Achieving an Ideal Churn Rate

By June 8, 2021Blog

ideal churn rate

If your churn reduction efforts make you feel like Sisyphus, you’re not alone.

The good news is, your customer success team will see forward momentum with the right strategy … unlike our mythological Greek friend.

In addition, SaaS companies historically experience lower churn rates than other types of businesses.

What a good churn rate is for YOUR company depends on so many factors. But there are benchmarks any CSM can look at.

Let’s start with “normal”.

What is a good churn rate?

Box of the month clubs, which rely on surprise merchandise, fickle consumers and the reality that these services are not essential, see relatively high monthly churn rates of 10.5%, according to a study by subscription billing platform Recurly. Other industries that see high-ish rates include:

  • Consumer goods (9.6%)
  • Education (9.6%)
  • Healthcare (7.6%)

SaaS companies, meanwhile, on average register a 4.8% monthly churn rate, according to the study. Normal ranges in the study were between 3% and 8.5%.

So, if you’re a SaaS company and below 3%, you’re probably doing something exceptionally well.

But it’s important to note that …

  1. Monthly and yearly churn rates are very different.
  2. There is no standard churn reporting protocol.
  3. Depending on the study — or analyst — numbers vary greatly.

Venture-backed SaaS companies, for example, tend to experience higher churn rates — between 20% to 30% higher.

So, 5% would be good … right?

Yes.

And, maybe, no.

Lincoln Murphy, a customer success consultant, contends that a 5% monthly churn rate could yield a horrible 46% yearly churn rate with no new customers. Put another way, he says, you could conceivably start the year with 100 customers and end up with only 54.

Even if you add 100 customers per month to that 100, you’d STILL end up with a 25%-29% yearly churn rate!

“It means running backwards on a treadmill blindfolded while lighting $100 bills on fire”.

Performing a churn calculation

There’s no right answer to what THE ideal churn rate is for everyone, especially when you factor in new sales. But if you want to avoid running backwards — or pushing boulders up mountains — your first step is a churn calculation.

The churn rate formula is calculated by dividing the number of customers you lost in a set period of time by the number of customers you started that period with.

 Customer churn (%) = (Users at the beginning of the period – Users at the end of period) ÷ Users at the beginning of the period

It’s important to note the “set period of time” part. Measuring your monthly churn rate 12 times a year will help you get a clearer understanding of whether customer attrition is tied to a specific action your team took. This could include a new feature release or a tweak in your onboarding strategy.

“Churn is the silent killer of your company”, says Patrick Campbell, CEO of Price Intelligently. “If you don’t tackle churn early, you’ll be working extremely hard just to stand still”.

Formulas aside, it’s all so simple: If customers leave at a higher rate than new ones come in, your company can’t grow. 

What leads to churned customers?

Once a customer decides to cancel, it’s often too late for you to intervene. Case in point: 40% of customers who make a decision to cancel will never reconsider, as found by the marketing technology company Paradoxes.

As you set out to unpack your churn rate — and figure out what drives users to cancel — it’s important to remember that not all churn is created equal. If customers are leaving soon after onboarding, for example, you’ve got a very different problem on your hands than if they’re canceling a relationship with your company that’s lasted years.

When it comes to customer churn, there are two distinct types:

  • Avoidable churn. Also known as voluntary churn. It could show that there’s a gap in your service or the platform. 
  • Unavoidable churn. Also known as involuntary churn. It happens due to reasons your team can’t control, like customers going out of business. 

A churn analysis will be your most valuable tool in determining what percentage of your overall churn rate you could (and should) be preventing. The in-depth evaluation of your company’s customer loss rate over time will help you find the signs that a customer is at risk of leaving  — before they ever make the decision for themselves. 

Churn KPIs

Although your churn analysis will reflect the needs of your own users, there are shared key performance indicators (KPIs) that the SaaS industry leverages to identify pain points across the customer lifecycle: 

  • A drop in usage. This includes time spent in the app and log-in frequency.  
  • Organizational changes. While you can’t directly influence stakeholder changes, you can set your team up for success by growing your sphere of influence.
  • Customer feedback. If you regularly collect sentiment, your CS team should be able to intervene quickly. 

How Spotify reduced churn

Spotify offers a powerful case study, especially for companies leveraging a product-led onboarding strategy.

Spotify churnIn 2018, Spotify began an aggressive campaign against churn, which at the time reached an annual rate of over 25%.

By the following year, the company’s letter to its shareholders proved it did exactly what it set out to accomplish — Spotify’s average monthly churn had fallen to a record low of 4.6%, putting it on track to hit just under 20% by year’s end. 

How did they do it?

Through customer-driven innovation.

The streaming service launched a massive initiative, creating country-wide research groups to better understand how users were engaging with their platform to listen to music. These efforts resulted in further personalization, with playlists using more complex, AI-based algorithms to curate new music selections based on an individual’s preferences.

After uncovering users’ wants and analyzing usage data, the company also built out what was found to be one of their sticky features, Spotify Stations. Through its push for innovation and a customer-first focus, Spotify was able to outperform all previous churn estimates — although a free Google Home for every subscriber likely helped along the way.

How YOU can reduce churn

So how can your SaaS company take a leaf out of this streaming giant’s book to reduce churn?

You probably won’t have to give out speakers.

BUT you will have to take a proactive approach to showing solution value and intervening when your data — such as customer health scores — show something amiss. Popping up at renewal time after being absent for 11 months won’t do the trick. 

Want more? If you’re ready to face churn head-on and start improving your retention rate, check out our recent guide to winning at customer success

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