Enterprise SaaS companies have a constant worry; what’s our churn rate — and how can we decrease it?
But, interestingly, there seems to be a difference on opinion when it comes to identifying an “acceptable” rate of SaaS churn. So, if you’re wondering if you even have a SaaS churn problem, read on.
What is SaaS Churn Rate?
The SaaS churn rate is the percentage rate at which a SaaS consumer cancels their monthly subscription. It is a crucial SaaS metric that is used to analyze historical SaaS business performance and for revenue forecasting. In a forecasting context, the SaaS churn rate can determine the probability at which your customers will cancel their subscription.
As explained by Kathy Lord, Senior Vice President of Sales & Customer Success at San Jose CA.-based Sage Intacct, the SaaS churn rate can be measured over a “given period of time, whether monthly, quarterly or annually.” She also mentioned that while there is “no official calculation” for measuring the SaaS churn rate, the most common calculation methods are the dollar churn rate and the logo churn rate. The dollar churn rate consists of both dollars lost from customers leaving and from those who have downgraded. The logo churn rate represents the percentage of customers that left your service.
The formulas for both calculation methods are shown below:
Dollar Churn Rate = [Expected Renewal Dollors]/[Actual Renewal Dollars]
Logo Churn Rate = [No. of Customers That Left Your Service]/[Total Number of Customer]
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What is an “Acceptable” Enterprise SaaS Churn Rate?
According to Lincoln Murphy of Sixteen Ventures, Bessemer Venture Partners says an acceptable churn rate for enterprise companies is in the 5 to 7 percent range annually. That means the monthly SaaS churn rate would be approximately 0.4 percent.
Research published by Tomasz Tunguz, a Managing Director at Menlo Park, Calif.-based Redpoint Ventures, shows that while enterprises should be aiming for between 6 percent and 10 percent churn, the SMB market creeps up to between 31 percent and 58 percent annual churn. For mid-market SaaS companies, a figure between 11 and 22 percent is desirable.
Further research by Pacific Crest, which surveyed 336 SaaS companies, revealed that the annual median SaaS churn rate for companies earning more than $2.5 million in revenue, was around the 6 percent mark.
All these findings agree that the acceptable range around 5 to 10 percent of annual churn — but does that mean that, if one enterprise SaaS company has double the churn of another, they shouldn’t be concerned?
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There’s No Magic Number
When we asked Lord what an acceptable enterprise SaaS churn rate is, she answered, “there is no magic number. Instead, [brands should be] looking at [their SaaS churn rate] in conjunction with customer growth rate, expected customer lifetime and CLTV (Customer Lifetime Value) to determine if you have a sustainable business model.”
You Mon Tsang, CEO & Founder of Arlington VA.-based ChurnZero, agreed. “I’ve seen a lot of churn rates in my [time] and having just a churn rate is not enough to explain if it’s good or bad,” said Tsang. “On the SMB side, I’ve seen churn rates [between] 20 percent annually to 35-40 percent annually and they can still [operate as] a healthy business. [For businesses that] sell to small businesses (B2B) that pay monthly – I’ve seen churn over 50 percent on an annualized basis, [but] if you get all your customers via word-of-mouth, you could [still] survive high churn rates.”
Indus Khaitan, Chief of Growth at San Francisco, CA Chargebee, shared his insight into what he deemed as an acceptable SaaS churn rate for “high growth” SaaS companies. “For high growth SaaS companies that have achieved a product market fit, and are looking to double their revenues in successive years, and are planning to raise venture investments, an acceptable churn rate is a ‘net negative revenue churn’,” he explained. A net negative revenue churn indicates that “increased revenue from existing customers is outstripping [the revenue lost from those who] have canceled their accounts.” According to Khaitan, that could range from zero percent to one or two percentage points.
Is There a Different Benchmark for B2B SaaS Churn Rates and B2C SaaS Churn Rates?
Lord stated that a bad churn rate is “not closely tied to a company type” whether that be B2B or B2C. “The real indicator comes from understanding what average customer life expectancy is, what a company’s CLTV is, and at what rate the company is acquiring customers,” said Lord. She continued to say if the churn is greater than the rate of new customer acquisition “then the churn rate is bad whether you're a B2B or B2C.”
Khaitan further supported this, stating that it is “hard to quantify a generic bad churn rate” since every industry has their own requirements and objectives and that each company will also serve to different segments.
“An email marketing software sold to SOHO (small office, home office) segment at a low price point could have a 20-25 percent annual churn, but the same company selling to the enterprise segment could have a 5 percent annual churn. The seasonality of buyers in the SOHO may come into play where they use it for a few months, cancel their accounts and probably come back again, as needed, whereas, enterprise customers may lock-in for multiple years,” said Khaitan.
At What Stage Should SaaS Companies Be Alarmed By Their Churn Rate?
Jake Mastrandrea, Head of Marketing at Sunnyvale CA.-based Checkbook.io, advised brands to look out for the following red flags:
- If the churn rate is higher than the churn rate from the previous year.
- The monetary value of customers who leave your business is either equivalent to or greater than your new business acquisition.
- If the churn rate is increasing every month.
- An unbalanced Lifetime Value (LTV) : Customer Acquisition Value (CAV) ratio (also known as LTV : CAV).
- Low LTV
Furthermore, Lord suggested brands must keep a close eye on their churn. “Companies need to closely monitor and take action to mitigate churn as soon as they complete their first renewal cycle,” Lord said, urging brands to investigate the reasons for customer churn — no matter the annual rate.
Finally, Khaitan shared that, while customers may leave for a number of reasons, if the cause of the churn is within the control of the business, then it must be addressed. “Customers leave for a variety of reasons; however, it is alarming when the [churn is] high and [is] due to issues that are within the control of the business and related to one of marketing, sales, product, support,” he said.
What’s your take on enterprise SaaS churn?