Churn is one of the most important SaaS metrics and our inspiration behind building this service. Let's dive right into it, exploring what churn really is and how to calculate it properly.

Definition

Churn (aka churn rate or cancellation rate) can be defined as ratio between the number of customers that have left (cancelled) the service in a given time period versus the total number of customers who could have done so.

Calculating Customer Churn

First let's make we are approximating churn correctly. There are many definitions and you can easily be calculating it wrong (if you are not, start doing so now).

Let's take an example of a service that has 100 customers at the beginning of a month, then during that month gains 25 new customers, while 5 cancel (churn) away, leaving 120 customers at the end of the month.

I've seen different (typically more wrong) calculations for churn:

  • Take what you had at the beginning of period (5/100 = 5%)
  • Take what you had at the end (5/120=4.16%)
  • Take the average (proposed in the Lean Analytics book) resulting in 5/110=4.54%

Following the definition given above, the correct calculation for churn would be 5 (number of customers that churned) / 125 (total number of customers that could have churned) giving 4% churn.

Calculating churn like this also means you can look at churn as counter-growth.

If one looks at growth as what they had at the end of the period divided by what they begun with, it makes sense to look at churn as a ratio of what one ended up having (because of churn) divided with what they could have had if there was no churn. In this example 120/125= 96% retained, 4% lost (or churned, same as above). This concept does not require thinking about cohorts if you want to see the big picture - similar to how when we look at growth we usually do not care whether the customer signed up on the very last day of the interval being looked at.

it's worth noting that there are more complex ways to calculate churn. Check here  for how Shopify does it and here for Jason Cohen .

Monthly vs Annual churn

While 4% may not sound as much this formula will help convert it to annual churn

annual churn = 1 - (1 - monthly churn)^12

So for 4% monthly churn we get

1 - (1 -0.04)^12 = 38% !

This means that this company will have to replace 38% of customers each year just to stay with the same number of customers.

Typical churn rates compared

As said in the beginning, churn rates vary from market to market. Hosting business may have 2%-3% monthly churn while a dating service like Match may have a whooping 30% monthly churn. The investors may have their own view, for some only 5%-7% annually is acceptable.

The table given below shows known annual churn rates (source).

Annual Churn Company Industry Data Year Country
1.0% Cox (triple-play customers) Cable TV 2002 US
4.0% C I Host Web Hosting 2003 US
4.0% Earthlink Internet Service 1999 US
4.5% Greenberg Traurig (lawyers) Legal 2003 US
4.6% Reed Smith (lawyers) Legal 2003 US
4.6% Sonnenschein (lawyers) Legal 2003 US
4.9% Local Telecom 2000 US
5.0% Piper Rudnick (lawyers) Legal 2006 US
5.3% Baker & McKenzie (lawyers) Legal 2005 US
5.7% Local Telecom 2002 US
6.0% Sirius Satellite Radio 2005 US
6.0% Wireless 2002 US
6.1% Local Telecom 2001 US
6.3% Holland & Knight (lawyers) Legal 2004 US
6.4% White & Case (lawyers) Legal 2003 US
6.5% McGuire Woods (lawyers) Legal 2003 US
6.6% Sirius Satellite Radio 2004 US
7.0% Morgan, Lewis (lawyers) Legal 2003 US
7.2% Sirius Satellite Radio 2006 US
7.5% Nextel Wireless 2001 US
7.9% Howrey (lawyers) Legal 2003 US
8.0% Triton PCS Wireless 2001 US
8.0% U.S. Cellular Wireless 2001 US
9.0% Wireless 2001 US
9.6% Duane Morris (lawyers) Legal 2003 US
9.6% Wireless 2000 US
10.0% Web Hosting 2003 US
10.0% Western Wireless Wireless 2001 US
10.3% Akin Group (lawyers) Legal 2003 US
11.0% Alamosa PCS Wireless 2001 US
14.0% Virgin Mobile Wireless 2005 GB
15.0% Nascar.com (premium subscribers) Sports Media 2004 US
16.0% Nextel Wireless 2005 US
17.0% Colorado teachers in 'excellent' schools Education 2004 US
17.0% Schnader Harrison (lawyers) Legal 2003 US
17.0% DBS TV 2002 US
17.2% Vodaphone Wireless 2005 IT
18.0% DirecTV DBS TV 2003 US
18.3% Vodaphone Wireless 2005 DE
19.0% Alltel Wireless 2005 US
20.0% Hutchison Telecommunications Wireless 2005 IN
20.0% Wireless 2001 AU
21.9% Vodaphone Wireless 2005 ES
22.0% Analog cable subscribers Cable TV 2002 US
23.0% Cingular Wireless 2005 US
23.0% Sprint Wireless 2005 US
23.0% Colorado teachers in 'unsatisfactory' schools Education 2004 US
25.0% Wireless 2005 GB
26.0% Sprint Wireless 2005 US
26.0% Subscribers Cable TV 2002 US
29.7% Vodaphone Wireless 2005 GB
30.0% LD Telecom 2002 US
31.0% Globe Prepaid Wireless 2003 PH
31.0% Pagers 1998 US
34.8% T-Mobile Wireless 2005 GB
35.0% Maricopa County (anglers) Recreation 2002 US
36.0% Las Americas - Cable California Cable TV 2002 MX
37.0% E-mail addresses 2003 US
45.0% E-mail addresses 2004 US
46.0% Prepaid Calling Cards 2004 US
46.0% Digital cable subscribers Cable TV 2002 US
51.0% Globe Prepaid Wireless 2004 PH
52.0% Florence (AL) Times Daily (readers) Newspapers 2005 US
58.0% Snowball.com E-mail newsletter 2000 US
78.0% Touch Mobile Prepaid Wireless 2004 PH
93.0% VOOM HD TV 2004 US
93.0% Runoff at time of sale Home Mortgage 2002 US

If you can control churn within reasonable limits for your market, you are doing OK and should focus on acquisition. However let churn go wild and you are in deep problem as all your acquisition efforts will be spent chasing churned customers which will cause you to hit the SaaS growth ceiling, topic we will cover in a separate article.

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1 Comment

  1. Ethan Anderson says

    This is very interesting Vladimir, I like your definition and explanation better than most.

    Thanks for the write up.

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