Churn Rate: How to Calculate, Benchmark, and Reduce It
Churn is the silent killer of SaaS businesses. Here's how to measure it, understand it, and fix it.
Quick Definition
Churn rate is the percentage of customers (or revenue) that you lose over a given period. High churn is like a leaky bucket—no matter how much you pour in, you can't fill it up.
You can have the best marketing and sales teams in the world, but if customers keep leaving, you'll never build a valuable business. Churn is the enemy of sustainable growth, and reducing it should be a top priority for every startup.
In our work as fractional CFOs, we see churn impact everything from LTV calculations to runway projections. Let's dive into how to measure and reduce it.
What Is Churn Rate?
Churn rate measures the rate at which customers (or revenue) leave your business. It's typically expressed as a monthly or annual percentage.
Why does churn matter so much?
- Growth efficiency: High churn means you're constantly replacing lost customers instead of growing
- LTV impact: Higher churn = shorter customer lifetime = lower LTV
- Valuation: Investors pay premium multiples for low-churn businesses
- Profitability: It costs 5-25x more to acquire a new customer than retain an existing one
Customer Churn vs Revenue Churn
There are two ways to measure churn, and they tell you different things:
Customer Churn
The percentage of customers who cancel their subscription.
Customer Churn = Customers Lost ÷ Starting Customers
Best for: Understanding customer behavior, product-market fit
Revenue Churn
The percentage of MRR lost to cancellations and downgrades.
Revenue Churn = MRR Lost ÷ Starting MRR
Best for: Financial planning, LTV calculation, investor metrics
Why they differ: If your highest-paying customers churn less than small customers, revenue churn will be lower than customer churn. Conversely, if your best customers leave, revenue churn will be higher.
How to Calculate Churn Rate
Monthly Customer Churn
Customer Churn Example
Monthly Revenue Churn (Gross)
Gross Revenue Churn Example
Converting Monthly to Annual Churn
To convert monthly churn to annual churn (what you'd lose over a year at the current rate):
Annual Churn = 1 - (1 - Monthly Churn)^12
For example, 3% monthly churn compounds to about 31% annual churn. That means you'd lose nearly a third of your customers every year!
Churn Rate Benchmarks
"Good" churn varies by business model, customer segment, and price point:
| Segment | Monthly Churn | Annual Churn |
|---|---|---|
| B2C / Consumer | 3-7% | 30-60% |
| SMB SaaS | 2-5% | 22-46% |
| Mid-Market SaaS | 1-2% | 11-22% |
| Enterprise SaaS | <1% | <10% |
Why Enterprise Churn Is Lower
Enterprise customers sign longer contracts, have more sunk cost in implementation, and face higher switching costs. They also go through more rigorous evaluation before purchasing, so they're more committed.
Why Customers Churn
Understanding why customers leave is the first step to reducing churn. The common reasons fall into several categories:
Product/Value Issues
- • Product doesn't deliver promised value
- • Features don't meet needs
- • Too difficult to use
- • Competitor has better solution
Price/Budget Issues
- • Price too high for perceived value
- • Customer budget cuts
- • Found cheaper alternative
- • Business closure/downsizing
Experience Issues
- • Poor customer support
- • Bad onboarding experience
- • Champion left the company
- • Lack of engagement/never really adopted
Involuntary Churn
- • Failed payment (credit card expired)
- • Billing issues
- • Company out of business
How to Reduce Churn
Reducing churn has the highest ROI of almost any activity. Here are proven strategies:
Before the Sale
Qualify Better
Don't sell to customers who aren't a good fit. Short-term revenue isn't worth the churn (and bad reviews) later.
Set Realistic Expectations
Over-promising leads to disappointed customers. Be honest about what your product does and doesn't do.
Onboarding
Fast Time to Value
Get customers to their "aha moment" as quickly as possible. Map out the critical first actions and optimize for them.
High-Touch Onboarding
For higher-value customers, personal onboarding calls and training can dramatically improve activation and retention.
Ongoing Engagement
Monitor Health Scores
Track usage, engagement, and satisfaction metrics. Identify at-risk accounts before they churn.
Proactive Customer Success
Don't wait for customers to complain. Reach out to help them succeed. Check in regularly, especially after key milestones.
Drive Deeper Adoption
Customers using more features churn less. Create campaigns to drive adoption of underutilized features.
Build Relationships
Know your key contacts. When champions leave, you should know immediately and build relationships with their replacements.
Preventing Involuntary Churn
Card Update Reminders
Notify customers before their card expires. Make it easy to update payment details.
Dunning Automation
Automatically retry failed payments and send escalating reminder emails. This can recover 20-40% of failed payments.
Net Revenue Retention (NRR)
While gross churn measures what you lose, Net Revenue Retention (NRR)accounts for expansion revenue. NRR above 100% means your existing customers are growing faster than they're churning.
NRR = (Starting MRR + Expansion - Contraction - Churn) ÷ Starting MRR
NRR Example
NRR Benchmarks
120%+
Best-in-class (Snowflake, Twilio)
100-120%
Strong (typical for good SaaS)
<100%
Needs improvement
Key Takeaways
- 1Track both customer churn and revenue churn—they tell different stories
- 2Benchmark against your segment: <2% monthly for SMB, <1% for enterprise
- 3Understand why customers churn through exit surveys and data analysis
- 4Reduce churn through better qualification, onboarding, and proactive success
- 5Target NRR of 100%+ through expansion revenue that offsets churn
Need Help Reducing Churn?
Eagle Rock CFO helps seed and Series A startups analyze churn patterns, build metrics dashboards, and improve unit economics. Get the financial clarity you need.
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