Why Does a 'Good Customer Churn Rate' Matter?

Customer churn rate, also known as logo churn rate is a key indicator of the health of your SaaS business.

At a high level, the customer churn rate gives you the rate at which your customers are canceling their subscriptions.

A high customer churn rate can be deadly for your business. In this post, we analyze, anonymized and aggregated data from ChartMogul to find out what is a good target customer churn rate for a SaaS subscription business.

We also discuss why it is important to track customer churn rate and the underlying reasons behind a high customer churn rate.

Monthly Customer Churn Rate by ARPA & MRR Bands

The chart below shows the median Customer churn by a companies average revenue per account (ARPA) per month.

As a reminder, ARPA is the average revenue per account i.e. average MRR across all your customers. It is also known as ARPU or APRC. You can find your ARPA within your ChartMogul Dashboard.

As you’ll notice, the customer churn rate for the median company varies by the ARPA band you are in. For companies with ARPA per month in the range of $0-10, the median monthly customer churn rate is 6.8%. It decreases to 1.9% as your ARPA per month increases to >$500.

In addition, to the median, the chart below also shows the 25th and 75th percentiles of the customer churn rate. The trend remains the same. For companies with lower ARPA, the customer churn rate is higher while for companies with higher ARPA the customer churn rate is lower.

The best companies should target a customer churn rate of <2% per month. This goes down to <1% as your ARPA increases.

Below is the data for monthly customer churn rate split by monthly recurring revenue (MRR) band.

As you’ll notice, the monthly Customer churn rate of a median company is higher in the initial stages of the business (6.8% for <$10k MRR, 4.6% for those with MRR b/w $10-50k). As more companies find product-market fit and hone into their customer category the churn reduces.

Down to about 3.5% per month. Although it then stabilizes at that level and doesn’t reduce even when a company grows.

The chart below also shows you the 25th and 75th percentiles of the customer churn rate by MRR band. The best companies should target a monthly churn rate <2%.

Calculation Methodology. Monthly Customer churn rate is calculated as the ratio of the number of customers who churned in the month (excluding any customers who both joined & churned in the same month) / Total number of customers at the start of the month.

We calculate the aggregates over a 3 month period (Nov ‘21, Dec ‘21 & Jan ‘22). We use the standard B2B churn formula for all companies for easier comparability.

Why Should You Care About Customer Churn Rate?

Customer Churn Rate is helpful because it gives you:

1. Quick feedback — compared to other cohort-based metrics such as Net or Gross dollar/customer retention, churn gives you immediate feedback. You can run tests on your platform and then see feedback in a few days or months.

   
   

2. Easy to measure — the formula for customer churn rate is straightforward and easy to measure. Also, it is relatively hard to game this metric.

   
   

If your customer churn rate is high that means that i) You’ll not be able to compound your user base and hence your revenue, and ii) The money you just spent to acquire your customers i.e. the customer acquisition cost (CAC) goes down the drain sooner.

Churn is deadly. A monthly churn rate of 5% corresponds to an annual churn rate of 46%. That means you’ll lose close to half your existing customers in the next year if you don’t contain your churn.

Here is a helpful table that helps you look at yearly churn corresponding to a particular monthly churn number.

The formula we use to get the annual churn rate from monthly churn rate is the following:

Annual Churn Rate = (1- (1-Monthly Churn Rate)12)

Why Do You Lose Customers, Anyway?

Customers leave you primarily because they don’t see value in your product. The underlying reason as to why they don’t see the value could be threefold:

1. They haven’t been onboarded well:

   
   

• They can’t get to the ‘Aha’ moment where they get to see the magic of your product. Your product is too complex to understand or they are not sure of what job your product accomplishes.

  
  

• Support docs are not easy to understand. Customers are searching for an answer and they just can’t get it. When trying out a new product what you don’t have is time/patience.

  
  

2. Price doesn’t correlate with value — even if some of your customers see the value in your product, they can get more value for the same price elsewhere. Hence they churn.

   
   

3. Wrong customer segment — Maybe they weren’t the right customer segment who should be using your product in the first place. Your marketing strategy needs to change in this case. And probably you’ll need to fire some of your customers too.

   
   

Unrelated to your product value, there is also some Involuntary churn that happens. This is because of card expiry, declined payments, etc. Customers also leave because they get acquired, and their new home no longer uses your product.

Consider digging deeper to get the real reason behind the churn. A way to do this is to talk to your customers. Find out why they churned? Was it because of your pricing or was it because your product was missing a key feature. And then test your hypotheses (eg. features, pricing, plan). Repeat.