Churn analysis: 6 ways to measure churn in your SaaS business

All SaaS businesses share a common enemy: churn. Defined as the percentage of customers that cancel their subscriptions in any given time period, churn rate is an essential metric that can make, or break, the success of your business. By understanding the nuances of why your customers churn, you can find more effective ways to reduce it.

How to do churn analysis

Churn affects more than just your business metrics.

It also shows whether your customers are getting good value from your product or service
To understand how to reduce churn, you need to know the following: Which customers are churning, why are they churning and which customers are more likely to churn soon
Have accurate subscription data to work with

Customer Acquisition Cost (CAC)

This tells you how much you need to spend to acquire a new customer.

Net Negative MRR Churn

Total revenue from your existing customers surpasses the revenue lost to churn.

Payment methods

Even the world’s best sales team can’t overcome a poor payment acceptance workflow

Your payment acceptance rate is the proportion of successful payments out of the total payments attempted.
Take a nuanced approach when analyzing it, which requires examining retried payments, failed payments, different payment methods, payments from different countries, etc.

Voluntary vs involuntary churn

There’s a critical difference between voluntary and involuntary churn. The former happens when a customer deliberately cancels or downgrades their subscription.

On the other hand, involuntary churn is often due to expired or declined payment cards, lack of funds, incorrect payment information, or poor payment routing.

The importance of calculating churn

Churn has a resounding impact on your business

Ways to Calculate Churn

The basic formula for churn is: Number of customers canceling their subscriptions per time interval, divided by the number of customers at the beginning of that interval.

Churn can be seasonal; you might find that it changes during certain months. Certain types of customers may churn more frequently than others.

Monthly Recurring Revenue (MRR)

Customer cancellations directly affect your MRR.

What is churn analysis?

Churn analysis provides a set of detailed insights on the factors affecting your churn rate

Delivers a full picture of your customers’ needs and evaluates whether your company is meeting them
Helps you decide how to allocate resources and make improvements to slash churn

Customer retention rate vs. churn rate

Ideally, you should aim for a retention rate of as close to 100% as possible.

Correspondingly, 0% is the ideal customer churn rate.
Managing your retention rate should be a primary focus for your business, because of the high cost of customer acquisition.

The importance of cross-referencing metrics

To truly understand the nuances of churn and calculate its impact on your business, it’s vital to take a holistic approach that considers all the metrics mentioned above.

The sooner you put a strategy in place, the sooner you’ll start seeing encouraging progress.

By Cohort

Segment your customer base according to a specific time period

Cohort reports are useful because they produce numbers which are not influenced by new customer acquisition
You can easily compare different cohorts to figure out if seasonal trends affect your churn rate
The downside is that if you have a lot of cohorts it can get confusing

By Customer Age

Analyzing churn by age allows you to identify patterns across your entire customer base without getting bogged down by too many cohorts.

Churn after 12 months could mean customers are leaving at the end of an annual contract. Focus on ways to encourage them to renew.

Customer Lifetime Value (LTV)

The cost of attracting a new customer is always more than maintaining an existing one.

If your churn rate is too high, you’ll have to invest substantially in attracting new customers to match the ones you’re losing.

Why analyzing churn is so important for SaaS businesses

Churn analysis allows you to evaluate strengths and weaknesses in your existing processes while improving your ability to deal with, and prevent, future churn.

Losing a few customers may seem insignificant at first. But churn is a metric that compounds over time. It’s a good idea to conduct a churn analysis whenever you notice something out of the ordinary with your churn rate.