SaaS Churn Rate: Essential Aspects Business Should Know

mins to read

How many times you've heard: "Churn is bad for business"? Of course, it hurts when customers leave your product. But well, nothing remains unchanged, neither in life nor in business. No need to panic. Let's better make it clear how to deal with the churn and benefit from it.

What is churn rate?

In essence, the SaaS churn definition is pretty simple. It means the percentage of customers who left your product over a certain period. Customer churn is a crucial indicator to understand if your business faces problems that threaten its growth. Churn rate directly influences financial metrics, such as recurring revenue, lifetime value, and customer acquisition cost.

Let's see how these metrics are all connected.

Monthly recurring revenue (MRR): when customers leave, they take your income with them. In this metric, "recurring" is a key – a SaaS company needs to have a stable and predictable cash flow for constant business growth. We dedicated a separate article to MRR metric, so take a look to learn more.

Customer lifetime value (LTV): the longer a user stays with a company, the more money they can bring. Customer churn impacts LTV as it naturally decreases possible revenue that could have been earned.

Customer acquisition costs (CAC): if customers churn before you get back expenses spent on their acquisition, your loss will exceed the gain in the long perspective. By the way, if you want to know more about CAC, check CAC SaaS metric article on our blog.

OK, now we know the churn rate basics, so it's time to move to its calculation.

How to calculate churn rate

Here is the simplest way you can calculate the churn rate:

Number of churned users / Total number of users

In this SaaS churn rate formula, the number of churned users means how many people left your service within a certain period, whereas the total number of users implies all customers you had during this period.

At first glance, this exercise may seem as easy as pie. In reality, though, you need to consider lots of nuances making your calculation show a real picture.

Firstly, you need to define what you will take as the moment of churn.

It can be either:

The moment a customer doesn't renew the subscription, or
The moment of the cancellation (in this case, there is always a chance to get customers back before their subscription ends)

Also, before the analysis starts, it will be useful to decide:

Exact time frames – a month, a quarter, or a year
Sample size (so-called cohort) – it defines how representative and predictive the results will be
Customer segment – low-tier and high-tier plan segments may have different churn numbers.

Thus, an aggregated figure will lack accuracy and lead you in the wrong direction.

Imagine, you did all the homework well. And now you're looking at the final churn rate number with a few questions on your mind: "What on earth does this percentage mean? Is it low, high, or normal? And what is a good churn rate for SaaS?"

Keep calm. The truly awesome story begins!

SaaS churn rate benchmarks

Though there are lots of opinions about the average churn rate for SaaS companies, most experts support the idea of the 5% - 7% range ANNUALLY as a benchmark. I will explain a bit later why the word "annually" is capitalized. Just note that this is important.

Whereas you can take this range as a reference, the churn rate "norm" depends much on a company's revenue growth.

Here is a graph to see the correlation between the churn rate and the revenue increase.

In this research, high growth companies are those that increase revenue by 75% year-to-year. Medium growth and low growth are businesses with 25% - 75% and less than 25% increase correspondently.

The percentage of each pie shows how many companies in a particular growth segment have a churn rate of less than 5%, from 5% to 10%, and greater than 10%. According to these graphs, the larger companies occur to be much closer to the desired 5% - 7% SaaS annual churn rate. This observation seems reasonable. Big SaaS companies usually focus more on enterprise customers with annual billings, high yearly contract value, and long-term contracts, making it more complicated to churn.

For the smaller businesses, the much higher rate is typical. Unlike the large companies, the earlier-stage companies target SMBs with monthly billings, shorter contacts, and, overall, lower contract value.

Do you remember I emphasized the word "annual" talking about the SaaS churn rate benchmarks?

You will get it right away.

Monthly vs. annual churn rate

The trickiest thing in the churn rate calculation is whether to stick to the annual or monthly churn rate numbers.

Let's see the difference in calculation.

For example, we assume that a startup has 1000 customers. A 5% annual churn will result in the loss of 50 customers within a year, which is not so dramatic, right? At least, this loss is easy to recoup with new customers.

But what's happening with a 5% monthly churn rate? Our startup will lose 460 customers in one year because the monthly churn compounds over time and reduces the number of customers by 5% every month. The loss of almost half of the customer base can be difficult to quickly compensate.

For early-stage SaaS companies or those primarily selling to SMBs, the expected churn rate will be closer to 3% - 5% monthly. However, the larger customers you target, the more your business matures, the closer you get to the "ideal" 5% - 7% annual churn rate.

Eventually, your progress should look like on this graph:

Why customers leave

Here are some possible reasons why customers decide to part ways with your product.

Users have different expectations from your product
Your product does not have the features or services they need
You bring wrong customers on board (that's a question to sales and marketing teams)
Poor onboarding and support
Price offering doesn't fit the customers' budget
Your product has critical bugs you fail to fix

Sometimes, everything is OK with your product and service, but the value is not fully uncovered, so customers don't comprehend why they should pay for it.

We will now get into one SaaS company churn analysis to see the real-life example.

Churn analysis example

The company is a SaaS startup that provides a subscription-based service mostly for SMB companies.

The data was gathered through a customer survey, covering recently churned users.

The graph below shows how much time the customers had spent with the company before they churned. "Fresh" customers, which were using the service less than a year, fall into the most considerable churn portion of 36,3%. Probably, they didn't feel the service satisfied their needs or didn't find the value they would be willing to pay for.

Another significant portion includes those who stayed with the company for more than two years. They had enough time to interact with the product and, chances are, were frustrated with bad customer service or switched to the competitors with a better price offering.

More than half of the churned customers - 57,2% - are small businesses with up to ten employees. As we already learned in the paragraphs above, monthly contracts, cash flow volatility, and low contract value, typical for SMBs, make it easy to churn.

Poor customer service is the top churn reason. Further go price, low service quality, sales, and implementation issues.

If we dig deeper into what poor customer service means, we see that sales process failure makes up a significant portion.

The SDRs inaccurately explained the functionality and failed to qualify the leads, which eventually led to churn. That's a widespread problem SaaS companies face. All marketing efforts and costs will be in vain if sales and support cannot qualify and retain customers.

How to reduce churn rate

To a certain extent, it is quite fair to claim that churn is inevitable. Indeed, you cannot appease everyone. However, to secure the company's profitability and revenue growth, your sacred duty is to minimize the churn rate, pursuing the target of 3% - 5% annually.

Here are a few tips to help you improve your churn rate.

Get to know your customers better

It may seem not obvious, but your "anti-churn" campaign starts long before you win a customer.

You have to know who your ideal customers are, how to reach them, what they need, and how much they are willing to pay for your product. The best way to see the total picture is by creating a customer persona based on users' characteristics such as demographics, industry, income, and jobs-to-be-done.

When your marketing team does this homework, the ball goes to sales.

Lead qualification is what your sales representatives must brilliantly perform. During a discovery call, SDRs should scan a lead and flawlessly determine if your company's service can fully satisfy a customer's needs. At every stage of the sales pipeline, you have to make sure your value proposition is exactly what the customer is looking for.

Engage users

Starting from a free trial over the first six months, you should track customer engagement and make sure your product meets the customer's expectations. It is up to you whether you will build your in-house system to monitor and manage the engagement or leverage a third-party tool.

The paramount goal is to help users engage with your SaaS product by constant communication, active listening, gathering their feedback, and working on users' experience improvement. We gathered 11 user engagement strategies you can try implementing for your SaaS business.

Get user feedback

Customer feedback is the principal source of valuable information. Sometimes, it is not easy to get an honest response from a churned customer, but it is worth trying. Assign your best sales reps to contact those who left and get their feedback through specific questions.

You can also gather responses via in-built customer surveys, which answers you will later turn into actionable insights.

Key takeaways

Churn is inevitable, but you can control and improve it
An average churn rate benchmark is 5% - 7% annually if you are a mature SaaS company
You can expect around 5% monthly if your business is young or if you target SMBs
Poor customer service, insufficient lead qualification, and bad user experience are among the reasons why clients leave your company
Customer satisfaction based on monitoring and analysis will help reduce your churn rate

Also, we're more than sure that customer-oriented design and great customer experience can help reduce your SaaS churn rate.

Churn is only one of the essential metrics you should monitor to ensure your business growth.

In the Best Books on SaaS Metrics article, we selected the books that share priceless advice on how to run a successful startup.

Natalia Borysko

Author

Table of contents

Principle 1: Meet users needs

In other words, the main principle you should build your design around sounds like “put the user first.” UI/UX design is customer-centered, meaning you need to consider whether your design satisfies customers’ needs and helps users achieve their goals. It’s crucial to walk in customers’ shoes and understand what they’re looking for when interacting with your website or app.

A UX designer and a design director of Mailprotector Jeremy Nigh said that the “U” in UX doesn’t mean “You” but “User”. Whatever excellent you think your design is, the actual customers may feel the opposite. Try looking impartially and reveal through UX research and UX audit what your customers really need.

The image saying that to understand what users actually do on your website, you should conduct user testing

As UX design’s primary purpose is to help users solve their problems, usability is one of the paramount user experience principles. Each design element, be it an icon, button, or image, should have a meaning and lead to a specific action you want users to take. Then it will be a good decision to run usability tests during the prototyping phase, long before your product goes live.

When designing, it’s also important to take into consideration the user’s context. It’s the location where a customer interacts with the design, the device, time, emotional state, and other people influencing the customer’s behavior.

Principle 2: Speak customers language

The statement above refers to both words and visuals we use in a product’s interface. Take for granted that nobody will spend extra time on guessing what an author (you) wanted to say with niche jargon or technical terms only your developers can get the point.

The image displays two mobile screens with some app opened. On one of them, categories are named in a more understandable manner than on another one — Image credit: Springboard

You should avoid (or at least reduce) ambiguity in UX-copywriting and graphic elements.

Here are some tips on how to make your design language readable and understandable:

Define who your audience is - what they need, what they’re searching for, and what goals they want to achieve by interacting with your product
Build your design template focusing on the typography, page layout, and infographics
Choose communication style and tone of voice your audience would better accept

The system should speak a real-life language. Just imagine how often you answer “OK” when somebody asks you “Are you sure?” Not often, right? The most common reply would be “Yes”. Then, use it in your system messages’ copy.

the image of system message "Are you sure?" and the options of answers "Ok" and "Cancel"

Visual metaphors should also correspond to real-world experience. The concept of a recycle bin icon on Mac, for example, would be easily caught even by those who had never seen any PC before.

Principle 3: Organize content clearly

This principle is talking about information hierarchy that helps users easily navigate through the website or app design. When you come to a random website, more likely, you will see the navigation bar showing the main sections like About, Products, Prices, Contact Us, etc. These sections make up the primary hierarchy. If you hover over one of them, the sub-sections appear, announcing what you will find when diving deeper into the website.

The image showing website page hierarchy

The more logical you arrange your site map, the easier it will be for customers to navigate, and the smoother user experience they will eventually have.

What is also worth mentioning is the size of target buttons and typography. The bigger-sized buttons ensure efficient interaction reducing the risk of performing the wrong action. And well-thought typographic choices can significantly improve a website’s accessibility facilitating perception of written information.

The image showing different size buttons and a finger trying to press smaller and bigger button — Image credit: XD Adobe

Principle 4: Don’t overwhelm, be simple

To put it another way, every design element that doesn’t assist in users’ goal achievement should be a subject to elimination. The unnecessary information distracts customers from their primary purpose wasting cognitive and operational resources. The pioneer who adopted a less-is-more design approach was Apple. From 2007 when the iPhone was introduced till nowadays, Apple follows the principle of simplicity in their products and website’s design.

MacBook Air landing page on Apple website

Another example of less-is-more philosophy in design is iA Writer, an app looking like a plain sheet without any distractive content or information. The simple UI allows writers to concentrate on the creative process, making it easier to get into the flow yet providing users with helpful tools to improve their writing.

The screens from iA Writer explaining an app capabilities

the screen from iA Writer app explaining an app capabilities

Principle 5: Keep design consistent

When people start using a new product, they expect it to be similar to what they have already experienced before. This way, users may reduce the cognitive load they encounter trying to learn something new. Design consistency follows the idea of so-called transferable knowledge. Microsoft adheres to this concept making design consistent throughout all products. For example, using Microsoft Word will help quickly adopt Excel or PowerPoint, which have similar UI concepts.

The Microsoft Word and Microsoft Excel navigation panels

Being comfortable for users, design consistency makes the design process easier for UX and UI designers as well. There is no need to continuously create new solutions when starting to work on a new product.

Consistency in UI embraces:

Visual consistency - all elements should look the same within one product
Functional consistency - all objects should work in the same way, preventing users from becoming confused with unexpected changes in item functionality.
Expectations consistency - using hundreds of different websites, users form certain expectations as of how interface components should work or look. If you destroy their expectations with a super creative design solution, users will “thank” you with frustration and a high bounce rate.

Also, don’t try using new UI/UX terminology - stick to wordings most people are familiar with.

Principle 6: Give feedback to users’ actions

Is there anything on Earth more frustrating than pushing a button on a website and having no idea what is happening? The great UX design should always inform customers of their system status and action progress.

Say, you started downloading a file and naturally expect the website to show you some sort of progress bar or a countdown to understand how much time is left. In its essence, the design feedback is a dialogue between humans and machines. The design may respond by altering the target button’s color, shape, or any other visible changes. Or, for example, you can show how many minutes are left to complete the task. To illustrate what I’m talking about, look at the GIF below. Do you see the button’s color is changing? That’s how the system is interacting with users.

The GIF showing how a button color is changing in a reponse to users' action

Relevant error messages are as important as feedback. Users will have a better experience if, together with explicit communication of an error, you will give them hints on how the problem can be solved. Stay polite, helpful, and upbeat.

You can also create preventive messages warning users about possible issues. For instance, Gmail uses pop-ups to notify customers about missing attachments.

Gmail preventive message warning that a user seems to forgot to attach a file

A good design is sending comprehensive error messages, whereas a great design is trying to prevent errors.

Principle 7: Allow users to control the process

People like feeling confident that everything is under control. When we know that our mistakes can be easily fixed, this gives us more freedom to explore new options and inspire us to be courageous and creative. The top-of-mind option that gives control in our hands is Undo. This function is critically important for text and graphic editors, where the creative process implies multiple changes to achieve perfection.

Also, Undo is helpful when users perform an action by mistake and want to backpedal it. For instance, Gmail sends a notification message offering to undo just deleted email.

I’m sure the possibility to rewind the wrong action saved millions of lives (definitely, mine is on the list). Thanks to Apple’s notification asking if I was sure to permanently delete the items in the Trash, I rescued the files that cost me tons of time and nerves.

Apple's MacOS notification asking if you want to permanently erase the items in the Trashs

Principle 8: Make interaction a no-brainer

Whether your user is an advanced expert or a no-clue newbie, the interactions with your website or app should be comfortable for both. For those who start using your product, tutorials and explanations would be helpful. For customers who are already familiar with the functionality, you should offer shortcuts to shorten the path to the mostly-used actions.

MacOS shortcuts for the mostly-used actions

Principle 9: Mind accessibility

In the modern world, where we celebrate our differences, accessibility has become a must for digital products. It’s a designer’s responsibility to ensure that people with various impairments, temporary or permanent, will have a hassle-free experience interacting with a website or application.

When designing a product, it’s crucial to build it for users with poor vision (who are blind or can’t distinguish the colors), who have motor, hearing, and cognitive impairments (like, for example, dyslexia).

We have a separate article on our blog dedicated to inclusive design examples, so if you find this topic interesting, take a look.

To complete the above principles list, I’m adding here some more UX design rules and UI principles our experienced designers follow in their projects.

Top UI/UX principles from Eleken designers

It’s critical to build the right navigation in the interface and outline the navigation hierarchy
If you can leverage visual objects like style and patterns - do it. It will keep the consistency and will relieve a headache of your developers
Don’t put a dozen buttons on one screen. Limit yourself to one primary button, a couple of secondary ones, and hide the others
UI design is all about managing customers’ attention. The good design doesn’t need onboarding - it will lead customers to an action we want them to take
Be simple and follow the less-is-more approach. At the same time, don’t oversimplify and remember that there are things that should be complicated
Mind accessibility (especially colors and fonts). We make design for everyone, not only for youngsters with the perfect sight.

By the way, you can learn more about accessibility in UX in our next article.

We hope the information in this article will help you create a great UI design for your digital products. And if you ever need a helping hand - let us know; we are here for you.

SaaS business

min read

MRR: A Simple yet Tricky SaaS Metric Crucial For Your Business

“Happiness is the longing for repetition,” said the world-known Czech novelist Milan Kundera in one of his novels. And if you wonder what the relation between this phrase and the article’s title is, I would give you a hint - it’s in the word “repetition.” In business, the same as in life, we value constancy because it gives us a feeling of stability and reduces uncertainty stress. The predictable monthly revenue is a foundation of all business growth-related plans.

We at Eleken think that it is a company’s lifeblood and health measurement. The revenue calculation seems as easy as pie yet can show you a distorted picture when performed incorrectly.

If you got excited to know more about MRR metrics, keep reading this article and learn why MRR is important, how to properly calculate it, and what are ways to increase your monthly revenue.

What does MRR stand for?

Let’s start with a quick recap of what MRR is.

MRR means monthly recurring revenue a SaaS company expects to receive each consequent month. Given most B2B SaaS businesses employ a subscription model, as long as their customers stay with a company and pay a fixed amount of money each month, the company can predict its monthly revenue. If customer retention rate is high and churn rate is not significantly deviating from month to month, MRR can be used to forecast the company’s average growth rate in a long perspective. By the way, you can learn more about SaaS churn rate and average SaaS growth rate in devoted articles, elaborating on these crucial business metrics.

Based on the above, it becomes obvious that MRR business metric is the main indicator of a healthy cash flow for subscription-based businesses. For the in-depth analysis, you can separate specific MRR types and get a more detailed understanding of what your total revenue is built from. We’ll talk about this point in a couple of paragraphs.

Why is MRR important for SaaS

Monthly recurring revenue underlies:

Business stability - predictable income gives freedom to build ambitious plans and ensures they have high chances to become real. Being able to forecast future earnings, it becomes easier to plan the expenses and create a company’s “safety bag” for just-in-case.
Company growth - based on current MRR, a SaaS business can estimate long-term income growth and create an actionable revenue expansion plan.
Investor valuation - for an early-stage startup with stable MRR, it’s much easier to receive high valuations from investors and get funded. For mature companies preparing for an IPO, a high investor valuation leads to a greater stock price.

And now, let’s dive into MRR calculation.

How to calculate MRR

The monthly recurring revenue formula is pretty straightforward.

MRR = Monthly users number * Monthly ARPU (average revenue per user)

For example, if you have ten customers paying each month $10 subscription price, your MRR would be 10 * $10 = $100. In case you offer several price plans, then you should do the same exercise for all plans and summarize the results to find out your total MRR.

Though the total revenue figure may be enough to understand the trend, MRR decomposition will unveil the root of income fluctuation in terms of a particular month. Under “decomposition,” I mean MRR types a total MRR consists of.

Types of MRR

Financial experts define five MRR types, which eventually make up the total MRR figure you see in your monthly reports. Understanding what brings you more money and where that gap your revenue leaks out is, you can control your income flow more efficiently.

New MRR - the revenue from new customers your company acquired in a given month
Churned MRR - the amount of revenue you lost due to customers’ subscriptions cancellations
Expansion MRR - MRR from the upgraded users
Contraction MRR - lost revenue from downgraded users
Reactivation MRR - the revenue from previously churned customers

For example, below is the report generated with Baremetric tool. You can see a month-to-month revenue breakdown and how it differs compared to the previous period on the graph below.

a graph from Barametric tool showing a month-to-month revenue breakdown

Even though the MRR formula is not complicated at all, there is a certain risk of including or excluding data, which can confuse MRR calculation and distort the results.

So, let’s clarify what you should or should not take into consideration when calculating your revenue.

What to include into MRR calculation

The five MRR types we discussed in the previous section clearly indicate with their very names, they should be included in the total MRR calculation. But not only those figures are important. Your calculation should also take into account:

All recurring, new, lost revenue from customers as well as plan upgrades and downgrades. Also, here goes any additional charges for extra users, seats, volume, etc.
Discounts you provide within a specific month. If not preliminary planned, promotional activities can seriously impact the final revenue you intend to generate this month. For example, if your customer’s regular monthly fee is $150, but they paid a discounted $100 price for the first month of service usage, your MRR from this customer will be $100, not $150.
Delinquent and transaction charges should also be minded while doing MRR calculation. Whereas some business owners tend not to mix up financial expenses with income from sales, invisible deductions will eventually pile up and “suddenly” diminish expected monthly results.

What to exclude from MRR calculation

Here the simple rule goes: don’t take into account all payments that are not recurring.

Among those are:

Long-term contracts paid upfront

Even if a customer pays you an annual fee at once, it doesn’t mean it falls into a particular month’s revenue. In this case, the payment should be evenly divided by twelve months. Though getting money upfront is good for a company’s financial health, the MRR metric is not measuring a cash flow. Its primary purpose is to measure how fast and efficiently your business is growing by comparing month-to-month dynamics.

One-time payments

This point is close to the previous one with a slight difference. If you offer customers not only a SaaS service but also a SaaP (software as a product), which usually implies you sell it once and leave it at customers’ discretion, then you shouldn’t include one-time payment into MRR calculation.

Trials that don’t convert

SaaS companies’ most common mistake is including “projected” trial customers alongside those who actually paid for the subscription. We clearly understand that not all trial users will eventually convert. Including them into “new” and then “churned” customers, we create wrong monthly income expectations.

Ways to increase your MRR

You can boost your company’s revenue by employing strategies listed below. They can be used at any stage of business growth and adjusted based on the analysis of the results.

Upsell your existing customers

To upgrade your current users is usually more cost-effective than acquiring new ones. Try upselling your customers to higher-tier plans by offering extra product values. What you need to implement this strategy is to know your target audience’s exact needs and pain points.

Utilize different pricing models

If coming to your pricing page, a lead won’t find an appropriate price plan that satisfies their needs, you will more likely lose a potential customer.

Here are the most common SaaS pricing models you can try implementing with your business.

Per-seat pricing

Freshdesk is an excellent example of this approach. They offer a broad range of pricing plans from a limited-features free plan up to a $99/agent plan suitable for enterprises. The per-seat (or per-user) pricing model’s value is its correlation to a customer’s company growth. The more the business scales, the higher the price plan they may switch to.

Freshdesk pricing plans from Sprout to Forest

Usage-based pricing

This type of pricing gives users more flexibility in terms of usage intensity. They are fully accountable for the usage volume and the cost they will end up paying. For example, Hubspot charges customers for the number of marketing contacts they will have available within the particular price plan. Though not that straightforward as per-user billing, usage-based pricing may be seen as a win-win model of customer-business relationships.

Hubspot pricing plans - Starter, Professional, Enterprise

Add-on pricing

On top of features you offer within your plans, you can give customers the possibility to enhance their existing plans with additional functionality. Referring again to Hubspot, which is definitely one of my favorite SaaS companies in terms of how they pack their services, they offer to build up to 3.000 custom reports with the increased dashboard limit for an extra $200/month.

Hubspot add-on offering custom report for extra $400/month

Overall, your pricing page should be visually appealing and comprehensive. As a design agency, we are confident that user-centered design matters especially when it’s going about pages where users are expected to make the desired action. Check our SaaS pricing page design article where we gathered the worth-looking examples you can learn from.

Continue improving your product

To retain your customers and make them willing to continuously pay for your SaaS, you should keep enhancing your product and regularly demonstrate the updates to your customers. Communicate them added functionality, upcoming products, new version release, bug fixes, and any other information you find useful to increase customer loyalty resulted in a high retention rate.

Last thoughts

Monthly recurring revenue is one of the most critical SaaS metrics you should regularly check to ensure your business is on the right track. To get an accurate result, you need to consider some nuances in MRR calculation. Think about what you need to include or exclude when calculating your MRR based on the information you learned in this article.

You can grow your revenue by price strategies diversification and consistent product improvement that will help retain existing customers and attract new ones. To get a more in-depth knowledge of crucial SaaS metrics, read next about AARRR metric in our blog.