“5% is that high or low?”
“Are we doing better or worse than our competitors?”
“Where should we set goals for the coming quarter”
Churn is the primary performance metric for Customers Success teams at SaaS businesses and, despite being simple to calculate, perhaps no other metric is the subject of so much confusion. SaaS markets are dynamic and competitive, often making it difficult to judge what constitutes a “good” churn rate. This is particularly true for startups that have little in the way of historic data for comparison or are rapidly iterating on pricing and business model.
Marking performance against industry benchmarks can be instructive for Customer Success teams at both new and establish business. At the very least, benchmark can give CS teams a sense of where they should be aiming.
However, before setting goals and building strategy around SaaS churn benchmarks, one should first understand the fundamental challenges in comparing churn across different businesses. To name a few:
- Business Maturity - An established company with a large user base and strong reputation often has lower churn than a less established company and may have a less volatile churn rate over time
- Product, pricing, and customer lifecycle - Some businesses are not optimized for long-term use, such as a dating app or a job search platform and, accordingly, expect experience churn
- Business Strategy - Rapid growth business with large target market sometimes tend to is likely to attract new subscribers with discounts and offers, fully expecting often have to choose between driving net new users as quickly as possible vs. retention
- Product Elasticity - With some products, it is much easier to regularly switch suppliers in search of the best deal. In sectors where it is harder to change vendors, such as complex technology infrastructure and business-critical systems, businesses often have lower churn.
- Macro influence - Some SaaS businesses are more subject to macroeconomic pressures, new government policies and regulatory forces. For example, a change in law may require a gambling or gaming platform to close underage accounts; or prohibit trade in cryptocurrencies. In such cases, churn will be temporarily high.
SaaS Churn Metrics
In its most basic incarnation, churn is the absolute number of customers that a business loses over a given time period. Most commonly, churn is expressed as a percentage of the customer base. For example, a business with 100 customers in January, that then has 90 customers in February, has a customer churn rate of 10%. However, customer churn is not the only churn-related metric that matters to CS teams.
Exactly which metrics are most useful to your org will depend on your stage of growth, revenue model, target market, growth objectives, and the data you have to work with.
- Subscribers: the easiest SaaS churn metric to understand is the amount of subscribers you have, compared to a previous point in time. Variations include users (helpful for accounts with multiple users), consumption (how much of a service is being used) or logos (how many individual companies are clients).
- Monthly Recurring Revenue (MRR): MRR ensures a SaaS business recognizes a subscriber’s revenue across the duration of their contract term, regardless of when payments are actually taken. Therefore, a customer with an annual contract worth $6,000 will have an MRR of $500. Recurring revenue can also be expressed in quarterly (QRR) or annual (ARR) terms. A falling MRR is usually a signifier of churn in absolute terms (i.e. subscriber numbers).
- Net Revenue Retention (NRR): NRR (sometimes known as Net Dollar Retention - NDR) takes recurring revenue a step further, by taking into account current customers who downgrade, pause or reduce their consumption alongside those who churn. NRR is expressed as a percentage, with anything under 100% showing revenue contraction – with industry benchmarks at 109%.
- Average Revenue Per User (ARPU): ARPU divides the total revenue of all subscribers by the number of subscribers, to determine how much revenue each subscriber is generating over a given period of time. A falling ARPU figure may not be evidence of subscriber churn in itself, but rather the loss of your highest-spending customers.
And here are two other metrics that, though not specifically churn, play an important part of any churn conversation.
- Customer Lifetime Value (CLV): CLV is the profit you can expect to receive from a subscriber over the course of their custom. It is predictive, and therefore can be a complex calculation, depending on how many variables are considered. CLV is important to churn because it can point to how much of a priority churn should be. For example, you may be able to offset the impact of increasing churn with a growing CLV, all other things being equal.
- Customer Acquisition Cost (CAC): The financial impact of churn is not just in lost revenue, but the cost of replacing the subscriber. A low CAC will tend to put less pressure on churn.
How Churn Benchmarks Differ
So, we know that benchmarking churn is a complex business. Let’s take a look at what that means in action:
SaaS churn benchmarks by growth stage
SaaS churn benchmarks by company age
Established companies with ARPUs in the $500+ range should have an average churn of somewhere between 2-4% range. For early-stage companies still searching for product-market fit, though, it depends. Churn in the first year can be as high as 24%. (Source: Profitwell)
Churn benchmarks by sector
- SaaS: 4.79%
- B2B services: 6.25%
- Consumer goods: 9.62%
- Subscription video on-demand: 10.01%
(Source: Rocket Marketing Group)
The upshot of this is that SaaS benchmarks, even by sub-sector, and even within a business, can be misleading. This can be overcome, but it requires significant analytical resources to set the right parameters and draw the correct conclusions.
4x4 Churn Matrix
Chasing a myriad of different churn calculations at once can quickly throw a strategy out of kilter. For example, you can optimize outcomes against one metric, only to find another churn indicator suddenly heading in the wrong direction. Worse still, you may discover an inverse relationship between two metrics: as one improves, it has a direct and opposite impact on the other (for example, retaining low-value subscribers will negatively impact ARPU.)
The following 4x4 grid can be a helpful way to think about churn—rather than approach churn as a single problem, approach it as multiple mini-projects, each with its own strategy and set of tactics.
Each quadrant represents the intersection between a moment in time (i.e. when in the subscription lifecycle is the churn occurring?) and the subscriber’s intent (i.e. what is the cause of the churn?)
- Top left - a proactive strategy to ensure subscribers continue to get value from your service, and so prevent churn happening (e.g. in-app messaging and walkthroughs can improve user onboarding and new feature adoption.)
- Bottom left - establish the payment mechanisms are in place to successfully process a subscription renewal (e.g. for international transactions, route payments through local acquirers and intermediaries to avoid them being flagged as suspicious and to ensure consistency in data formatting between different banking systems.)
- Top right - a timely response to dissuade customers against ending their subscription (e.g directing a cancellation request to a webpage that restates your value proposition, captures and addresses the specific cancellation reason, or makes the customer an offer to stay.)
- Bottom right - remedying issues that have resulted in a payment failure, in time for the subscription to continue (e.g. a dunning program designed to retry failed payments, or to prompt the customer to supply new payment details.)
Revenue Delivery's Impact on Churn
Churn is not just about falling out of love with a product. There are many other drivers that contribute to churn i.e. CRM, subscription management, customer communication, payment management, and beyond. Moreover, managing these processes with multiple tools can be prove difficult.
Here are some ways an effective revenue delivery strategy can impact churn:
- Automated reactivation flows: Customers who intend to cancel their subscription can be persuaded against doing so if you can automatically funnel at-risk subscribers through a program of communications and engagements, tailored to the things you know about them and their (probable) reasons for wanting to leave you.
- Flexible subscriptions: Occasionally, customers churn because they are faced with an all-or-nothing proposition, when really all they want is a little less of your service; sometimes over a specific period of time; or to change the frequency of their payments so they are paying slightly less each time, but over a longer period. Giving customers a greater choice in subscription packages ,and making it easy to switch between them, provides control and confidence in their ROI.
- Automatic payment update: Payment failing because the payment details are incorrect is one of the biggest causes of involuntary churn. With card payments, anti-fraud laws dictate that cards must expire after three years, and of course customers can lose theirs or have them stolen in the meantime. Because vendors know when a card will expire, it's relatively easy to prompt the subscriber to update their details in time to take the next payment. This preemptive strike is not possible with lost and stolen cards; but timeliness in letting the customer know and directing them to update their new card details can make a big difference.
- Smart payment routing: If the route a payment takes from the customer’s bank to the merchant’s bank crosses borders, for example, where the two banking systems have little in common, the payment can be hard to reconcile and get flagged as suspicious, triggering an immediate stop to proceedings. However, with access to the right technology, merchants can reroute the transaction through more accommodating intermediaries.
- Payment preference: Letting customers pay how they want is easier said than done, especially with alternative payment methods growing in popularity. However, a unified revenue delivery solution is more likely to have multiple payment methods and currencies for you to access, without the need for more integrations.
Originally published on Paddle's blog. Paddle is the all-in-one revenue delivery platform for SaaS businesses. With Paddle, software companies are able to transform their revenue delivery infrastructure into a strategic growth lever that sees them respond faster and more precisely to every growth opportunity.
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