Study up on churn rate basics to set customer and revenue benchmarks
In the early stages of building a company, churn gives you quick feedback, which other metrics seldom do. Studying churn lets you run tests on your platform and get feedback in a few days or months.
Churn gets a lot of bad press. Yes, it is complex and confusing, but as a metric, it is helpful.
In the early stages of building a company, churn gives you quick feedback, which other metrics seldom do. Studying churn lets you run tests on your platform and get feedback in a few days or months.
In this post, we dive deep into churn. First, we answer a few key questions: What is churn? What are its different types? And how can it be negative?
Then, we dive into churn benchmarks. We analyze anonymized and aggregated data to answer the question: What is a good churn rate?
So without any further ado, let’s dive in.
What is churn?
Churn is an indicator of the health of your existing subscriber base. In simple terms, churn is the rate at which your SaaS business loses customers or revenue.
From a high level, you can look at churn in two ways:
- Customer churn — measures the rate at which customers are leaving your SaaS business
- Revenue churn — measures the rate at which revenue is leaving your SaaS business
Negative net MRR churn is akin to SaaS nirvana, because with each passing month, your existing subscribers become more and more valuable.
Why look at customer and revenue churn separately?
Depending on the revenue concentration, customer churn can be different from revenue churn. Hence, it’s good to look at both numbers.
For example, imagine you’re running a SaaS business with three customers: A, B and C. Their monthly recurring revenue (MRR) is $20, $30 and $50, respectively (for a total MRR of $100).
Now, one day, C decides to cancel their subscription and churn. So when you calculate your customer churn rate for the month, it will be 33% (as one of three customers churned). But if you calculate your revenue churn rate, it will be 50%. This is because C made up 50% of your MRR.
Types of revenue churn
Let’s dig a little deeper into revenue churn. You can calculate revenue churn in two different ways:
- Gross basis — This is called gross MRR churn because it only takes into account the MRR lost (and not MRR gained) from your existing customers. As a reminder, you lose MRR from your existing customers via both churn and downgrades.
- Net basis — This is called net MRR churn because you net the MRR lost and gained from your existing subscriber base. So you lose MRR via churn and downgrades, but you also gain MRR via expansion and reactivation. Net MRR churn gives you a more holistic picture of the state of your subscriber base.
