Churn Definition for SaaS
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Churn is a measure of client attrition. Churn is the single most important and widely discussed subscription metric, yet it has no clear definition. To a certain degree, churn is arbitrary, churn is made up. In the end, Churn is what you define it to be, but you should clearly define what it means for your organization.
Churn has evolved as a widely used SaaS industry term that makes it easier for industry people to discuss disparate business that share the SaaS model. But, there are no audit standards for churn. There is no industry or regulatory definition of churn, or “churn rate” as it is sometimes called. In SaaS, you define a churn rate however you want. The biggest issue you will have with churn is the internal debate on how to define it.
Depending on the context, churn may be expressed as a rate or ratio, or discussed as a whole number.
Common Uses of Churn
As a renewal metric measured as a ratio
Frequently, churn is a way to describe your renewal rate, of course here presented in the “negative.” As a ratio or percentage, churn may be calculated based on renewal bookings or based on contract or customer counts.
As a loss metric measured as a whole number
Churn is also frequently expressed as the lost contract value of customers that have canceled.
As a loss metric measured as lost revenue
Popularized by Bessemer Ventures, a frequent use of Churn is revenue churn, or more specifically in their definition, MRR Churn.
What do you do with Churn?
If you sell/license one solution at one price with one contract to a homogeneous set of clients, and you have enough clients so that the “law of large numbers” might apply, then you can use a single churn rate as input to important decision making. Otherwise, a single churn number is good for chats with analysts, reporters, peers and other important but non-operational discussions.
To make the best pricing, packaging, marketing, product planning, and other decisions to maximize customer revenues throughout the customer life cycle, you need a spectrum of churn numbers that represent unique customer and market segment behaviors. Understanding segment cancellation and renewal patterns enables you to respond with appropriate and targeted measures.
To make solid business decisions, measure churn in as many dimensions as possible, such as:
- Churn by sales channel
- Churn by industry
- Churn by revenue size of client
- Churn contract value
- Churn by marketing campaign
- Churn by promotion
- Churn by buying investment time (measured in time from lead to close)
- Churn by licensed functions/modules
- Churn by functions used
And don’t forget that in addition to variance in churn by these and other dimensions, there is also the dimension of time. Is a client coming up for the third renewal as likely to cancel as an identical profile client coming up for its first year of renewal? Upon analysis, many SaaS companies find a wide range of distinct Life Cycle Renewal Rate curves within the customer base.
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