What is churn rate in saas: what is churn rate in saas explained

So, what exactly is churn in the SaaS world? At its core, it's the percentage of customers who decide to hit the cancel button over a set period.

Think of your business as a bucket you're desperately trying to fill with water (new customers). Churn is the hole in the bottom of that bucket. No matter how fast you pour water in, that hole is constantly draining your progress.

Why Churn Is the Silent Killer of SaaS Growth

It's easy to get fooled by flashy customer acquisition numbers. You might be celebrating dozens of new logos this month, but if just as many are quietly walking out the back door, you’re not actually growing. You’re just treading water.

This is exactly why churn gets called the "silent killer." It eats away at your foundation while you're busy focusing on building the next floor. It's a direct, unfiltered signal that something is wrong—your product isn't delivering on its promise, your onboarding is a mess, or your pricing feels unfair.

Left unchecked, churn forces you onto an acquisition treadmill where you have to run faster and faster just to stay in the same place.

The Two Faces of Churn

To really get a grip on churn, you have to look at it from two different angles: customer churn and revenue churn. They sound similar, but they tell two completely different stories about the health of your company.

• Customer Churn is simple: it’s the percentage of customers you lose. It tells you how many logos are leaving.
• Revenue Churn is about the money: it’s the percentage of revenue you lose from those departing customers. This is often where the real pain lies.

Here’s why that distinction matters. Losing ten small startups paying you $50/month is a completely different problem than losing one enterprise client paying $5,000/month. In the first case, your customer churn is high, but in the second, your revenue churn is devastating. You have to track both.

The real danger of churn isn’t just the revenue you lose today. It's the compounding damage it does to your future. A 5% monthly churn rate doesn't just mean you lose half your customers in a year—it means you lose half your potential for expansion revenue, referrals, and long-term brand advocates.

Customer Churn vs. Revenue Churn at a Glance

Getting the nuance between these two metrics is the first step to diagnosing your retention problems correctly. One tells you how many customers are leaving, while the other tells you how much value is walking out the door.

Here’s a quick breakdown to keep them straight.

Understanding both is non-negotiable. One might send up a flare about a widespread usability issue affecting all users, while the other could warn you that your most valuable customer segment is at risk. Both are critical signals you can't afford to ignore.

Calculating Your SaaS Churn Rate with Confidence

Knowing your churn rate isn't some vague feeling in your gut; it’s about concrete math. Getting this calculation right is the difference between diagnosing a problem accurately and just chasing symptoms. Thankfully, the basic formulas are pretty straightforward, and they give you a powerful lens into the health of your business.

This map breaks down the two main branches of churn—losing customers and losing revenue. Think of them as two distinct leaks in your bucket.

While both customer and revenue churn contribute to the problem, they represent different kinds of loss. That means they need their own formulas to measure them correctly.

The Basic Customer Churn Rate Formula

Customer churn, sometimes called logo churn, is the simplest place to start. It measures the percentage of your customers who cancel their subscriptions over a specific period. It answers the most basic question: "How many of our customers are leaving?"

The formula is dead simple:

(Customers Lost in Period / Customers at Start of Period) x 100 = Customer Churn Rate %

Let's walk through a practical example. Imagine a company called SaaSCo.

• SaaSCo starts the month of May with 500 customers.
• During May, they lose 30 customers who cancel.
• The math: (30 / 500) x 100 = 6%

So, SaaSCo had a monthly customer churn rate of 6% for May. That's a useful number, but it doesn't tell the whole story. What if those 30 customers were all on your cheapest plan? That’s where revenue churn comes in.

Measuring the Financial Impact with Revenue Churn

Revenue churn measures the percentage of recurring revenue you've lost from existing customers. It’s arguably the more critical metric because it puts a real dollar amount on the damage. To get the full picture, you need to look at both Gross and Net MRR Churn.

Gross MRR Churn

Gross MRR Churn is the total monthly recurring revenue (MRR) you lost from both cancellations and downgrades. It’s a pure, unfiltered look at revenue walking out the door, ignoring any new revenue you might have gained from the customers who stayed.

Here's the formula:

(MRR Lost to Churn & Downgrades / MRR at Start of Period) x 100 = Gross MRR Churn %

Let's check back in with SaaSCo:

• Their MRR at the start of May was $50,000.
• The 30 customers who canceled were paying a combined $4,000 in MRR.
• The math: ($4,000 / $50,000) x 100 = 8%

SaaSCo’s Gross MRR Churn is 8%. Notice how this is higher than their customer churn of 6%? That's a huge red flag. It tells us they lost customers who were, on average, more valuable than their remaining ones. This kind of insight is exactly what helps you prioritize who you need to save.

Net MRR Churn and the Holy Grail

But what about the customers who stuck around and actually started paying you more? This is where Net MRR Churn comes into play. It calculates your lost revenue after you factor in any expansion revenue (upsells, cross-sells, or add-ons) from your existing customer base.

The formula looks like this:

((MRR Lost - Expansion MRR) / MRR at Start of Period) x 100 = Net MRR Churn %

Let's add one last detail to SaaSCo's story for May:

• MRR Lost from cancellations: $4,000.
• Expansion MRR from existing customers upgrading their plans: $1,500.
• The math: ($4,000 - $1,500) / $50,000 x 100 = 5%

SaaSCo’s Net MRR Churn is 5%. This is a much healthier number. It shows that while they are losing revenue, they're also successfully growing accounts, which helps offset some of the losses.

The ultimate goal for any SaaS business is to achieve Net Negative Churn. This magic moment happens when your expansion MRR is greater than the MRR you lose from cancellations. When you hit this, your business can grow even without acquiring a single new customer—a powerful sign of a healthy, scalable product that people can't get enough of.

What Is a Good Churn Rate for a SaaS Business?

Trying to figure out if your churn rate is "good" or "bad" can feel like you’re chasing a moving target. The honest truth? There's no single magic number that works for everyone.

A good churn rate depends entirely on who you sell to, how mature your company is, and what your average contract is worth. A startup selling a $20/month tool to freelancers is living in a completely different universe than a company selling a $20,000/year platform to enterprise clients.

Those smaller customers are naturally more transient and sensitive to price, which makes higher churn almost unavoidable. Context is everything here; what’s perfectly acceptable for one business could be a five-alarm fire for another.

Benchmarks Based on Your Target Customer

The single biggest factor shaping your churn rate is your customer segment. Each group has different expectations, buying habits, and levels of "stickiness."

• Small and Medium-Sized Businesses (SMBs): These customers are the most volatile. They go out of business more often, have tighter budgets, and are quick to jump ship for a better deal. A monthly customer churn rate of 3-7% (which adds up to a staggering 31-54% annually) is common in this space.
• Mid-Market: As you move up the food chain, companies become more stable. They have dedicated budgets and embed your software deeper into their day-to-day operations. Here, a monthly churn rate of 1-2% (11-22% annually) is a much more reasonable target.
• Enterprise: Big enterprise clients are the stickiest of all. They sign multi-year contracts, pour serious resources into implementation, and have complex buying processes that make switching a massive headache. The best-in-class enterprise SaaS companies shoot for an annual churn rate of less than 1%.

These benchmarks paint a pretty clear picture. While a <5% annual churn rate is the gold standard, recent data shows average rates often hover between 10-14% per year.

For CTOs and COOs trying to build resilient products, the takeaway is clear: if you're focused on SMBs, you might see 15-30% annual churn. But if you're selling to the enterprise, you absolutely need to aim for 5-8% or lower. You can dig into more 2025 SaaS churn insights to see how leaders are flipping the script by driving retention through expansion revenue.

Beyond Churn: The Power of Net Revenue Retention

Look, tracking churn is critical. But the most sophisticated SaaS operators have moved on to a more powerful metric: Net Revenue Retention (NRR).

NRR doesn't just track lost customers; it tells you what percentage of revenue from your existing customers you kept over a period, factoring in both churn and expansion revenue from upgrades and add-ons.

Here’s the simple formula:

((Starting MRR + Expansion MRR - Churn MRR) / Starting MRR) x 100 = NRR %

NRR answers the single most important question for a sustainable business: "Could we still grow even if we didn't sign a single new customer this month?"

If your NRR is over 100%, the answer is a resounding yes. This is the hallmark of an elite SaaS company. It means the new revenue you’re generating from your current customers—through upsells, cross-sells, and new features—is outpacing the revenue you're losing from cancellations.

Imagine you start the month with $100,000 MRR. You lose $5,000 to churn, but you gain $10,000 from existing customers upgrading their plans. Your NRR is 105%. You're not just replacing lost revenue; you're growing from the inside. This is the true engine of compound growth.

Finding the Real Reasons Why Your Customers Leave

To really get a grip on churn, you have to look past the spreadsheets and understand the human stories behind the numbers. Knowing that customers are leaving isn't enough. You have to find out why.

This means putting on your detective hat and digging into the root causes that push a customer to finally hit "cancel."

The reasons people leave generally fall into two big buckets. Getting this distinction right is the first step toward building a retention strategy that actually works, because each type demands a completely different fix.

Voluntary vs. Involuntary Churn

Not all churn is created equal. Some customers make a conscious, deliberate choice to leave you. Others just drift away because of a simple, preventable technical glitch.

• Voluntary Churn: This is what most founders think of when they hear "churn." It’s when a customer actively decides to cancel their subscription. Maybe they're unhappy with the product, they found a better tool, or their business needs have changed.
• Involuntary Churn: This is the "accidental" churn that happens when a payment fails. It’s not a conscious choice; it’s a billing failure from an expired credit card, insufficient funds, or a random bank rejection.

It's easy to obsess over unhappy users, but involuntary churn is a silent killer of growth. For many B2B SaaS companies, it can account for a surprisingly large chunk of lost revenue. Fixing this is often low-hanging fruit—simply improving your dunning process or integrating a better payment provider can plug a serious leak in your ARR. You can explore SaaS churn benchmarks to see how these numbers break down by industry.

Digging Into Why Customers Actively Leave

When a customer makes the choice to leave, it’s a direct signal that your product or service missed the mark. Your job is to pinpoint exactly where that breakdown happened.

The usual suspects behind voluntary churn include:

• A Confusing Onboarding Process: First impressions are everything. If a new user can't figure out how to get value from your product quickly, they'll give up before they even really start. A clunky setup is a top reason for early-stage churn.
• The Product Doesn't Deliver on Its Promise: This is a classic value gap. They signed up expecting your tool to solve Problem X, but after trying it, they found it just didn't live up to the marketing hype.
• Poor Customer Support: When users hit a snag, they expect fast, helpful support. Slow response times, canned answers, or just making it hard to find help will frustrate customers right out the door.
• Pricing Doesn't Align with Value: Customers are constantly doing a cost-benefit analysis. If they feel they're paying too much for the value they're getting, they'll start shopping around for a cheaper alternative.

To get to the bottom of these issues, you have to gather feedback directly. Don't guess why people are leaving—ask them. A simple, one-question exit survey can give you invaluable clues.

Your Churn Diagnostic Framework

To build a complete picture, you need to mix that qualitative feedback with hard, quantitative data. Here’s a simple framework to get you started:

1. Analyze Customer Feedback: Systematically go through your support tickets, read customer service chat logs, and check online reviews. Look for recurring themes and complaints that point to specific friction points.
2. Spot Warning Signs in Product Analytics: Dive into your product usage data. Identify users with low engagement, those who haven't logged in for weeks, or those who aren't using your "stickiest" features. These are your at-risk accounts.
3. Conduct Effective Exit Interviews: When a high-value customer cancels, reach out personally. A quick call or a thoughtful, non-automated email can provide brutally honest feedback that a simple survey would never capture.

By combining these methods, you move from just knowing your churn rate to understanding the specific stories behind it. That knowledge is the bedrock of any successful retention strategy. For more on this, check out our guide on how to increase user retention for actionable strategies.

Proven Strategies to Reduce Customer Churn

Knowing why customers churn is one thing. Taking decisive action is what actually protects your revenue.

The truth is, there's no single magic bullet for reducing churn. It's about building a layered system—a combination of product improvements, proactive support, and smart financial management that makes leaving a much harder decision for your customers.

We've found these strategies fall into three core buckets: making your product indispensable, supporting customers before they get frustrated, and fixing the financial friction that causes them to drop off accidentally. Let's break down the playbook.

Fortify Your Product Experience

By far the most effective way to crush churn is to build a product that customers can't imagine their workflow without. When your tool is deeply embedded in how they make money or save time, it becomes incredibly "sticky."

A huge driver of early churn is a clunky onboarding experience. If users don't get their first "win" quickly, they lose momentum and just… fade away. Your job is to get them to that "aha!" moment as fast as humanly possible.

• Practical Example: A project management tool could use short, in-app tutorials that guide a new user through creating their first project, assigning a task, and setting a deadline—all within the first five minutes. That immediately proves the tool’s value.

Next, you have to drive feature adoption. Your power users—the ones who never churn—are probably using a few core features that make your product essential. Your mission is to get every customer to discover and use those same high-value features.

• Practical Example: An email marketing platform might see that users who create an automated welcome series have 80% higher retention. They could then launch an in-app prompt for users who haven't set one up, showing them exactly how it grows their business on autopilot.

Implement Proactive Customer Success

Don't wait for customers to tell you they're unhappy. By the time they send that email, it's often too late. Proactive customer success is all about spotting at-risk customers before they even think about canceling and stepping in with targeted support.

Use your product analytics to build a customer health score. Track the leading indicators of churn, like:

• Decreased login frequency: Are they using the app less than they used to?
• Low feature usage: Have they stopped using the features that correlate with long-term value?
• Unresolved support tickets: Are they sitting on frustrating issues that haven't been fixed?

Once you flag an at-risk account, your success team can reach out. The key is to be helpful, not salesy. Frame the conversation around their goals, not your desire to save the account.

Pro Tip: Your outreach could be as simple as an email saying, "Hey, I noticed you haven't used our reporting feature yet. Many of our customers in your industry find it saves them hours on weekly analysis. Can I show you how to set it up in 5 minutes?"

This flips customer service from a reactive cost center into a proactive retention engine. For a deeper dive, our comprehensive guide on how to reduce customer churn offers even more detailed tactics.

Optimize Pricing and Billing Management

Finally, a surprising amount of churn comes from simple financial and administrative friction. This is often the easiest churn to fix and can give you a quick win for your retention numbers.

First, attack involuntary churn from failed payments. This happens way more than you'd think—credit cards expire, get replaced, or are declined for all sorts of reasons. An automated dunning process is non-negotiable; it's a critical safety net for recovering failed payments and preventing these accidental cancellations.

Next, use your pricing strategy to encourage long-term commitment. Offering a meaningful discount for annual prepayment is a powerful incentive. It not only locks in a customer for 12 months but also gives your cash flow a healthy boost.

In the B2B SaaS world, the average monthly churn rate has dropped to around 3.5% as of mid-2024. That's a huge improvement from the painful 7.5% peak we saw back in late 2021. The market has shifted: with new sales slowing down, retention is the new growth engine.

Answering the Tough Questions About SaaS Churn

Even when you feel like you've got a handle on the basics, founders always have a few nagging questions about how churn really works in the wild. Let's move past the theory and tackle the practical questions that pop up when you start putting these metrics to work.

What Is Cohort Analysis and Why Should I Care?

A cohort analysis is just a fancy way of grouping your customers by the month they signed up. Instead of looking at one big, messy churn number for your entire user base, you track each group's behavior over time. This is where the real story is.

Think about it. Your overall churn might be sitting at 5%. That seems okay, maybe not great, but not a five-alarm fire.

But when you run a cohort analysis, you see the truth: the customers who signed up in January (your "January Cohort") are sticking around, churning at only 2%. Fantastic. But your April Cohort? They're leaving in droves, churning at a terrifying 8%.

That's the kind of insight that saves a company. It tells you that something broke in April. Maybe you pushed a buggy feature, a competitor launched a killer marketing campaign, or a change to your onboarding process completely missed the mark. Without cohort analysis, you're just flying blind.

How Often Should I Actually Calculate Churn?

The right rhythm for measuring churn depends on your business. There's no single right answer, just trade-offs.

• Monthly: This is the standard for most SaaS companies, especially if you're selling to SMBs. It gives you a real-time pulse on the health of your business, letting you spot and react to problems fast. The downside? It can be noisy. A single bad week can make the whole month look worse than it is.
• Quarterly: If you have longer sales cycles or sell to enterprise clients, looking at churn every quarter smooths out those monthly bumps. It provides a more stable, strategic view of your business. The risk, of course, is that you might be slower to notice a problem that's quietly getting worse.

My advice for most startups? Start with monthly. It forces a discipline of paying attention. As you grow, you can layer in quarterly and annual views to see the bigger picture.

Is It Possible to Get to Zero Churn?

Let's be real: achieving zero churn is a fantasy. It's just not going to happen. Customers go out of business. They get acquired. Their internal strategy shifts. People will leave for reasons that have absolutely nothing to do with how good your product is.

Instead of chasing the impossible dream of zero, the best SaaS companies aim for something far more powerful: net negative churn. This is the holy grail. It happens when the new revenue you get from your existing customers—through upgrades, expansion, or add-ons—is greater than the revenue you lose from the customers who cancel.

When you hit net negative churn, your customer base transforms into its own growth engine. Every cohort you acquire actually becomes more valuable over time.

How Does Churn Mess Up My Other Metrics?

Churn is the silent killer of your unit economics. It never lives in a silo; it bleeds into everything and makes it harder to build a profitable company.

High churn torpedoes your Customer Lifetime Value (LTV). It's simple math—the fewer months a customer pays you, the less they are worth to your business.

At the same time, it completely destroys the ROI on your Customer Acquisition Cost (CAC). If you spend $500 to land a new customer and they churn after paying you just $200, you haven't just failed to make a profit; you've literally lit $300 on fire. A healthy, low churn rate is what gives you the runway to earn back your CAC and build a sustainable business.

Building a product that keeps customers around requires more than a great feature set—it demands a technical foundation built for retention from day one. At Vermillion, we partner with founders to build scalable, resilient software, making sure that hidden technical flaws don't become the root cause of your churn. Learn more about our approach.