Average Churn Rate For SaaS Companies In 2023
When it comes to running a SaaS company, churn is arguably the biggest threat to your growth and success.
After all, the SaaS business model relies on long-term customer relationships. Sure, this business model is one of the most profitable today. But only if you continuously generate recurring revenue from your customers over a span of years.
In fact, even under ideal conditions, it generally takes 12 to 28 months for a SaaS business just to break even on its customer acquisition costs.
So if a customer takes off after just a few months, you actually lose money as a result of acquiring that customer. Your business won’t see any of that precious ROI from them — let alone profits.
Ready to hear more bad news? How about this: churn is inevitable.
Whether due to uncontrolled circumstances or deliberate choices, there will always be customers who pull the proverbial plug on their relationship with you.
But how much churn is too much? Is there any way you can prevent it?
Well, buckle up. Because in this article, we will talk about the average churn rate for SaaS companies and how you can reduce your churn rate.
What Is The Churn Rate?
If we’re covering all our bases here, there are a few types of churn you can track. You have your customer churn rate and revenue churn rate.
And even with revenue churn, you also have your gross revenue churn and net revenue churn rates.
And while it may be interesting to delve deeper into those topics, in this article, we will be focusing on the most straightforward churn metric — your customer churn rate. This is also sometimes known as the logo churn rate or customer attrition rate.
Your customer churn rate is the percentage of customers that cancel their subscription and stop paying for your SaaS product during a given period (usually a month, a quarter, or a year).
For example, let’s say you have 1,000 customers at the start of the month. And by the end of the month, you lost 20 customers.
That would mean your monthly churn rate for that particular month is 2%.
The Average Churn Rate For SaaS Companies
If we’re going to pinpoint a standard for all SaaS businesses without looking at their specific contexts, the average churn rate for SaaS companies is 5% to 7% for annual churn. For the monthly churn rate, it would be at 1%.
However, each SaaS business is different and has unique circumstances that may affect its churn rate.
So let’s look at general factors or categories that can affect your customer attrition rate and talk about the average for each category.
Average Churn Rate By Customer Type
The SaaS industry is huge and very diverse. You can have a wide variety of customer types.
You can either have a business-to-consumer (B2C) or business-to-business (B2B) SaaS product.
Even these categories are still pretty general. Within a B2C market, you may still have people of different demographics. And within a B2B audience, you may cater to companies of different sizes.
And each of these various customer types will have different behaviors and tendencies — including their likelihood of churning within a particular period of time.
So let’s look at various average churn rates for each customer type and cite some possible explanations why.
B2C SaaS Companies: 5.06%
According to Messaged, B2C SaaS companies tend to have a churn rate somewhere around 5.06%.
Generally speaking, B2C customers are more likely to leave than B2B customers due to their motivations for buying your SaaS product.
B2C SaaS products are usually only for the customer’s convenience, while B2B solutions can become integral parts of a company’s processes.
B2B SaaS Companies (SMB): 3% to 5%
Zeroing in on B2B customers, small and medium-sized businesses (SMBs) tend to stick with their SaaS products longer, compared to B2C customers.
However, SaaS companies catering to SMBs may still experience a higher churn rate compared to those that are targeting larger businesses and enterprises.
As reported by Eleken, the average churn rate for B2B SaaS companies that mainly target SMBs is 3% to 5%.
B2B SaaS Companies (Enterprise): 1% to 2%
Larger businesses and enterprises tend to stick with their SaaS solutions even longer than SMBs do. Especially for large enterprises, these buyers usually have customized SaaS solutions, which they often purchase through multi-year contracts.
What’s more, enterprise SaaS solutions generally come with priority customer support, dedicated account managers, and personalized customer success services.
With all these personalized efforts, customers may be more likely to stick with your SaaS product for a significant amount of time.
According to a report by Userpilot, the average customer churn rate for enterprise SaaS businesses is around 1% to 2%.
Average Churn Rate By SaaS Company Size
Another factor that could greatly affect your customer churn rate is your company size (in terms of annual recurring revenue) and maturity.
In the first place, your company’s maturity can greatly influence the types of customers you’re catering to. Newer SaaS businesses tend to target SMBs first, while more mature ones expand into enterprise markets.
But even if we take that out from consideration, your business size and maturity can still have a heavy impact on your churn rate.
Let’s see how:
Small and Medium-Sized SaaS Companies: 3%
According to the report by Messaged that we mentioned earlier, SaaS businesses with annual recurring revenue (ARR) of $1 million to $10 million tend to have a churn rate of around 3%.
Why? SaaS startups and younger SaaS companies usually focus on building their customer base. So most of their capital and profit goes to marketing, sales, or other customer acquisition strategies.
Businesses in this early stage may not be able to provide the same levels of customer support and success services as more mature companies that can easily afford it. This may increase their likelihood of churning.
Large SaaS Companies: 1%
On the other hand, the average churn rate for more mature SaaS businesses with an ARR of more than $10 million is 1%.
Bigger SaaS companies tend to focus more on building customer satisfaction, loyalty, and brand advocacy. What’s more, they usually have bigger budgets for their customer service and customer success efforts.
Naturally, placing more focus and resources on customer retention greatly reduces the logo churn rate for these large SaaS companies.
How To Reduce Your Customer Churn Rate
Measuring your logo churn rate and comparing it to the relevant industry averages is a great first step to figuring out how your SaaS company is performing.
But to make sure that you’re setting yourself up for success, it’s even more important to have a strategy in place that focuses on reducing your customer churn rate.
Here are some tips you can use:
1) Find Causes Of Churn
There are many possible reasons that a customer would decide to stop using your SaaS product. It could be due to poor product usability, customer service quality, pricing, or any number of other factors.
So take the time to survey your current customers to find out what they think about your product. Look for insights that can help you pinpoint the causes of churn.
What’s more, you can also set up an offboarding process that asks each churned customer why they decided to stop using your SaaS solution.
These methods will help you identify the primary issues that need to be addressed in order to reduce churn for your SaaS company.
2) Prevent Involuntary Churn
Sometimes, when a customer stops using and paying for your SaaS product, it’s not always intentional.
That’s what we call involuntary churn.
Most cases of involuntary churn are caused by technical problems during subscription renewals. As a result, their subscriptions lapse without the customer being aware of what happened.
For example, your customer’s credit card may be expired or maxed out. Or, there may be a delay in payment processing. Sometimes, fraud prevention safeguards may even block a customer from renewing their subscription.
One common practice to minimize involuntary churn is to set up notifications that would alert your user when their subscription is due for renewal. Emails and in-app reminders seem to work the best in this area.
You could also provide a generous grace period for customers who experience technical difficulties in renewing. This way, you would give them enough time to take action and not miss out.
What’s more, you could also use account updaters that automatically update the customer’s payment information if necessary. This is especially useful if most of your involuntary churn is caused by outdated credit card information.
3) Provide Excellent Customer Service
When a customer is frustrated with the issues they are experiencing with your SaaS product, your customer service can make or break your relationship with them.
That’s why it’s important to make sure that your customer support team has both the technical knowledge to troubleshoot problems and the people skills to build rapport with your customers.
When it comes to customer service, excellence isn’t just doing the bare minimum to keep your customers happy. It’s also going above and beyond to show your customers that you value them.
The more satisfied your customers are with the service they receive from your team, the less likely it is that they will leave.
4) Deliver Data-Driven Customer Success Services
For SaaS businesses, customer success is essential to keep your customers engaged and reduce churn.
After all, the goal of customer success is to make sure that your customers are attaining their goals with the help of your SaaS product. So if your SaaS solution is successfully helping your customers reach their desired results, they won’t even consider leaving it.
Note, however, that we mentioned the word “data-driven” there.
Data-driven customer success involves using product usage data to analyze and improve the customer experience.
You can start by monitoring what features each customer often uses and how often they are using them.
Then, you can use that data to give them personalized recommendations on how to better utilize your SaaS product and achieve their desired outcomes.
By taking a data-driven approach to customer success, you’ll be able to keep your customers engaged, reduce their need for customer support, and ultimately lower churn.
5) Perform A Cohort Analysis
Cohort analysis is an effective way to analyze and compare customer retention over time.
It involves grouping customers based on their common attributes, such as when they joined or their usage of a particular feature. Then, you can track the progress of each group and compare the differences in their retention rate.
For example, let’s say you’re grouping your users based on when they started using your SaaS product. You could track how their retention rate changes over time and see which group is more likely to churn.
This may lead to deeper insights into the quality of leads you generate during certain months of the year.
The great thing about cohort analysis is that it can help you identify trends in customer retention.
This can help you determine specific areas you need to focus on in order to reduce your user churn rate.
6) Try To Win Back Canceled Customers
Based on our earlier definition of churn, it happens when a customer cancels their subscription AND stops paying for your SaaS product.
One detail you can draw from this is that a customer that cancels their subscription is not necessarily a churned customer.
Not yet, at least.
You see, when a user cancels, their most recent payment might still be active for a few days or weeks. In that span of time, it’s still possible to win them back and avoid losing them as a customer.
You can do this by offering incentives, usually a discount. Or, if you can identify why they canceled in the first place, you may be able to offer a solution that solves their problem.
For example, they may be leaving because they no longer have the budget for your SaaS product. In this case, you can also offer a downgrade, if they don’t take the discount.
If they downgrade, it will take a bit off of your recurring revenue. But it’s still better than losing the customer altogether.
7) Build More Third-Party Software Integrations
Integrating your SaaS product with third-party software is a great way to increase customer engagement and reduce user churn.
Third-party integrations allow your existing customers to connect your product with the business tools they currently have. This increases the value they get from your SaaS solution as they can get more work done in a shorter amount of time.
What’s more, having more third-party apps integrated into your SaaS platform will make it harder for customers to stop using it.
If they do, they would have to go through the hassle of setting up all those integrations again with a different provider.
The most popular integrations are usually customer relationship management (CRM) and marketing automation solutions. But you can also consider other business tools that your target customers use, such as accounting and project management software.
Final Thoughts About The Average Churn Rate For SaaS Companies
Since churn is one of the biggest challenges for SaaS companies, it pays to understand your churn rate and compare it with industry averages.
But more importantly, you need to use whatever data you have in order to reduce your churn.
Still, every SaaS business is different. What’s causing a high churn rate for one company may not necessarily be a challenge for another.
So while there are common best practices for reducing churn, make sure you understand its underlying causes for your SaaS business so you can better address it.
That way, you can get back to focusing on growth instead of worrying about customer attrition.
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