retention rate measures how many customers are staying with the company. This metric can be useful for identifying areas where customers are more likely to churn and determining how to improve retention. 

When to choose:

Companies may choose to use this metric when they want to understand how well they are retaining customers and where they need to focus their retention efforts.

Each of these metrics provides a different perspective on customer engagement and retention, and companies may choose to use one or more depending on their specific goals and needs. For example, a company may use customer engagement to identify areas where customers are struggling to use their product and then use customer retention rate to measure how well they are addressing these issues. Ultimately, the choice of metric will depend on the company's specific goals and what they want to achieve.

Summary

Reducing customer churn rate isn't just the responsibility of the product development team. By working together with other departments and stakeholders, you can create a culture of customer-centricity that benefits everyone.

Frequently Asked Questions

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Authors

Olga Gierszal
github
Software Engineering Editor

Software development enthusiast with 6 years of professional experience in the tech industry.

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