Churn is the percentage of customers or sales lost in a given period (usually monthly). Most SaaS entrepreneurs monitor two different types of churn.
Customer churn: percentage of customers lost
(# cancelled customers last 30 days / Active customers 30 days) * 100
Revenue churn: percentage of revenue lost
(MRR Lost to Downgrades & Cancellations last 30 days ÷ MRR 30 days) * 100
In most cases, when you hear a SaaS entrepreneur talk about churn they are talking about losing customers. But revenue is equally, if not more, important. In fact, with customer churn we only consider customers who cancel their account altogether. Churn on revenue gives a more realistic picture given we can take into account downgrades, for instance.
SaaS companies depend on long-term customers to grow. The longer your customers pay, the better. If you are not able to control your churn, it will eat away at your revenue to the point where your business becomes unsustainable. No matter how many new customers you can acquire every month, if you fail to retain them long-term, you are basically on a hamster wheel going nowhere.
It is important to actively analyse and reduce your churn. Even if you have a low churn rate (say 2% or less), you need to constantly look for ways to keep it as low as possible.
For most SaaS companies, a churn rate of 5-7% is considered “healthy”. Once you start hitting over 10% monthly churn on a regular basis, it is a sign that something is wrong and you really need to do a deep dive into what is going on with your business.