Wondering how to drive success in your app's user experience? Understanding churn rate and retention rate is key. In this article, we'll dive into the formulas, benchmarks, and ways to improve these essential metrics.
What's the Deal with Churn Rate?
The churn rate measures the rate at which customers stop using your app over a given period. An increasing churn rate signals a flawed product or service that leaves users dissatisfied, ultimately impacting revenue.
Calculating Churn Rate: A Step-by-Step Guide
There are two main types of churn: customer churn and revenue churn. We'll explore each in detail and provide formulas to calculate them.
Customer Churn Rate Formula
To calculate the customer churn rate, divide the total number of customers lost by the total number of customers at the start of a time period. Multiply by 100 for a percentage.
For example, suppose you had 200 customers at the start of October and lost 30 during the month. Your customer churn rate would be (30/200) x 100 = 15%.
Revenue Churn Rate Formula
The revenue churn rate calculates how much revenue was lost during a given period. This occurs when existing customers pause or downgrade their subscriptions.
To calculate revenue churn, estimate total revenue at the start and end of a period, then subtract the two to get net revenue lost. Divide the lost revenue by the total revenue at the start of the period.
For instance, let's say your revenue from existing customers was $25,000 at the start of January and decreased to $22,000 by December. Your annual churn rate would be (3,000/25,000) x 100 = 12%.
What's a Good Churn Rate in SaaS?
There is no one-size-fits-all average churn rate. Industry and company growth stage play significant roles.
As a general rule, established SaaS companies aim for an annual churn rate of 5-7% and monthly churn of 1% or less. Early-stage startups may have higher churn rates, with 10-15% considered acceptable.
Retention Rate: The Key to Customer Loyalty
Customer retention measures the percentage of customers who make repeat purchases during a given time period.
For SaaS companies, retaining customers is crucial for increasing customer lifetime value and monthly recurring revenue. Calculating retention rate is straightforward:
- Subtract the number of paying customers at the end of a period from the number of customers acquired during that same period.
- Divide this number by the total number of customers at the start of the period.
- Multiply by 100 for a percentage.
For example, suppose you had 80 customers at the start of June and lost 25 but gained 10 new customers. Your customer retention rate would be ((65 - 10) / 80)) x 100 = 68.75%.
What's a Good Retention Rate?
Similar to churn rate, there is no set rule for a good retention rate. Industry and company growth stage influence what's considered good.
Newer SaaS companies tend to have lower retention rates, while established ones aim for high rates (up to 90%). Research by SaaS Capital reports median net retention rates of 102% and median gross retention rates of 91%.
Churn Rate vs Retention Rate: What's the Difference?
Customer churn rate and retention rate are two sides of the same coin. The churn rate shows how many customers you lost, while the retention rate shows how many you kept.
For both metrics, businesses strive to be as close to one extreme as possible: 0% for churn rate and 100% for retention rate.
Making Sense of Customer Churn and Retention Data
Calculating customer churn and retention rates isn't enough. You need to know how to read the results effectively.
There are several ways to interpret customer retention and churn data, including:
- Conducting cohort retention analysis
- Using retention tables to study user behavior trends
- Improving your app's user experience based on insights gained from these methods
By understanding churn rate vs retention rate, you'll be well-equipped to drive success in your app's user experience.