What Is Churn Rate? Formula, SaaS Benchmarks, and How to Reduce It
"We keep acquiring new customers every month, yet revenue barely grows"—in many cases the cause is customers quietly leaking away through cancellation. The metric that quantifies this is the churn rate.
This article systematically explains churn rate, from its definition and concrete formulas to SaaS benchmarks and practical strategies for actually reducing it.
Churn rate is a metric that shows the percentage of customers who cancel or leave a service—or the percentage of revenue lost—within a given period. It is also called the cancellation rate or attrition rate.
In subscription-based businesses, especially SaaS, revenue is supported by ongoing contracts. As a result, how well you retain existing customers matters just as much as acquiring new ones for driving growth. Churn rate is the most fundamental KPI for measuring that retention strength.
Churn rate falls into two broad categories.
Even with the same number of customers, losing a high-priced-plan customer has a larger impact on revenue. To understand the health of the business, it is important to look at both together.
Customer churn rate (%) = customers lost during the period ÷ customers at the start of the period × 100
Example: if you have 1,000 customers at the start of the month and 30 cancel that month, the churn rate is 30 ÷ 1,000 × 100 = 3%.
Revenue churn rate (%) = MRR lost during the period ÷ MRR at the start of the period × 100
Example: if MRR at the start of the month is $100,000 and you lose $4,000 of MRR to cancellations, the revenue churn rate is 4,000 ÷ 100,000 × 100 = 4%.
Revenue-based churn has two further perspectives.
The best SaaS companies achieve negative churn through upselling and cross-selling, growing revenue from existing customers faster than they lose it to cancellations.
Simply multiplying monthly churn by 12 to get annual churn is not strictly accurate. Because the customer base shrinks each month, you need to compound the calculation. For example, 3% monthly churn is 36% per year by simple multiplication, but about 30.6% per year when compounded. Multiplying by 12 is fine for a rough estimate, but use the compounded calculation for accurate comparisons.
What counts as a "good churn rate" varies greatly by target customer (SMB vs. enterprise), price point, contract length, and business stage. Generally, for B2B SaaS, under 1% monthly (under 5% annually) is considered a strong level.
Recent benchmarks report roughly the following trends by customer segment (monthly, customer-based estimates).
B2C and consumer-facing SaaS tend to have higher churn than B2B because switching costs are low and competition is intense. Churn also splits into "voluntary churn," driven by the customer's decision, and "involuntary churn," caused by expired cards and failed payments—and the latter can account for a substantial share of total churn. This is an area with significant room for improvement simply by putting payment-recovery mechanisms in place.
What matters more than the industry average itself is setting realistic improvement goals based on your own historical data (for example, reducing churn by one point over six months) and monitoring continuously.
The causes of churn are varied: a gap with expectations, a failure to feel the value, payment failures, and more. Let's organize effective strategies by type of cause.
Much of churn happens early in the contract. Set up initial-setup support, tutorials, and use-case examples so that customers reach their "first success (aha moment)" as quickly as possible right after adoption. Whether customers feel the value within the first 30–90 days greatly influences subsequent retention.
Use usage data to detect early signs of churn (declining login frequency, unused key features, etc.) and follow up proactively. Rather than relying on a rep's intuition, it is effective to quantify these signals as a health score and prioritize outreach to high-risk customers.
Continuously collect customer requests and reasons for leaving, and reflect them in product improvements. Because frequently used features deter churn most, it is important to design for "adoption" that embeds the product into daily work.
Unintended cancellations from payment failures and expired cards can be greatly reduced with reminder notifications, automatic prompts to update cards, and retries (dunning management). This is an area where results come relatively easily with little effort.
Survey customers at cancellation and classify reasons into categories such as price, missing features, support, and loss of use case. By identifying the most common cause from the accumulated data and using it to prioritize initiatives, you can continuously run an improvement cycle.
Offering incentives for annual contracts, or presenting a temporary downgrade or pause plan to customers considering cancellation, is also effective. This prevents full cancellation and leaves room for reactivation.
Churn rate is a core metric for measuring the health of a subscription business. First, calculate your own numbers correctly on both a customer and revenue basis, then compare against industry benchmarks to understand where you stand.
From there, executing strategies such as strengthening onboarding, systematizing customer success, and curbing involuntary churn—prioritized according to the cause of cancellation—is the shortest path to sustainable growth. Above all, what matters most is monitoring churn continuously and accumulating small improvements.
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