Churn: a quick guide for subscription businesses
Tracking customer metrics and understanding how they are connected with your cash flow is essential for making decisions about product development, growth, and investments.
In addition, knowing how often customers stop subscription payments can help you gauge which products or services are working best for you, and which may need to be adjusted or dropped altogether.
Let’s unpack churn rate and why it’s important for subscription business models.
What is the churn rate?
Churn rate is the percentage of your customers that stops using or paying for your service or subscription over a set period. This is an essential metric for subscription-based businesses to monitor, since it demonstrates whether you are retaining or losing customers.
What are the different types of churn?
There are two major types of churn: voluntary and involuntary.
The distinction is whether the customer deliberately decided to cancel or had their subscription lapse without renewing.
Voluntary churn occurs when a customer actively decides to cancel their subscription to your business. Customers cancel because they were unhappy with the service, their needs changed, or they didn’t get the value they wanted from your service.
To reduce voluntary churn, you would need to look closely at customer satisfaction feedback, data, and your pricing structure.
Involuntary churn happens when a customer’s subscription lapses because of something unintentional, usually payment failure. This can happen because of system glitches, insufficient funds in the account used for payment, or expired payment methods. Involuntary churn is easier to manage with automation than voluntary churn. Setting up reminders for customers that their payment method is about to expire, for example, or setting up automatic retries when payment fails.
How do you calculate customer churn rate?
To calculate your business’s churn rate, you’ll need to look at your data on the number of customers you gain and lose over a set timeframe. You can calculate your churn rate monthly, quarterly, or yearly.
Calculating churn uses a simple formula:
(Lost customers/total number of customers) x 100
For example, if you had 1,000 customers at the beginning of the month and lost 10 of them during that month, your monthly churn rate would be 1%.
Churn rate formulas
What other churn rate metrics might a business calculate, and why?
In addition to customer churn, businesses should look at revenue churn. There are a few different ways to calculate this.
Revenue churn rate
Your revenue churn rate looks at the amount of income you lose over a given period, rather than the number of customers. If your business only has one service with one price, customer churn and revenue churn will give you the same information.
Since this is rarely the case, monitoring your revenue churn will show you if you’re losing earnings, even if you are retaining the same number of customers. This can happen when existing customers downgrade to lower tiers of your service or otherwise change their subscriptions so they are paying less.
Your revenue churn rate is based on your monthly recurring revenue (MRR), which is the total amount you earn each month from recurring payments.
To calculate your revenue churn rate, use this formula:
(MRR for current time period/MRR at beginning of time period) x 100 Example: Your financial year goes from January to January. It is now the end of June and you want to see what the revenue churn is.
Historically, you’ve found that a bad June usually indicates a rough Q3 is coming. The formula would be:
(MRR for June/MRR Jan-May) x 100
If the MRR for June is €1200 and the MRR Jan – May is €40,000, then the formula looks like:
(€1200 / €40,000) x 100 = 0.03 or 3%
Net revenue churn rate
Net revenue churn rate takes into consideration both the revenue you gain and the revenue you lose during a certain period of time. This metric will show whether your business is gaining or losing customers and revenue overall. Customers upgrading to a higher subscription tier can offset churn losses.
Calculate net revenue churn rate with this formula:
(gained MRR – lost MRR)/starting MRR x 100
Say your monthly revenue is €12,000, your revenue expanded €600, and your revenue churn was €1200:
(1,200-600)/12,000 x 100 = 5%
Net negative revenue churn rate
A net negative revenue churn rate occurs when your revenue grows more than it declines.
For example, if your recurring revenue expanded €1200 and your revenue churn was €600:
(600-1200)/12,000 x 100 = -5%
This is a good sign for your business. It shows that your gains are offsetting your churned customers.
What is a good churn rate for SaaS companies?
While the ideal churn rate can vary based on a number of factors, most SaaS companies should aim for about 3-7% monthly, which translates to an annual churn rate of 36-76%.
This is the case for SaaS companies that work with small- and medium-sized clients. These companies usually bill monthly, and their clients’ budgets are relatively small. SaaS companies with larger corporate clients should target lower churn rates, closer to 1%.
This is because these large enterprises have larger, more stable budgets, and they tend to have annual contracts. Newer startups that are perfecting their product or service can expect a higher churn rate than more established companies.
Regardless of which categories your business falls into, it’s usually most effective to calculate your current churn rate and set goals to improve that number.
What are the benefits of subscription-based businesses monitoring their churn rates?
Subscription-based businesses need to make sure that the amount of revenue each customer brings in is worth the amount they spend on getting that customer to sign up for the service. Frequent turnover can create financial problems for your business if it leads to customer acquisition spending that’s out of proportion with the value of those customers.
Since most subscription services have multiple tiers or pricing options, it’s important to monitor both customer churn and revenue churn. Looking at customer churn and gross and net revenue churn together will give you a better sense of your customer retention rate and earnings overall.
With this information, you can identify potential revenue problems early and have time to look for solutions before things get out of control.
A payment processor for subscriptions
To help manage your subscription payments, Mollie integrates with Recharge, a suite of subscription payment tools. Worry less about high churn rate, and instead nurture your customer base and new customers. Mollie + Recharge reveals insights about your revenue and bottom line so you can understand current customers’ needs.
Learn how to make churn calculations and find more actionable ecommerce metrics with Mollie today.