Customer churn

Why churn matters in SaaS

Investors often say, “Growth hides churn, until it doesn’t.” Early on, fast ARR growth can mask retention issues, but over time churn compounds heavily:

• A 5% monthly churn rate = losing half your customers in a year.
• A 95% retention rate sounds good, but it means losing 25% of your base every 5 years.

High churn signals deeper problems: misaligned ICP, weak onboarding, missing features, or poor customer success.

SaaS-specific nuance

• SMB vs. Enterprise: SMB SaaS typically faces higher churn, but deals are smaller and easier to replace. Enterprise SaaS may have lower churn, but each lost account is a bigger hit.
• Product-led vs. sales-led: PLG SaaS can experience trial churn at massive volume, but that doesn’t always translate to poor paid retention. Sales-led SaaS tends to have lower trial volume but higher commitment.
• Gross vs. Net retention: Churn is best understood in relation to Net Revenue Retention (NRR). A company can lose customers but still grow revenue if upsells outweigh downgrades.
  

Common causes of churn

• Poor onboarding → customers never hit the “aha” moment.
• Mis-sold product → promises don’t match reality.
• Lack of ongoing engagement → customers go inactive before canceling.
• Competitive pressure → switching costs are low, alternatives are plenty.
• Budget cuts → especially in SMB and mid-market segments.

Pitfalls in tracking churn

• Mixing metrics: Confusing logo churn with revenue churn leads to false optimism or panic.
• Short-term focus: Looking at churn monthly without annual context can misrepresent long-term retention.
• Ignoring cohorts: Overall churn rate may look stable, but new customer cohorts could be performing worse.

Example of customer churn‍

A SaaS company starts the quarter with 1,000 customers.

• By quarter-end, 50 have churned.
• Logo churn rate = 50 ÷ 1,000 = 5%.

The same company had $1,000,000 ARR.

• Lost $100,000 ARR from churned customers.
• Revenue churn rate = $100,000 ÷ $1,000,000 = 10%.

If expansions added $150,000 ARR in the same quarter:

• Net revenue retention (NRR) = (ARR – churn + expansion) ÷ ARR
• = ($1,000,000 – $100,000 + $150,000) ÷ $1,000,000
• = 105%.

So even with 10% revenue churn, the company net grew through expansion.

How to reduce churn

• Improve onboarding with guided walkthroughs and milestone-based checklists.
• Proactively monitor usage patterns and flag at-risk accounts early.
• Offer quarterly business reviews (QBRs) to enterprise clients.
• Create tiered support: live chat for SMB, dedicated CSMs for enterprise.
• Introduce annual contracts to reduce short-term cancellations.
• Build customer communities to strengthen stickiness.

AI prompt

What to provide the AI beforehand

• Logo churn % _and revenue churn %
• Timeframe (monthly, quarterly, annual)
• Breakdown of churn by cohort (SMB vs. enterprise, geography, product line)
• Net revenue retention (NRR), if available
• Usage/adoption data (e.g., % of customers inactive after 30 days)
• Notes on customer feedback, support tickets, or competitive losses