Churn Rate: How to Understand, Calculate, and Reduce Churn to Retain Your Customers

Every day, SaaS companies lose millions in revenue not because they can’t acquire customers, but because they can’t retain them.

The painful truth is that while a company celebrates signing 100 new customers a month, 20 existing customers are planning to exit. And this means a loss in recurring revenue.

Churn is every business’s nightmare and it is inevitable.
So, fixing your leaky bucket in time can help curb it significantly.
Whether you’re dealing with active cancellations or passive product usage decline - this guide will teach you everything you need to know about SaaS churn rates from calculation methods to tips for reducing churn.

What is Churn Rate?

The churn rate represents the percentage of customers who quit using your product over a period of time. In simple terms, churn rate is the rate at which a business loses its customers which can be due to:

• Canceling their subscriptions / not renewing the contract
• Switching to competitor products or alternative solutions

Churn rate is a critical metric for understanding your business health, especially for SaaS and other subscription-based companies, as it impacts the company's recurring revenue.

When the churn rate is:

• High churn rate: more number of customers stop using your product. This reduces the recurring revenue for the company.
• Low churn rate: only a small number of customers stop using your product. It indicates no drastic change in recurring revenue.

To calculate the churn rate for your business, it is good to know about the two dimensions of churn:

• Customers
• Revenue  

Customer Churn

Customer churn represents the number of customers who stop using your product. This churn helps to understand your customer behavior and customer satisfaction.
When a company offers multiple products at different price points (like Google does), tracking customer churn rates helps evaluate how well each product is performing.

From the insights derived, a company can:

• Identify which products have retention problems
• Understand if certain pricing tiers are more prone to cancellations
• Spot patterns in customer behavior across different offerings
• Make informed decisions about product improvements and pricing strategies

For example, if Google notices high churn in Google Workspace Business tier but low churn in Enterprise, it might indicate pricing issues or missing features at that tier level.

Revenue Churn

Revenue churn measures the amount of recurring revenue lost due to customers who churned. It indicates how much it affects the financial health of your business.

Types of Churn

Churn can be of two types - Voluntary and Involuntary churn, each with distinct triggers.

Voluntary Churn

Voluntary churn happens when the customer chooses to leave. The reasons are

1. Product Dissatisfaction

When customers are not satisfied or face problems while using your product. This includes:

1. Poor product navigation
2. Frequent bugs or technical issues
3. Lack of promised functionality
4. Complex product
   

Example:  A company stops using project management tools because it lacks crucial integration capabilities with other tools that it needs in its workflow.

2. Competitive market

Customers switch to an alternative or competitors’ solutions over the following advantages:

1. Lower price
2. Advanced features
3. Better customer support

Example: A small business switches from one CRM to another because the competitor offers AI-powered insights at a similar price point.

Involuntary Churn

Involuntary churn occurs when customers unintentionally stop using the product, typically due to payment failures or technical issues, rather than an intended decision to cancel.

Reasons for involuntary churn:

1. Failed Payment Processing

• Expired credit cards
• Insufficient funds
• Declined transactions
• Invalid card information

2. Technical Issues

• Failed automated renewals
• System errors
• Authentication problems
• Account access issues

3. Administrative Problems

• Outdated billing information
• Wrong contact details
• Missed renewal notifications
• Lost account credentials

Importance of Churn Rates

The churn rate is a critical metric that impacts the health and growth of a business. Here’s why understanding churn rates is particularly crucial for SaaS companies:

Recurring Revenue

As customers quit using your product, it directly impacts your recurring revenue. Since SaaS companies rely heavily on MRR and ARR, high churn leads to a loss in predictable revenue, making it harder to sustain or grow. Addressing churn helps to maintain steady revenue by retaining existing customers rather than relying on acquiring new customers.

Provides Customer Satisfaction

Churn rates provide clear insights into how customers are satisfied. High churn often signals dissatisfaction, which may stem from issues like poor product-market fit, insufficient value delivery, or inadequate customer support. Tracking and analyzing churn rates helps to understand where you are falling short in delivering value to customers. Therefore, addressing their needs and expectations fosters a positive customer experience and boosts overall satisfaction.

Influences Growth and Scalability

When a company loses customers faster than it gains them, growth becomes challenging. High churn rates force businesses to focus primarily on replacing lost customers instead of expanding their reach. By understanding and reducing churn, companies can stabilize their revenue, which allows them to invest more effectively in product development and customer acquisition.

Note: A good monthly customer churn rate for SaaS is between 3% and 5%.

Calculating and Analyzing Churn Rate

Now that we understand what churn rate is and its importance, let's learn how to calculate Customer and Revenue Churn.

Important - When you calculate churn rates using the formulae below, always determine the time period: monthly, quarterly, or annual.

Simple Churn

Tells about lost customers during the specified period.

Traditional Churn Rate

This only takes into consideration churned customers within a specified period of time.

Customer Churn Rate

Since this takes into account the number of customers lost, it is calculated as

Customer Churn Rate = (Number of Customers lost / number of customers at the beginning of period) X 100.

Example:

If the customers at the beginning of a month are 10,000.

Out of 10,000 customers, 100 customers quit using your product.

Customer churn rate = 100 / 10000

= 0.1

= 0.1 X 100

= 10%

Customer churn rate = 10%

Revenue Churn Rate

Since this takes into account the amount of revenue being lost, it is calculated as

Revenue Churn Rate = (Amount of revenue lost due to customers churn / Amount of revenue at the beginning of the period) X 100.

Example :

Let's take the same example with their revenue contribution ( product plan price )

10,000 customers at the beginning of a month = 6000 customers with $30 + 4000 customers with $50.

100 customers churned = 50 customers churn with $30 + 50 customers churn with $50.

9000 customers at the end of the month = 5950 customers with $30 + 3950 customers with $50.

Net Churn Rate

Net churn rate shows lost customers by taking into account new customers gained during that time period.

It typically indicates the growth rates. It shows the balance between customers churning and new customers joining at a specified period. Here, are the formula for calculating the net churn rate.

Net Customer Churn Rate

Net Customer Churn Rate = [(Customers at the end of the specified period - Customers at the beginning of the period) / Customers at the beginning of the period] × 100%

Example :

Net customer churn rate = [(10,100 - 10,000) / 10,000) X100]

= (100 / 10,000) X 100

= 1%

Net customer churn rate = 1%.

Net Revenue Churn Rate

Net revenue churn rate = (Revenue at the end of a specified period - Revenue at the beginning of a specified period ) / Revenue at the beginning of a specified period) X 100%.

Example:

Net revenue Churn rate = [( $3,74,000 - $3,80,000 ) / 3,80,000] X 100

= (-$6000 / 380000) X 100

= -1.6%

Net revenue churn rate = -1.6% which means the revenue is shrinking, not growing.

Annualized Churn Rate

The annualized churn rate is calculated from the monthly churn rate / quarterly churn rate. The annual churn rate offers a view of long-term trends, helping evaluate the success of your customer success folks.

Formula :

Annualized Churn Rate = 1 - (1 - monthly churn)^12

Example:

Monthly churn rate = 1%

Annualized churn rate = 1 - (1 - 0.01)^12

= 1 - (0.99)^12

= 1 - 0.886 = 11.4%

Annualized churn rate when quarterly churn rate is given

= 1 - (1  - quarterly_churn)^4

Example:

Quarterly churn rate = 10%

Annualized churn rate = 1 - (1 - 0.10)^4
                                    = 34%

Understanding Churn Drivers

Before tackling how to reduce the churn in your organization, it is important to find out the most common churn drivers:

1. The Onboarding Gap

The onboarding gap refers to the gap between a customer's initial expectations and their ability to achieve value from your product during the early stages of their journey.

If customers don’t receive the right guidance, they may never fully adopt the product.

The following reasons lead to onboarding gaps:

• No proper guidance
• One-size-fits-all onboarding flow
• Unnecessary product tour
• Long time to value
• Poor product-customer fit
• Lack of clear success metrics
  

2. Poor Value Realization (Product).

If your customers do not realize the value of your product sooner, then they are likely to churn. Some reasons for poor value realization are:

• No guidance for customers to use your sticky features
• Features not aligning with needs
• Improper walkthrough of your product.
• Frequent bugs
• No clear product roadmap
• Security/compliance concerns
• Complex user interface

3. Poor Customer Support

When issues are not addressed promptly, it can lead to customer dissatisfaction and diminishing trust in the product and the organization. Some drivers:

• Long response time for support tickets
• Poor quality in support response
• Lack of self-service support resources
• Frequent bugs in the software
  

4. Lack of Engagement

When there is little to no communication or interactions with customers, they feel undervalued, neglected, and ultimately churn. Lack of engagement includes

• No regular check-ins
• Irregular tracking of customer behavior
• No proactive engagement
• Missing quarterly business reviews
• No user/feedback sessions

How to Conduct Churn Analysis and Surveys

Before we learn how to conduct churn analysis, let’s revise the key indicators that help identify churn.

The Key Indicators for Churn Analysis

• Customer Lifetime Value (CLV) -  Projects a customer’s total revenue over their relationship with your service, helping prioritize retention efforts.
  
• Average Revenue Per User  (ARPU) - This helps determine if churn is higher among high-valued or low-valued customers.
  
• Customer Acquisition Cost (CAC) - Indicates how much it costs to acquire a customer. A high churn rate relative to CAC can mean that acquisition costs aren’t recouped.
  
• Net Promoter Score (NPS) - Measures customer satisfaction and likelihood to recommend.
  
• Customer Engagement Score - Assesses usage frequency, feature adoption, and engagement levels. It helps identify at-risk customers based on low engagement.
  
• Time to Value (TTV) - Measures how quickly customers gain value from the product, with a long TTV potentially leading to higher churn.

Step 1: Collect the required data

Collect customer data based on demographics and behavior.

Demographics:

• Age, location, industry
• Company size (for B2B)
• Purchase history

Behavioral:
To track how customers interact with the product over time.

• Product usage patterns
• Feature usage
• Support ticket history
• Payment history

Step 2: Conduct churn analysis

With the data, analyze their behavior using one of the two models:

Descriptive Analysis:

• Segment customers based on characteristics and usage
• Identify patterns among churned customers
• Identify peak churn periods
• Analyze their customer journey to find high-risk touchpoints

Predictive analysis

Uses data modeling to forecast churn likelihood and at-risk customers.

• Logistic regression

It works by identifying how different factors (e.g., customer usage, support tickets, payment history) impact the likelihood of churn

Example: If a model finds that a high number of support tickets increases the probability of churn, it assigns a positive weight to that factor. Logistic regression is effective for understanding how each factor affects churn likelihood, making it a popular choice for early-stage churn prediction models.

• Gradient boosting
  Builds models sequentially, with each new model correcting the errors of the previous one. It starts with a simple model, and gradually improves accuracy by focusing on data points that previous models misclassified.

Example:
Identifying subtle signals in customer behavior that increase churn risk. It’s powerful for churn analysis because it effectively "learns" from mistakes, refining predictions with each step.

Conducting Effective Churn Surveys

Surveys are critical for gathering direct customer insights on churn. Here’s how to structure them:

Survey types

• Exit surveys

1. Timing: Immediately after cancellation
2. Format: Short, focused questions

The questions should focus on the primary reasons for churn and whether anything could have prevented their churning.

• Customer Satisfaction Surveys

1. Timings: Regular intervals (quarterly recommended)
2. Format: Mix of quantitative and qualitative questions, Likert scale
   

Survey guidelines:

• Make sure the survey is short ( under 5 mins)
• Use a mix of question types - MCQs, rating scales, and open-ended questions(very few)
• Question Framework

1. Product Usage - Frequency, commonly used features, and areas of frustration
2. Satisfaction-based questions (metrics)
3. Future intention - Likelihood of continuing the service, potential for expansion, and likelihood to recommend

• Use multiple channels - emails, in-app, and websites

Strategies to Reduce Churn

Strategies centered on offering proactive customer service and enhancing customer relationships can drastically reduce churn rates.

Proactive Customer Success Management

Preventing churn begins with a proactive approach. Anticipating and addressing potential needs and issues helps build trust among customers and increase retention.  

Onboarding and Adoption

Onboarding provides a valuable first impression - to show how your product is going to be the best solution to achieve their goals.

For a smooth onboarding process, here’s what you can do:

• Set up a knowledge base with video tutorials, interactive guides, and help documents
• Schedule one-to-one sessions to understand your customers and their goals
• Personalize onboarding journeys based on different user roles  

Some things you can do to be proactive

• Establish regular feedback sessions with customers on the onboarding journey
• Create a roadmap to explain how your product will help them to address their needs over time
• Send automated emails or notifications to accounts with irregular product activity

Continuous Engagement and Support

This strategy helps retain customers long after onboarding is completed. Consistent customer engagement ensures customers continue to see value in the product, which ultimately helps to reduce churn.

Here’s what you can do:

• Offer a self-service knowledge base that is always available
• Schedule periodic touchpoints to discuss goals and gather feedback
• Implement chatbots to handle common queries, reducing response times and enhancing accessibility
• Providing education materials and training opportunities to customers

Some things you can do to be proactive:

• If there is a decline in user product activity, connect with them through emails, or calls to identify issues and address them before they escalate
• Frequently update the knowledge base with solutions for new issues, product updates, and best practices, so that customers can resolve at their own pace
• Conduct webinars frequently to stay connected with your customers and to show the best out of your product and related industry trends
• Provide an LMS that includes interactive, gamified elements to guide users through product features and benefits, increasing engagement and product proficiency

Personalization

Personalization is about crafting customer experiences that directly cater to customers’ unique needs and goals. This makes customers feel the entire experience is hand-crafted for them.

Some ways to personalize:

• Trigger product recommendations through emails or in-app messages based on their usage pattern and level of customer lifecycle stage
• Offer training courses based on customers’ job roles
• Recommend relevant help content in the Knowledge Base based on customer role

Enhancing Customer Experience

Customer experience is often the cornerstone in a SaaS company’s ability to retain customers for long-term. Consistently delivering value, and helping customers achieve success can significantly enhance their experience to reduce churn and drive loyalty.

Delivering Value and Meeting Expectations

Meeting customer expectations is about consistently delivering the value promised. Here’s how to execute it effectively:

1. Listen first: Understand your customer's goals and needs

Schedule a comprehensive onboarding call or discovery session to capture customers’ challenges, what they want to achieve with your product, and specific KPIs. Listening carefully helps to gain a deep understanding of their goals, challenges, and desired outcomes.

Key questions to guide this process:

• What does success look like to them in 6 months?
• What are the challenges they are facing?
• How would they measure ROI from your solution?

2. Create a value-based roadmap

Use insights gathered to design a personalized roadmap showing how your product will help them achieve their goals.

Tips :

• Include milestones to show your customers nearing their success.
  Example: If a customer wants to streamline operations within six months, the roadmap might include milestones like full team onboarding in Month 1, automation of specific workflows by Month 3, and tracking efficiency improvements by Month 6
• Make sure the goals are in the form: Specific, Measurable, Achievable, Relevant, and Time-bound (SMART)
• Set realistic expectations on what your solutions can provide

3. Track the Roadmap and Show Progress

Regularly review the roadmap’s progress in monthly or quarterly business reviews, providing updates that clearly show how the product is helping achieve customers’ goals.

Use metrics and examples to demonstrate the value of your partnership.

• Usage statistics
• Success metrics
• ROI calculations
• Time to Value

Building Strong Relationship

Long-term relationship-building is essential to creating a loyal customer base who are less likely to churn. While a product’s functionality is critical, the trust and rapport-like relationship, you and your team establish with your customers can significantly impact retention.  Position yourself as a knowledgeable partner by consistently sharing best practices, industry insights, and valuable content tailored to your customers’ needs. This can be provided through

• Webinars - you can share

1. Monthly best practice on product
2. Quarterly industry trends
3. Customer success stories

• Community engagement

Establish a presence on social media or other platforms where users can connect, share experiences, and discuss solutions

• Share helpful content by publishing blogs, how-to guides, Industry research, Success blueprints

Addressing Feedback and Concerns

Valuing and actively addressing customer feedback is crucial to a positive customer experience. To demonstrate that their voices are heard and valued:

1. Structure feedback collection systems

Collect feedback to get different insights from various channels such as

• Check-in calls
• Surveys
• In-app and website feedback
• Customer support team
• Emails

Segment the feedback collected as onboarding challenges, feature requests, training needs, product workflow, and more. And conduct sentiment analysis to find positive, negative, or neutral feedback.

1. Create closed-loop feedback

Closed-loop feedback means responding to the customer’s input and showing them how it was used. Follow up on the feedback by explaining what actions were taken and how they improved their experience.

Steps:

Collect -> Analyse -> Action -> Follow up

Example :

If a customer suggests a feature enhancement, acknowledge the request, then inform them once it’s implemented, detailing how the feature works and inviting them to test it. This follow-up shows that their input is valuable and contributes directly to product development.

Reduce Churn Rate and Retain Your Customers Better With Trainn

Trainn, an AI-driven customer training platform, empowers your users to unlock the full value of your product with easily accessible, interactive educational content. Here’s how Trainn supports customer retention and minimizes churn:

With Trainn, you can -

1. Automate content creation - Quickly produce Video tutorials, Interactive guides, and user manuals, enabling users to learn at their own pace.
2. Launch a personalized Knowledge Base - Offer a self-service knowledge hub tailored to customer needs for instant, independent support.
3. Build a Digital Academy - Design custom courses that take users through personalized learning journeys, turning education into a strategic advantage.
4. Optimize with analytics - Track key metrics like course enrollment, engagement, and completion rates to continuously refine and improve customer education and strategies.

Don't let another quarter go by watching valuable customers slip through the cracks. It's time to try Trainn for free with our 14-day free trial.