Imagine filling a bucket with water. You can pour water in as fast as you want, but if there is a hole in the bottom, you will never fill it. This “leaky bucket” analogy is the perfect way to describe churn in a subscription business. You spend significant resources acquiring new users, but if they leave out the back door, your growth stalls.
Churn is the silent killer of growth. A monthly churn rate of 5% might look small on a spreadsheet. However, that compounds to losing roughly 46% of your customer base every single year. That puts immense pressure on your sales team just to maintain the status quo.
By the end of this guide, you will master the calculation of both Customer and Revenue Churn. You will understand the benchmarks for your specific industry. We will also look at how AI can now predict churn before it happens.
What Is Churn Rate? (Definition and Importance)
Churn rate is simply the percentage of customers or revenue that a business loses over a specific period. It is the direct inverse of your Retention Rate. If you retain 90% of your customers, your churn rate is 10%.
This metric matters because acquiring a new customer costs significantly more than retaining an existing one. Depending on the industry, acquisition costs can be 5 to 25 times higher than retention costs. High churn destroys your unit economics, specifically the ratio of Lifetime Value (LTV) to Customer Acquisition Cost (CAC).
If your customers leave too quickly, you never recover the money you spent to get them. Churn is not just a support problem. It is a fundamental indicator of product health, sales targeting, and marketing messaging.
Customer Churn vs. Revenue Churn: Knowing the Difference
To fix a “leaky bucket,” you first need to know what you are losing. In SaaS, you must distinguish between losing logos and losing money.
Customer Churn (Logo Churn)
This measures the percentage of individual customers who cancel their subscription. It is useful for understanding overall user satisfaction and product-market fit. If this number is high, your product may not be delivering the value users expect.
Revenue Churn (MRR Churn)
This measures the percentage of revenue lost during a period. For many SaaS companies, this is more critical than customer churn. Losing one enterprise customer paying €10,000 per month hurts far more than losing 100 small business customers paying €10 per month.
Net Negative Churn
This is the holy grail of subscription growth. It happens when your expansion revenue from existing customers exceeds the revenue you lose from cancellations. This means your revenue grows even if you do not add a single new customer that month.
How To Calculate Churn Rate (Formulas and Examples)
Now we will look at the exact maths required to track your performance.
The Basic Customer Churn Formula
This is the most common way to calculate the percentage of customers leaving. You divide the number of lost customers by the total customers you had at the start.
Formula: (Lost Customers / Total Customers at Start of Period) x 100
Example: You start the month with 500 customers and lose 25.
Churn Rate = (25 / 500) x 100 = 5%.
The Revenue Churn Formula
This formula focuses on the financial impact of cancellations. It tracks the Monthly Recurring Revenue (MRR) lost.
Formula: (Churned MRR / Total MRR at Start of Period) x 100
Example: You start with €50,000 MRR and lose €2,000 due to cancellations.
Churn Rate = (€2,000 / €50,000) x 100 = 4%.
The “Adjusted” Formula
The basic formula can be misleading for high-growth companies because it ignores new customers added during the month. To fix this, you can use the average number of customers in the denominator.
Formula: (Lost Customers / ((Start Customers + End Customers) / 2)) x 100
This approach smooths out volatility if you are adding customers rapidly.
What Is a “Good” Churn Rate? (Benchmarks)
Context is vital when analysing your numbers. A “good” rate depends entirely on who you serve.
B2C / Consumer Apps. Higher churn is normal here, often hovering around 5-7% monthly. Consumers are more fickle and switching costs are low.
SMB SaaS. Expect moderate churn of roughly 3-5% monthly. Small businesses go out of business or change tools more frequently than large corporations.
Enterprise SaaS. Low churn is expected, typically 0.5-1% monthly. Enterprise contracts are annual and implementation is complex, leading to higher stickiness.
The “Rule of 40”. Investors often look at the Rule of 40. Your growth rate plus your profit margin should equal 40%. Low churn helps you maintain the high margins needed to satisfy this rule.
How To Analyse and Reduce Churn
Calculating the number is only the first step. You must move from calculation to action to plug the holes in the bucket.
Cohort Analysis
Do not just look at aggregate churn. Look at churn by “vintage,” which groups customers by the month they signed up. Are newer customers churning faster than older ones? If so, you may have broken something in your recent onboarding or product updates.
Identify Churn Reasons
Categorise every departure into “Involuntary” or “Voluntary.” Involuntary churn happens due to failed payments or expired cards. You can fix this with dunning management and card updaters. Voluntary churn is a choice the customer made to leave. You fix this with product improvements and better customer success.
Improve Onboarding
The seeds of churn are planted early. If a user does not find value in the first 30 days, they are likely gone. Review your initial user journey to ensure “time to value” is as short as possible.
The Future: AI-Powered Churn Prediction
Most companies only react to churn after it happens. The future belongs to those who predict it.
Predictive Churn Modeling
AI can analyse usage patterns such as login frequency and feature adoption. It identifies who is about to churn before they actually cancel. This allows you to intervene while the customer is still active.
Sentiment Analysis
AI tools can scan support tickets and emails for frustration signals. It detects changes in tone that a human agent might miss. This provides an early warning that a relationship is deteriorating.
Automated Intervention
When a customer’s health score drops, AI can trigger a “save” play. This might be an alert to a Customer Success Manager or an automated, personalised offer. This turns retention from a reactive scramble into a proactive strategy.
Moterra: Your AI Retention Specialist
Manual spreadsheets can only tell you what happened in the past. Moterra acts as your AI Data Analyst to help you secure your future revenue.
Don’t let customers slip away. Let the AI Data Analyst predict and prevent churn.
FAQ
- How do I calculate annual churn from monthly churn?
It is not as simple as multiplying the monthly rate by 12. You must use the formula: 1 – (1 – Monthly Rate)^12. - Should I include trial users in churn calculations?
No. Churn only applies to paying customers who stop paying. Trial users who do not convert are a conversion rate issue, not a churn issue. - What is “Logo Churn”?
Logo Churn is simply another term for Customer Churn. It refers to losing the business logo from your client list. - How does churn affect LTV?
Churn is a divisor in the LTV equation (LTV = ARPU / Churn Rate). Lowering your churn rate directly multiplies your Lifetime Value. - What is the difference between churn and attrition?
These terms are often used interchangeably. However, attrition sometimes refers to employees leaving a company, while churn specifically refers to customers cancelling.
