What is SaaS Churn Rate? A Beginner's Guide for Founders

Something that I have been thinking about a lot is churn rate. 

As a SaaS founder, you've got a lot on your plate. Product, funding, marketing the list goes on. But there's this one thing, churn rate, that can really undo all your hard work.

Understanding churn isn't just about numbers. It gives you signals about your business. Churn rate matters because it’s about keeping your revenue flowing which will help you build a solid business by ensuring sustainable growth.

The thing is while most people think that churn is when customers leave, it's a bit more complicated than that. There's this kind of "silent killer" or “sneaky” churn that can really impact your business.

So, What Exactly is SaaS Churn Rate?

Okay, put simply, SaaS churn rate is just the percentage of customers (or money) you lose over a certain time. Think of it like a leaky bucket. You're pouring water into a bucket, but the bucket's got a big hole. You keep adding water, but it keeps leaking out. That leak? That's churn.

It's super important for your SaaS business because the entire business model is built on repeat customers. If you're losing those customers, you're losing money, and getting new customers gets way harder (and more expensive).

Why Should Founders Actually Care About Churn?

You're trying to build a sustainable business right? Something that grows profitably. And churn rates are the biggest clue about whether you're on the right track. High churn means:

• Stagnant or Declining Revenue: Even if you're bringing in new customers, high churn can mean your net growth is flat, or even negative.

• Higher Customer Acquisition Cost (CAC): If you're constantly replacing lost customers, your effective CAC goes way up, as you're spending marketing dollars just to stay in place.

• Wasted Effort: All that time spent onboarding, supporting, and building relationships with customers goes to waste when they leave.

• Poor Product-Market Fit Signals: Sometimes, high churn tells you that your product isn't truly meeting customer needs, or your ideal customer profile is off.

How to Calculate Your SaaS Churn Rate (Accurately)?

Calculating churn isn't hard, but doing it consistently and accurately is key. Here’s the most common ways to calculate customer churn rate over a period (usually a month or quarter):

Customer Churn Rate: Number of Customers Lost in Period​/Number of Customers at start of period × 100%

Example: If you started the month with 100 customers and lost 5, your customer churn rate is (5/100) × 100% = 5%.

You can also calculate revenue churn rate, which gives a more accurate picture, especially if you have varying subscription tiers:

Revenue Churn Rate: MRR Lost from Churned Customers in Period​/MRR at Start of Period × 100%

Example: You have a total Monthly Recurring Revenue (MRR) of $50,000.

• MRR Lost from Churned Customers in Period (during May):

  • Customer A was paying $500/month and churned.

  • Customer B was paying $1,000/month and churned.

  • Customer C was paying $200/month and churned.

  • The total MRR lost from these churned customers in May is $1,700.

Now, let's plug these numbers into the formula:

Revenue Churn Rate =$1,700​/$50,000 × 100%

Revenue Churn Rate = 0.034 × 100% = 3.4%

This means that during May, your business lost 3.4% of its starting MRR due to customer churn. This percentage gives you a much clearer picture of the financial impact of churn than just counting lost customers, especially when customers pay different amounts.

Two Kinds of Churn You Need to Know About: Voluntary vs. Involuntary

As you can tell from the heading there's two types of churn and not all churn is created equal:

1. Voluntary Churn: This is when someone chooses to leave. Maybe they don't like the product, found something better, or can't afford it. Surveys are your friend here.

2. Involuntary Churn: This is the "silent revenue killer". Customers who churn unintentionally. Think failed credit card payments, expired cards, soft declines, or even payment processing errors. They want to keep using your service or product, but something technical is preventing them from paying.

This involuntary churn can make up a significant portion of your total churn. And for a founder, it's particularly frustrating because these are customers you could have kept with the right system in place.

My Story: The Churn Headache

We experienced this problem firsthand. In prior businesses we charged clients a monthly subscription.

But we started running into failed payments often. The payments would bounce for all sorts of reasons: expired cards, banks flagging transactions, insufficient funds. It wasn't because clients were unhappy; they just had a payment issue.

How did we handle it? Tedious, manual outreach. We’d track down each failed payment, send emails, make calls, and remind clients to update their billing info. It took a massive amount of  time.

On top of that, simply tracking who was active, who was past due, and who had cancelled their subscription was a headache. We lost revenue that we didn't realize we were losing because the process was so messy and manual.

That personal pain point was the spark for ChurnDog. We wanted to build a better, automated way to deal with these "silent" revenue leaks and get a clear picture of subscriptions.

What To Do After You Know Your Churn Rate

Understanding your churn rate is just the first step. The real work begins when you use that knowledge to take action. For many founders, the first thing to tackle is involuntary churn. Automating the process of recovering failed payments can often lead to significant, immediate revenue recovery without acquiring a single new customer.

Knowing your churn rate empowers you to:

• Identify pain points: Is it voluntary churn due to product issues? Involuntary churn due to billing?

• Prioritize retention efforts: Focus on the biggest leaks first.

• Measure the impact of your changes: Did that new feature reduce churn? Did your new dunning strategy improve recovery?

Your churn rate gives you important clues about your business. As a founder, you need to constantly monitor churn both voluntary and involuntary.