SaaS + Churn
True SaaS plays in tech are a great joy to work with because we have multiple data points that are correlated to historical revenue trends, marketing & sales spend and other variables. Our experience is that most founders struggle with not only calculating churn by also understanding the long-term and tactical impact of churn. We wanted to detail out how to calculate churn. In this example, we will be focused on B2B SaaS since B2C requires slight modification due to customer behaviors and market segmentation.
When calculating churn and MRR churn it is important not to mix subscriptions with significantly different billing periods. Annual and monthly plans should be calculated separately. To calculate churn, use this formula:
Customer Churn Rate = # of customers who churned (excluding customer that both joined and churned in that period) / Total number of customers at start of period
Designing metrics that are monitored on a regular basis is the foundation of understand churn since the right data is required to calculate the rate. Fortunately, you don’t have to create a complicated spreadsheet, export reports and crunch the numbers. Today, there are plenty of platforms that offer integrations to help you calculate this information. Services such as SaaS Optics or Chart Mogul are great solutions to automate this process, while some can be costly - it’s important to understand which type of platform is right for your size of business and stage.
Why monitor Churn? Churn rate obviously decreases your revenue but it greatly effects MOM growth rates, not allowing SaaS companies to fully enjoy their up sell and acquisition numbers. Focusing on understanding how to decrease churn is vital to reaching optimal MOM growth rates. To better understand how this is measured, you could monitor the SaaS Quick Ratio which measures the growth efficiency by looking at combined growth and churn. To calculate the Quick Ratio use this formula:
SaaS Quick Ratio = (New MRR + Expansion MRR) / (Churned MRR + Contraction MRR)
Regardless of stage in a SaaS company, designing metrics that can calculate Churn and things like the Quick Ratio can help make decisions that affect the tail-end of revenue forecasts.