Churn Rate vs Retention Rate: How They Differ and Which to Prioritize

So, if you have 1,000 customers and 100 of them cancel their subscription, your monthly churn rate would be 10% and your retention rate would be 90%.

Understanding user behavior metrics like churn rate and retention rate is vital for any SaaS business.

While these two metrics may sound similar at first glance they actually measure completely different things.

In this comprehensive guide. we’ll cover everything you need to know about churn rate vs retention rate. including

Definitions of churn rate and retention rate
How each metric is calculated
Their differences and why both matter
Benchmarks for SaaS businesses
Tips for analyzing and improving both
Whether to prioritize one over the other

Let’s dive in!

What is Churn Rate?

Churn rate shows the percentage of customers you’ve lost over a given period of time. It represents customer cancellations and quantifies customer defections.

For example, if you had 100 customers at the start of a month, and 5 of them canceled by the end of the month, your monthly churn rate would be 5%.

The churn rate formula looks like:

Churn Rate = Customers Lost / Total Customers x 100

Churn rate is a critical metric because it directly impacts your revenue. Losing customers means losing their recurring monthly payments.

High churn also suggests your product or service isn’t providing enough value to retain users. Identifying and reducing churn should be a priority.

What is Retention Rate?

Retention rate measures the opposite: the percentage of customers you’ve retained over a period of time.

For example, if you had 100 customers at the start of a month, and 90 of them were still customers by the end of the month, your monthly retention rate would be 90%.

The retention rate formula is:

Retention Rate = Retained Customers / Total Customers x 100

Retention rate shows customer loyalty. High retention means you offer something customers find valuable enough to stick around. This leads to predictable revenue.

Calculating Churn Rate vs. Retention Rate

While the formulas are straightforward, accurately tracking churn and retention takes a bit more work. Here are some tips:

Set a recurring schedule – Calculate churn and retention at consistent periods, such as monthly or quarterly. Irregular periods make trends hard to spot.
Account for new customers – Your total customer count should only include customers you had at the start of the period. Don’t include newly acquired customers when calculating retention.
Consider revenue impact – Weigh churned customers by their subscription value to understand revenue impact. Losing one big customer hurts more than losing five small ones.
Track cancellations – Keep close tabs on churned customers and their reasons for canceling to identify issues proactively.

Churn Rate vs. Retention Rate: What’s the Difference?

While churn and retention may seem interchangeable at first glance, these metrics actually measure very different things.

Churn rate focuses solely on the customers you’ve lost and the negative trend of cancellations.

Retention rate focuses only on the positive trend of kept customers.

For example, say you had 100 customers last month, and 10 customers churned this month. Your churn rate would be 10%. However, your retention rate for the same period would be 90%, since you retained 90 out of 100.

Retention rate completely ignores the customers you lost and focuses on the ones you kept.

Tracking both provides a more holistic view. High churn indicates problems to fix, while high retention shows what’s working well.

Benchmarks for Churn Rate and Retention Rate

What are considered “good” or “bad” when it comes to churn and retention? Here are average SaaS benchmarks according to industry research:

Acceptable SaaS churn rate – 5-7% annual churn is generally acceptable, with under 2% monthly churn.
Good SaaS churn rate – Under 5% annual churn (under 1% monthly) is excellent.
Bad SaaS churn rate – Over 7% annual churn indicates retention issues.
Great SaaS retention rate – Over 90% annual retention is strong.
Poor SaaS retention rate – Under 80% annual retention signifies problems.

Of course, these benchmarks can vary significantly based on your niche, ideal customer lifetime, and other factors. Monitor your own baseline trends.

Tips for Analyzing and Improving Churn and Retention

Once you’re tracking churn rate and retention rate, here are some tips for further analysis and driving improvement:

Conduct cohort analysis – Analyze churn and retention trends over time for different customer segments. Identify issues.
Set targets – Establish specific churn and retention targets to hit, such as 2% monthly churn and 95% monthly retention.
Dig into cancellations – Ask for feedback from churned customers to understand the “why” behind cancellations.
Optimize at risk points – Look for parts of the customer journey with higher churn, such as onboarding, and improve them.
Survey customers – Use in-product surveys to gather satisfaction feedback and identify frustration.
Reward loyalty – Offer promotions, discounts, and perks to delight your retained customers.

Should You Prioritize Churn or Retention?

Is it better for SaaS companies to obsess over reducing churn or increasing retention?

The answer is that both deserve equal attention. Here’s why:

They’re two sides of the same coin – You can’t meaningfully improve one without impacting the other. Lower churn directly leads to higher retention.
Each provides unique insights – Churn reveals pain points, while retention shows what works well. You need both perspectives.
False confidence in retention – Focusing solely on a high retention rate can provide a false sense of security if churn is still high.
Margin for error – Having both strong retention AND low churn gives you more margin in case one metric sees volatility.

The combination of decreasing churn and increasing retention is key for sustainable business growth.

Key Takeaways on Churn Rate vs. Retention Rate

Churn rate measures cancellations and lost customers, while retention rate measures kept customers.
Though related, these metrics focus on completely different data points. Track both for the full picture.
Acceptable SaaS benchmarks are 5-7% annual churn and over 90% annual retention.
Analyze cohort trends, survey customers, and target at-risk touchpoints to improve both metrics.
Focus on reducing churn just as much as boosting retention for optimal results.

Understanding and acting on churn and retention data will grow your business by keeping more customers happy for longer. Now go keep that revenue retention strong!

churn rate vs retention rate

What is a good churn rate?

For research, I read several dozen data analyses and finger-in-the-air takes on what “good churn” looks like. Suffice it to say there are contrasting views on the topic.

Ive collated the better sources in the appendix. What follows is my own, not-quite-scientific meta-analysis:

B2C SaaS: Subscription services like Netflix or Tidal typically have higher churn than those targeting businesses, so a 3 to 5% monthly churn rate is pretty good. Anything less than 3% is very good, though B2C services are more price sensitive – churn trends much lower among services that charge less than $10 per month, for example. A monthly churn rate of 5% is equivalent to annual churn of 46% – i.e. a company with 1,000 customers would lose 460 over 12 months.
Mid-Market B2B SaaS: Anything up to 5% monthly churn is OK for a B2B SaaS that doesnt sell to big enterprises, but something around 3% is preferable if your average revenue per customer (ARPC) is above $250 per month. Anything below 2% is excellent. A monthly churn rate of 3% is equivalent to 30.6% annually – i.e. a company with 1,000 customers would lose 306 over 12 months.
Early-stage B2B SaaS: A monthly churn rate above 5% is to be expected for any early-stage company B2B SaaS, so dont worry too much if youre growing fast, and youre above that benchmark. Just monitor your trend and dig deeper if you dont see it decline as you mature. A monthly churn of 5.65% is equivalent to 50.24% annually – i.e. a company with 1,000 companies would lose 502 over 12 months, more than half.
Enterprise B2B SaaS: Products selling to large enterprises (think more than 1,000 employees) have lower churn, mainly because large companies change slowly and are billed annually. A monthly churn rate up to 2% is good. Anything less than 1% is excellent. A monthly churn rate of 1% is equivalent to 11.3% annually – i.e. a company with 1,000 customers will lose 114 over 12 months.

Good retention rates are the same, but inverted – 5% churn equals 95% retention, and so on.

Subscribe to our newsletter

Helping engineers and founders flex their product muscles

Well share your email with Substack

Check for involuntary churn

Involuntary churn typically means billing problems – e.g. expired cards, out-of-date info etc. In e-commerce, abandoned baskets are a form involuntary churn.

When to Use Churn Rate vs. Customer Retention Cohorts

FAQ

What does 5% churn mean?

What does 5% churn mean? The ideal churn rate for established businesses is around 5% to 7% in annual churn and less than 1% in monthly churn. So, if your SaaS company had 1,000 customers, this means you would only lose 50 customers per year or four to five customers per month.

What is the difference between churn rate and turnover rate?

Turnover includes both voluntary and involuntary employee departures, while attrition refers to departures that are voluntary and/or “natural”—such as retirement or a position being discontinued. Employee churn is the total number of turnover and attrition cases combined.

What is the difference between churn and renewal rate?

It tells you how many customers/dollars renewed as a percentage of those that could have renewed. It’s your contract renewal batting average. Churn is the inverse of Renewal: it tracks the number of customers (or dollars) that stop doing business with you at any time up to their contract-end dates.

Should you track customer retention and churn rates?

A high customer retention rate shows that customers are happy with the value you’re providing. Conversely, a high churn rate suggests the exact opposite. Having such insights is helpful when formulating new customer success strategies. In conclusion, it’s important to track both if you want comprehensive data.

What is Churn rate & retention rate?

Here’s what you need to know about churn rate and retention rate: Churn rate is the percentage of customers who stop using your product during a given period of time. Retention rate is the percentage of existing customers who continue using your product.

How do you calculate Revenue churn?

Revenue churn generally occurs for two reasons: existing customers pause their subscriptions or downgrade their plans. To calculate the revenue churn rate, first estimate the total revenue at the start and the end of a given period. Then subtract the two to get net revenue lost.

What is Churn rate & why is it important?

The goals and critical levels for churn rate vary from business to business. Retention rate measures the good (how often customers come back), while churn rate measures the undesirable (how often your customers leave you). A high retention rate means your business successfully attracts repeat business and establishes a solid and trustworthy brand.