43 ways to calculate SaaS churn (and why you should just keep it simple)

Added by leahfaul 3 years ago in
Churn
Customer Success
SaaS Metrics
At its core, churn rate is a super simple concept: Your churn rate is the percentage of your customers that leave your service over a given period of time. Yet, in looking at hundreds of different SaaS companies, we've discovered that there's a wealth of complexity behind this seemingly simple calculation. Some necessary - breaking down your churn into segments, cohorts, etc. Some invented - counting trialers in your churn, not properly counting episodic/seasonal customers, etc. In fact, retention rates have become so complicated, at last count there were 43 different ways public SaaS companies were accounting for the metric. CLICK HERE TO GET ALL 43 WAYS PUBLIC COMPANIES CALCULATE RENEWAL RATE Unfortunately, all of this complexity ends up putting us down a rabbit hole of wasted time and hidden opportunity, because you end up spending more time trying to understand and qualify the metric, rather than actually using the metric to build your business. Above all else, you need to understand the foundation of your churn rate and the axes through which you and your team can impact that number. To do this, you can't make your churn calculations overly complicated or they'll lose their impact. Let's explore this concept by first walking through the elements of churn, including what churn is specifically used for, before walking through a number of ways to calculate churn, and why you should fundamentally just keep it simple. What are the Issues that Make Churn So Hard to Understand On a high level, the churn rate calculation looks like the following: number of churned customers / total number of customers where number of churned customers is how many people have left your service over the period out of the total number of customers you had during the period. That looks pretty straightforward, but (1) how exactly we define those two numbers can greatly affect the output and (2) business-dependent external factors may wreak havoc on our understanding of what number comes out. How to count customers The total number of customers for a period, say, 1 month, isn’t a well-defined concept because that number will change during the month due to new sign ups and cancelations. For any given month, you have three kinds of customers: Those that signed up prior to the month. These customers will come up for renewal in the current month. New customers during the month. Newly churned customers during the month. If, for instance, your group of new signups is large in proportion to the existing customer base, that can distort your churn rate calculation in a number of ways: The number you use for the “total number of customers” in the denominator will be much different on day 1 than it is on the last day of the month. This will mean that no matter what number you use for the “total number of customers”, it will either be pretty distant from the day 1 number, the day 30 number, or both. New customers typically churn at a higher rate than customers that have stuck around for a bit. That means that if your company is growing, your churn rate will skew your higher than it really is. The moment of churn People define the moment of churn in two ways: At the moment, the subscription ends and renewal doesn’t happen, or At the moment of the cancelation. We’ve written about how when a customer cancels, they haven’t churned yet. Customers don’t churn until the end of their subscription period arrives and they don’t renew, because they’ve already paid up until the end of their subscription period. If they’ve only canceled, you still have a chance to win them back before their subscription ends.

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