Finance glossary
Churn Rate — Definition, Calculation and Thresholds
In one sentence
The churn rate (or churn rate) is the metric that SaaS founders hate to look at — but investors scrutinise first. It measures the proportion of customers or revenue lost over a given period. High churn is a sign of insufficient product-market fit. Low and controlled churn guarantees the predictability of recurring revenue.
Full definition
Customer churn rate: % of customers who cancel their subscription over a given period.
Churn rate income (Revenue Churn): % of revenue lost over a period — including terminations and downgrades.
NRR (Net Revenue Retention): % of revenue retained from a cohort, including expansion (upsell). NRR > 100% = existing customers generate more revenue despite churn.
Gross Churn: revenue lost by terminations only.
Net Churn: Gross Churn − Expansion (upsell/cross-sell).
Calculation formula
Customer Churn = Customers lost (month N) / Customers at the beginning of month N × 100
Revenue Churn = MRR lost (month N) / MRR at the beginning of month N × 100
NRR = (MRR start + Expansion − Contraction − Churn) / MRR start × 100
Why it matters
PMF indicator. Churn > 5%/month for B2B SaaS = product or targeting problem. < 2% = sticky product.
Exponential impact. Churn of 5%/month = 46% annually. Even with a strong acquisition, net growth is penalised.
Acquisition cost vs. retention. Acquiring a new customer costs 5 to 25x more than retaining one.
Valuation. Significant discount for startups with high churn. NRR > 120% = premium valuation.
Benchmarks and thresholds
Churn B2B SaaS customer: excellent < 2%/month. Good 2-3%. To watch 3-5%. Critical > 5%.
B2C customer churn: excellent < 5%/month. Good 5-8%. To watch 8-12%. Review > 12%.
NRR B2B SaaS: excellent > 120%. Good 110-120%. Healthy 100-110%. <100% critical.
Net revenue churn B2B: ideal < 0% (negative churn). 0-2% good. > 5% critical.
Limits and pitfalls
Churn by segment. The churn of small customers can be 3x higher than that of large accounts.
Churn early adopters ≠ mainstream. The first customers are more tolerant.
Misleading annualised churn. 2%/month ≠ 24% annually. Formula: 1 − (1 − monthly churn)^12.
Voluntary vs. Involuntary churn. Involuntary churn (expired card) = 20-40% of the total, recoverable by dunning.
Churn masked by growth. Always calculate churn alongside NRR.
FAQ
What is a good churn rate for a B2B SaaS? < 2% monthly (22% annual) = good. < 1% = excellent. > 5% = critical.
How to reduce churn? Proactive customer success, optimised onboarding, sticky features, pricing aligned with value, regular NPS.
Customer churn vs revenue churn? Revenue churn includes downgrades. A customer churn of 3% can coexist with a revenue churn of 5%.
What is negative churn? When expansion exceeds churn — NRR > 100%. Ideal state of a mature SaaS.
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