What it is
Churn rate is the percent of customers (or revenue) that leaves in a given period. If you start the month with 100 customers and 5 cancel, monthly churn is 5%. Simple enough.
Two flavors matter:
- Customer churn: percent of accounts that cancel. Counts every cancellation equally, even when one was a $20 hobbyist and another was a $2,000 enterprise contract.
- Revenue churn (or “net dollar retention” inverted): percent of revenue lost from existing customers. A single enterprise downgrade can wreck this even if the customer count stays flat.
Customer churn = customers lost ÷ customers at start of period Revenue churn = revenue lost from existing customers ÷ revenue at start of period
A healthy SaaS business reports both. If only one is reported, it’s usually the flattering one.
Why it matters more than you think
Lifetime value falls off a cliff as churn climbs. The formula is LTV = (ARPU × gross margin) ÷ monthly churn rate, so doubling churn cuts LTV in half. Here’s what that looks like at constant pricing:
| Monthly churn | Average customer lifetime | LTV (at $100 ARPU, 80% gross margin) |
|---|---|---|
| 1% | 100 months (~8 years) | $8,000 |
| 3% | 33 months (~3 years) | $2,667 |
| 5% | 20 months (~1.5 years) | $1,600 |
| 8% | 12.5 months (~1 year) | $1,000 |
A B2B SaaS at 1% monthly churn ($8,000 LTV) and a consumer app at 8% monthly churn ($1,000 LTV) at the same ARPU are not the same business. They cannot afford the same CAC.
What it is NOT
| What churn actually is | What people confuse it with |
|---|---|
| A loss-rate, computed against the starting cohort | Net change in customer count |
| Two different metrics (customer vs revenue) | One number |
| Compounds across months | A single annual percentage |
A SaaS reporting “5% annual churn” is misleading; that’s barely 0.4% monthly, which is unusually low. The two scales are not interchangeable.
Worked example
A subscription startup starts March with 500 customers paying $40/month. During March:
- 12 customers cancel
- 1 customer downgrades from $40 to $20
- 2 customers upgrade from $40 to $80
Customer churn: 12 ÷ 500 = 2.4% monthly
Revenue churn: starting MRR was 500 × $40 = $20,000. Revenue lost from churned and downgraded customers = (12 × $40) + ($40 − $20) = $480 + $20 = $500. Revenue churn = $500 ÷ $20,000 = 2.5%.
Net dollar retention (the opposite view) factors in the two upgrades: net revenue change = upgrades ($80 each, +$40 each above their old plan = +$80) − revenue churn ($500) = -$420. Net dollar retention = ($20,000 − $420) ÷ $20,000 = 97.9%.
Common mistakes
1. Conflating monthly and annual. “5% churn” is dangerous to quote without the period. Always specify monthly or annual; the two differ by an order of magnitude.
2. Tracking customer churn only. A SaaS losing five $50 customers and gaining one $1,000 customer looks bad on customer churn and great on revenue churn. You need both views.
3. Excluding voluntary cancellations. Some teams exclude trial-end drop-offs or downgrades from the churn number to make it look better. The number then doesn’t reflect actual revenue dynamics. Be honest about what’s included.
4. Optimistic churn in early-stage forecasting. A pre-launch founder modelling 2% monthly churn (typical of best-in-class B2B SaaS) when their product is a consumer app produces fantasy unit economics. Use a benchmark anchored in your category.
Further reading
- David Skok, SaaS Metrics 2.0. Defines the churn metrics used industry-wide.
- LTV glossary. Churn is the dominant variable in the LTV formula.
- ARR/MRR glossary. Churn is what makes ARR real or imaginary.
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