What is Churn Rate?
Churn rate measures the percentage of customers or revenue lost over a specific period. Customer churn (logo churn) counts the number of customers who cancel, while revenue churn measures the dollar amount of recurring revenue lost. For subscription businesses, churn is the silent killer, even small monthly churn compounds into devastating annual losses.
The Formula
Monthly Churn Rate = (Customers Lost During Month ÷ Customers at Start of Month) × 100 Annual Churn = 1 − (1 − Monthly Churn)^12
A seemingly small 5% monthly churn compounds to 46% annual churn, nearly half your customers gone every year.
Worked Example
A SaaS company starts the month with 1,000 customers, loses 35 customers, and gains 50 new customers.
- Customers lost = 35
- Starting customers = 1,000
- Monthly churn = (35 ÷ 1,000) × 100 = 3.5%
- Annual churn = 1 − (1 − 0.035)^12 = 34.6%
📌 At 3.5% monthly churn, the company loses about 35% of its customer base annually. They need to acquire at least 350 new customers per year just to maintain current revenue.
Why This Matters
Growth feasibility
If churn exceeds your acquisition rate, you're shrinking even while spending on growth. A company with 5% monthly churn needs 60% annual growth just to stay flat.
Revenue predictability
Low churn makes revenue more predictable, which improves forecasting accuracy, reduces cash flow volatility, and makes the business more attractive to investors.
Product-market fit signal
High churn (>7% monthly) is the clearest signal of poor product-market fit. Before spending more on acquisition, fix the retention problem or you're pouring water into a leaky bucket.
Common Mistakes
❌ Ignoring involuntary churn
Failed credit cards, expired payment methods, and billing errors account for 20-40% of all churn. This is the easiest churn to fix with dunning emails and payment retry logic.
❌ Not distinguishing logo vs revenue churn
Losing 10 small customers ($50/month each = $500) is very different from losing 1 enterprise customer ($5,000/month). Revenue churn tells the real story.
❌ Celebrating low churn without checking NRR
Low churn is meaningless if remaining customers are downgrading. Net revenue retention (NRR) captures both churn and contraction for the complete picture.
Industry Benchmarks
| Category | Good | Average | Poor |
|---|---|---|---|
| B2B SaaS (Enterprise) | Below 1%/mo | 1-2%/mo | Above 3%/mo |
| B2B SaaS (SMB) | Below 3%/mo | 3-5%/mo | Above 7%/mo |
| B2C Subscription | Below 5%/mo | 5-8%/mo | Above 10%/mo |
Source: ProfitWell Subscription Benchmarks
Benchmark data sourced from ProfitWell Subscription Benchmarks.