SaaS companies base their growth and performance evaluation on different metrics, such as cac, mrr or churn rate. All these kpi’s are key when making key decisions for the development of the company.
The b2b saas churn is one of the basic indicators for any SaaS company. It has a concept and calculation that are simple in appearance, but in some cases it is not so trivial.
Churn is an essential indicator for a SaaS, and due to its importance, we are going to dedicate a specific article to it in which I will describe its definition, how to calculate it, how to improve it and relevant information about it.
What is the Churn Rate in a saas?
The b2b saas churn rate is a business indicator that calculates the percentage of customers or users that have abandoned a product after a certain period of time.
So we must identify between:
User Churn and Customer Churn
In addition, there are two important concepts that must be understood in order to correctly calculate Churn:
- Voluntary Churn: refers to those customers who have actively decided to cancel their subscription.
- Involuntary churn: refers to those customers who have not been able to expire their subscription, to errors in the billing process or to any other reason that was not an active decision.
There are several common misconceptions about churn, which can lead to inaccurate reporting or poor business decisions.
Voluntary Churn vs Involuntary churn
A common error related to churn is the misconception that churn and cancellations are interchangeable terms. However, there is a crucial difference between the two. User-initiated cancellations are considered voluntary churn, but churn can also include other types of unintentional customer losses such as expired credit cards or payment processing errors. Understanding these distinctions is important, as they impact data interpretation and decision-making.
How to calculate customer churn
Calculating and understanding this metric is essential to have a clear idea of the health and loyalty that the business is generating. Of course, a high churn rate can indicate a problem of satisfaction with the product or service offered, and it could also affect the monthly recurring revenue.
Generally, the b2b saas churn is evaluated considering a specific time range, according to a cohort of users, this can be:
- Weekly churn rate.
- Monthly churn rate.
- Quarterly churn rate.
- Semiannual churn rate.
- Annual churn rate
Don’t forget that as we saw in this post about b2b metrics, the more a customer uses your service, the more time he is away from churn.
How is the churn rate calculated in a saas?
At first glance, the concept and calculation of churn rate seems quite intuitive and simple. However, there are certain factors that can affect the final result of the indicator and it is convenient to define them in an efficient way in order to get closer to reality.
I will now review some factors that can complicate the process of defining and calculating churn:
- It is not easy to keep track of churn customers.
- The number of customers for a given period is not a concept that is well defined for a SaaS, as that number can change due to new subscriptions or cancellations.
- The churn rate provides a percentage as an indicator, however, this result should not be confused and should be interpreted with care when drawing qualitative conclusions from it.
How to calculate the churn rate in b2b?
The b2b saas churn rate is calculated by dividing the number of customers who abandoned the product or service by the number of customers you had at the beginning of that period. This is the simplest way to calculate it.
Beyond this, there are more complex ways of doing this calculation and they allow a deeper analysis. Below, I will review some of them.
Common Errors in SaaS Calculation
One common mistake is to include new subscribers in the churn calculation, which should not be done since these users are not yet established customers. The same applies to users on trial periods who have not yet committed to a subscription.
Another important distinction to make is between churn and downgrade. In the context of subscription-based products, downgrading to a lower-tier plan should not be considered as churn because the business still generates revenue from these users and there is a greater chance of retaining them. However, some analysts still consider it as churn.
In B2B and SaaS businesses, churn and retention are two sides of the same coin. Churn represents the number of users who did not renew their subscription, while retention represents those who did. Both metrics are useful for measuring revenue, subscriptions, and user behavior using cohort analysis.
Simple churn formula
The result is obtained by dividing the number of customers who abandoned the product or service by the number of customers at the beginning of the period analyzed.
This form allows a quick and simple calculation, it is easy to analyze and compare month after month. However, it can generate distortions that make analysis difficult for companies that are in the process of hyper-growth. To avoid these distortions we recommend reporting in 6 customer segments:
- New customers – new users who subscribed for the first time in a given period.
- Customers who are renewing – paying customers who are expected to renew their subscriptions in a given period.
- Renewing customers – users who successfully renewed their subscription in a given period.
- Cancelled customers – customers who did not renew their subscription in a given period.
- Non-renewing customers – paying customers who are NOT renewing in a given period (relevant for companies with different subscription duration periods).
- Customers who re-subscribed – customers who came back and re-subscribed after having cancelled earlier.
Once you have these 6 groups of customers, the whole report becomes simpler and you can easily calculate the other groups:
Customers who cancelled = Customers who are on renewal – Renewed customers.
Then the churn rate becomes:
Churn indicator: adjusted form
This form divides the number of customers who abandoned the product in service by the average number of customers during the time period analyzed.
It is useful for companies that want to efficiently manage the growth in the number of customers. However, it is important to be consistent in the time periods considered for the calculations of the indicators to be compared.
What is the churn rate calculated for?
The b2b saas churn has different uses and all are essential to the success of the product or service. To begin with, it serves as a good measure to determine the health of the company and its ability to retain customers in the long term.
In addition, it is useful to understand what can be improved to enhance customer retention over comparable time periods. It is also a good way to get answers about customer satisfaction with respect to the product or service offered.
Undoubtedly, this indicator is one of the indispensable tools for product managers, as it offers them an initial overview of what their product or service is achieving.
Misconceptions about churn
There are several common misconceptions about churn that can lead to inaccurate reporting or poor business decisions. Below, we will discuss some of the most common ones:
Use Retention instead of Churn
In the context of B2B and SaaS businesses, churn and retention are actually the same metric, but inverted.
Churn measures users who did not renew their subscription, while retention measures users who successfully renewed. Both metrics can be used to measure revenue, subscriptions and users, and can be cohorted to analyze data over time. It is a common misconception that churn only applies to subscriptions and retention only to users, as both metrics can be used to measure both. In terms of analytics, a decision must be made whether to report churn and retention at the customer or subscription level. In addition, retention by cohort is popular but churn can also be cohorted to learn which cohorts of users are retained and which are not.
Including new subscribers in the Churn formula
New users cannot be counted in the churn rate formula because they cannot leave the service during their first billing cycle. Even if they cancel, they will still have access to premium features until their subscription expires. This is why it is crucial to define the objective of measuring and reporting churn to avoid including new users in the calculations.
In the image we can see that method 2 is using new paid subscriptions added during the period. This practice is not correct and this method will underestimate the churn, making it appear smaller (i.e. better) than it is.
The first method, while interesting, makes things very difficult.
Saas Churn Benchmark
Not having churn is almost impossible, but what is a good churn? 5% customer churn? 7% or 3%?
Companies like hubspot, salesforce surely have a lower churn. But don’t be discouraged, building a good product takes many iterations.
To start with, a churn rate of 10% means that 1/10 customers abandoned the product or service, or 1,000/10,000, so a high churn rate takes away all our growth.
Despite this, the churn rate must be evaluated with respect to the sample size because the two figures above make numerical sense, but the context of the number of customers evaluated is what gives them interpretative meaning.
In this sense, the churn rate is an indicator that scales with the stage of the company. It is important to have a clear idea of the limitations of this indicator and not to interpret data that do not correspond to the business context.
It is common to have customer segmentation and these may have different churn rates, even with abysmal differences. Therefore, making a global calculation can generate an erroneous interpretation of certain sectors.
In the Saas b2b world, a churn rate below 5% is considered a good metric.
Predictive churn model
One of the factors why Saas b2b is so interesting for venture capitals is because its metrics, such as mrr, churn and cac, can be very predictive.
How to reduce churn rate?
The most effective way to reduce the b2b Saas churn rate is to give users a product proposition that matches what they are willing to pay for. To do this, several factors must be taken into account:
- The first is knowing how to reach the ideal customer; the ideal buyer will be more willing to pay for your service or product for longer.
- On the other hand, it is convenient to invest in training and tutorials to show customers all the potential of the offered product. In other words, proper onboarding.
It is also important to understand that existing customers value the new features of the product and represent one more reason to stay. However, this only works when existing features that have been successful with existing customers are not affected.
Why do customers abandon the product or service?
There is no short or simple answer to this question. Generally, each customer has his or her own reasons for dropping out. Despite this, there are certain causes that tend to recur among the different customers who drop out:
- Dissatisfaction with the experience offered.
- A frustrated or dissatisfied user with an issue as important as the product experience is a candidate for abandonment. Poor performance, lack of specific features or constant failures are some of the triggers for a customer to abandon based on their experience.
- The customer no longer considers the product profitable
- If the customer perceives the product as an unnecessary part of your company’s operation or does not find the return on investment, he may abandon the product.
- Lack of customer appreciation
- The customer usually buys the product because it solves a problem or helps streamline a particular process. If the problem disappears or they no longer need the product for whatever reason, they may drop down the priority scale and end up abandoning it.
- The customer has found another solution
- If the customer finds an alternative solution that is more cost-effective or even free, he may stop using the product in order to take care of his costs.
As you can see, churn is one of the most constant pains in a SaaS, but do not forget that the longer a user uses your product, the further away you are from churn, so this metric must be associated with other product usage metrics.
It seems like a lot of work, but remember that with Next Scenario’s tool, you can measure all your b2b saas metrics in one place and without code, I leave you here the link:
You can use our free SaaS data analysis tool to calculate SaaS Retention Rate and other metrics for free.