Is there such a thing as a “good” churn rate?
In the dynamic and highly competitive SaaS markets, it can be hard to judge what constitutes a “good” churn rate. This is particularly true for startups that have little historical data to compare against, making churn analysis extra tricky. It's tempting for businesses to seek out industry benchmarks, and use those as gauges of success. But even if you leave to one side the accuracy of a given benchmark, there are fundamental challenges in comparing churn across different SaaS businesses.
- Maturity - an established SaaS business that has built a strong reputation and large user footprints can expect to have lower churn indicators than a startup that may be one of a number of vendors that a business is trying out.
- Business model - some churn is expected, even designed for. For example, it can be a valid business strategy to dispose of unprofitable subscribers, or to purge dormant or fake accounts. Other SaaS businesses are not designed for long-term use, such as dating apps or a job search platforms.
- Business objective - a business targeting rapid growth is likely to attract new subscribers with discounts and offers, fully expecting that only a percentage will be retained.
- Customer type - in some SaaS sectors, it's more normal to switch suppliers in search of the best deal regularly. Other sectors, such as complex technology infrastructure and business-critical systems, have far more stable subscribers and, therefore, less churn.
- Macro influences - some SaaS businesses are more subject to macroeconomic pressures, new government policies and regulatory forces. For example, a change in law may require a gambling or gaming platform to close underage accounts; or prohibit trade in cryptocurrencies. In such cases, we predict higher churn rates.
According to our studies, the average churn rates for SaaS companies are all over the map—everywhere from 1-20% of MRR (monthly recurring revenue). Therefore, a churn rate at the low end (2%) would be considered “good.”
But that doesn’t tell the whole story. Since every company, product, and market is different, it’s impossible to properly compare churn rates across different companies. There are just too many factors in play.
So what benchmarks should subscription companies aim for? What is a good churn rate?
Established companies should aim for steady, low churn
For established companies and enterprise products that have found product-market fit, revenue churn should be low and stay low. Jumping back to our ARPU data from earlier, companies with ARPUs in the $500+ range should have an average churn somewhere in the 2-4% range—but ideally no more than 6%. These numbers are backed up in our company age studies—companies over three years old should be in the same range.
Early-stage companies should aim to improve churn over time
For early-stage companies still searching for product-market fit, though, it depends. Churn in the first year tends to be much higher, often hovering around 10-15% per month (and ranging as high as 24%) as companies figure out their product marketing and pricing strategies to fit their target customers.
As you get better at finding and retaining more ideal customers, that rate should go down over time. Your best benchmark should be your own metrics from last week, last month, or last year.
The best answer I can give is: track your churn and find ways to improve your churn rate over time. Keeping the ship pointed in the right direction is more important than spending your time focusing on your specific churn rate—and certainly more important than comparing it to your competitors.