Churn rate vs retention rate: a 2022 Masterclass

Churn rate vs retention rate: a 2022 Masterclass

Churn rate.

Retention rate.

  • What’s the difference?
  • What’s the relationship?
  • How much does churn rate vs retention rate matter for my SaaS product?

That’s what this guide is here to help you with. Starting, growing and running a successful startup is far from easy. Especially when churn rate, retention rate and 1,000 other things seem to require your attention.

And when you really get it right, it drives huge interest from bigger companies…

@TechCrunch

Paddle acquires ProfitWell for $200M to bring analytics and retention tools to its SaaS payments platform.

See the tweet

Let’s talk about churn and retention rates, what exactly they are, the relationship between the two, and how you can optimize both for your SaaS company.


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Table of contents


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What is churn rate?

If you’re brushing up on churn rate vs retention rate, you most likely already have a solid idea what churn is.

Simply put, churn measures how slowly (or quickly) either users or revenue is leaving your business through cancellations, etc.

But there’s more. Let’s do a quick review of the 2 kinds of enterprise SaaS churn rates you need to worry about and how to calculate them both.

How to calculate churn rates?

Before you dive into calculating churn rates, you have to know the difference between revenue churn and user churn.

Both are calculated slightly differently and give you unique rates that tell you something different about cancellations in your business.

Let’s quickly calculate user churn as an example.

User churn measures the percentage of users who leave your product or services monthly or annually.

(Total # of customers that cancel during a time period) / (Total # of users at start of that time period)

For example, let’s say you have 100 total customers and 2 cancelled (or churned) last month.

Here’s the equation calculating churn for this scenario.

(2) / (100)

2%

Learn much more about user churn (and all about revenue churn) in our article here.

Additional reading: Calculating SaaS user and revenue churn rates

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What’s a reasonable churn rate?

Because every business is so unique, comparing your churn rate with other companies can be difficult.

But if you have a large enough sample size of companies, you can find benchmark churn rates to compare your churn rate with and even beat.

For more data, let’s take a look at 2021 subscription churn benchmarks from our friends over at Profitwell.

They analyzed data from 30,000+ SaaS & subscription companies to show how churn & cancellation rates are trending.

Some important takeaways:

  • The more customers pay per month (the higher their ARPU), the lower their churn rate.
  • B2B has lower churn rates compared to B2C and subscription e-commerce.
  • The less funding your company has received, the lower your churn (on average).

Download the report to see more data, like churn based on region, industry, etc.

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What is retention rate?

Now that we’ve clearly defined churn rate, let’s dive into retention rate.

Simply put, retention measures how slowly (or quickly) either users are continuing to be customers (instead of leaving or cancelling).

How to calculate retention rates?

Here’s a quick formula for retention rate.

(Total # of customers that don’t cancel after a time period) / (Total # of users at start of that time period)

For example, let’s say you have 100 total customers and 98 continue using it (or are retained) after last month.

Here’s the equation calculating retention for this scenario.

(98) / (100)

98%

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What’s a reasonable retention rate?

As we’ll talk about more in the next sections of this guide, retention rate and retention rate are inverses.

This pretty much means…

Churn rate + retention rate = 100%

That means you can look at the benchmark churn rates from Profitwell linked above and calculate retention rates from them through simple subtraction.

Churn rate = 5%

Retention rate = 100% – 5% = 95%

So benchmark churn rates also give you benchmark retention rates. Boom!

@SimonHoiberg

Retention. This is one of the scariest metrics to look at! Currently, FeedHive has a retention rate of around 9-12%. That is actually quite decent for a SaaS product at this stage (a retention rate above 15% is considered very good for a product in this segment)!

See the tweet

Simon’s data above taken before public access was available. It was measured using the number of closed beta users who still signed into the platform after 30 days.

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Why is customer retention so important?

If you’re running a SaaS business, your users are the ones who make it a reality.

Without them, you’re running a “business” that generates $0.

The more high-quality customers you can attract and keep in your user base, the more healthy growth you’ll achieve and the more you’ll be able to reinvest into your business.

The more customers you lose (and don’t retain), the more revenue you’re losing alongside those users. And because monthly recurring revenue is what powers your business, if you don’t retain enough customers, you’ll run out of revenue to fuel growth, operating expenses and even payroll.

That’s why customer retention is so essential. The more quality customers you retain, the more revenue the business generates.

Plus the faster your user base grows. More customers means more referrals, more word-of-mouth, etc.

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Is churn the same as retention?

Let’s look at both definitions side-by-side to really dive into churn rate vs retention rate.

Churn rate

(Total # of customers that cancel during a time period) / (Total # of users at start of that time period)

Retention rate

(Total # of customers that don’t cancel after a time period) / (Total # of users at start of that time period)

Clearly churn rate and retention rate aren’t the same at all.

  • Churn tells you about all the customers that cancelled.
  • Retention tells you about all the customers that didn’t cancel.

But there’s an even deeper relationship here…

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Is churn rate the opposite of retention rate?

Churn and retention are actually inverses of each other! That’s because the percentage of customers who cancel plus the percentage of customers who don’t cancel always add up to 100%.

If you’re a mathlete, the way to think about it is…

Churn = 1 – retention

Let’s use the examples above of churn and show them side-by-side.

You have 100 total customers and 98 continue using it (or are retained) after last month while 2 cancelled.

Here’s the equation calculating churn for this scenario.

(2) / (100)

2%

Here’s the equation calculating retention for this scenario.

(98) / (100)

98%

2% + 98% = 100%

Because churn rates and retention rates are inverses, this property will always hold true. They’ll always add up to 100% in any SaaS example!

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How to reduce churn rates and increase retention rates?

@MicroConf

When you are first starting out, you are wearing a lot of hats as a SaaS founder. The two things you have to get right if you want to stay in business: sales and customer retention.

See the tweet

Because churn rate + retention rate always add up to 100%, the two metrics will always be connected.

  • When churn rate increases (bad), retention rate decreases (also bad).
  • When churn rate decreases (good), retention rate increases (also good).

So working to decrease churn rate and to increase retention rate are both achieving the same ends.

Doing one or the other may simply require a small change in thinking…

One thing we’d recommend you try is of course integrating Driftly guided tours into your site or software.

  • Showing new users around and making their onboarding experience a great one decreases churn and increases retention.
  • Using Driftly tours to increase adoption of your most powerful features will also decrease churn and increase retention.
  • Driftly tours will turn average users into power users, meaning their retention rate will go through the roof!

Here are a few other strategies to experiment with to help tilt churn rate and retention rate in the right direction…

Product adoption

  1. Build for adoption from day one
  2. Personalize onboarding for every user
  3. Keep honing your marketing channels
  4. Implement engagement (and re-engagement) campaigns
  5. Talk to customers
  6. Build out helpful documentation
  7. Keep support a high priority
  8. Use analytics and metrics

Driftly product tours help onboard new users and adopt your product faster and more fully. Build your first tour in 5 minutes with a free trial today!

Hello, new users! Right this way…

Feature adoption

  1. Avoid common feature adoption mistakes
  2. Experiment with best practices for feature adoption

Driftly product tours can also target existing users and nudge them to get acquainted with your most powerful features. Build your first tour in 5 minutes with a free trial today!

Target a segment of existing users to announce new features to!

Pricing & billing

  1. Continue improving your pricing model
  2. Continue improving your activation model
  3. Continue improving your price points
  4. Continue improving your billing systems
  5. Experiment with best practices for pricing and billing

Use Driftly product tours to convert free trial conversion, remind customers to add credit card details, etc. Build your first tour in 5 minutes with a free trial today!

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What are additional retention metrics?

While user churn rates and retention churn rates are great ways to literally measure retention, there are other metrics that may dictate how your retention is trending.

Revenue churn

Revenue churn measures the percentage of MRR (not users) that leaves your product or services monthly or annually.

Example: Out of 10 customers paying $100/mo, 2 cancelled last month. That’s $200 / $1,000 = 20% revenue churn

This metrics tells you if smaller customers are churning or bigger ones are. That means it also tells you if bigger/smaller customers are being retained.

Expansion revenue

Expansion revenue measures the growth of MRR that comes from existing customers, not new ones (upgrading tiers, buying add-ons, etc).

Example: Out of 10 customers paying $100/mo, 2 upgraded to $200/mo plans last month. That’s $200 of expansion revenue.

This metrics tells you if existing customers are not only being retained, but continuing to expand their usage of your product as part of their product adoption cycle.

Monthly Active Users (MAUs)

Monthly Active Users measures the number of total users who have been active in your software at least 1 time in the past 30 days.

Example: Out of 100 users, 73 took at least 1 action last month. That’s 73 MAUs (and a 73% active user base).

This metrics tells you if the users you retain are actually getting value from your product, not just paying for it as a tool they forgot about.

Lifetime Value (LTV)

Lifetime Value is the total revenue generated by your average customers since they first became paying customers.

Example: 10 customers have been paying $100/mo for 1 year (12 months). That’s $1,200 LTV.

This metrics tells you if retention is truly leading to your business generating more revenue from customers.

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What’s next?

There you have it.

You started this blog post wondering, “what’s the difference between churn rate and retention rate?”

Hopefully you’ve learned a thing or two. Not just about actions you can take to increaser retention and lower churn, but to understand the nuances to truly make sense of your SaaS metrics.

If you can get retention rates to a level that can really grow your customer base, you can run one hell of a SaaS business.

You got this!

If you have any questions or want to chat about feature adoption, don’t hesitate to ask Driftly’s co-founders on Twitter!


Implement product tours in just 5 minutes

Driftly Homepage With Tour

Use no-code product tours to nudge users towards that WOW moment. Guide your customers towards the most impactful areas of your software as they breeze through onboarding, adopt core features and become life-long power users.