Churn. The five-letter word that keeps SaaS founders, revenue leaders, and investors up late at night, listening to Gong calls at 2 AM.
Customer churn is when the accounts that were paying you stop paying you.
In companies with high-touch sales and customer success motions, each churned account also means losing out on a big contract with a large annual contact value (ACV).
Keep reading to learn how you use churn analysis to understand why customers are leaving so you can improve annual recurring revenue (ARR).
What is customer churn analysis (and why do we need it)?
Churn analysis helps identify reasons for revenue loss to prevent it from happening now and in the future.
Churn analysis involves looking for patterns in product usage, identifying best- and worst-fit customers, tracking engagement with customer success, and identifying common reasons for churn.
It’s like being Tom Cruise in Minority Report.
You’ll often hear definitions like “analyzing historical churn data” or “measuring how many customers are leaving your product” get thrown around, but these miss out on a fundamental concept.
Churn analysis isn’t just about doing a calculation to produce a number—it’s about building a strategy for retaining customers and growing revenue.
You’ve heard it before, but losing customers costs a lot more than trying to gain new ones. Frederick Reichheld—who invented the net promoter score (NPS)—found that a 5% increase in customer retention grew profits by 25% to 95%.
That was in 2014. It’s safe to say that number has only grown.
Customer acquisition costs are steadily rising and companies are 17% less likely to purchase new SaaS. This has only been amplified by the recent wave of tech stack consolidation and tight budgets.
Analyzing customer churn vs. revenue churn
Analyzing customer churn in mid-market SaaS looks a lot different than it does for e-commerce subscription businesses.
You’re dealing with large accounts with multiple stakeholders, not an individual subscriber base.
That’s why it’s important to differentiate customer churn rate from revenue churn rate:
- Customer churn rate focuses on the number of customers lost
- Revenue churn rate (or gross churn rate) calculates the number of dollars lost to churn.
Both are important to measure, but revenue churn rate is the winner for most high-touch SaaS businesses. It prioritizes the right customers and saves you from falling into the trap of trying to keep everyone happy.
Noisy churn is misleading
Why is churn analysis necessary?
We tend to focus on the most “noisy” form of churn: when a customer calls their CS or AM team to tell them they’re not going to renew because of issues with customer support or the product.
But there are many other reasons for high churn:
- new buying committees
- or just a bad overall experience
All of these boil down to one issue: The buyer no longer sees the value of your solution. If they did, they would see past most of the flaws and fight against any internal objections.
Losing a key stakeholder—like a champion, admin, or sponsor—is the most common precursor to churn.
As Jay Nathan of Higher Logic explains, “the root cause is a lack of value and ROI, and all it took was someone with a fresh pair of eyes for the new sponsor to see it.”
The good news is that churn analysis not only helps improve retention rates amongst an existing customer base but also helps acquire and keep new customers.
That’s why churn analysis is so important for mid-market SaaS companies. The problem can be fixed by helping buyers get more value out of the product.
Part of the research involves identifying the type of churn we’re fighting against.
The seven most common types of churn in SaaS
There are types of churn we can control, and then those we can’t.
Voluntary churn and active churn
Voluntary churn, also known as active or deliberate churn, is the one we think about the most because it hurts the most. The same people who once called your baby beautiful are now calling it ugly. In other words, voluntary churn is when customers intentionally stop using your product.
The reasons can be grouped into a few subcategories, only some that are relevant to us.
1. Technical churn is when customers leave due to bugs, limitations, or other problems that drive them away. One example is if an integration you said would work doesn’t work for them. The only way to prevent this type of churn is to set expectations and deliver on them.
2. Reactive churn is the equivalent of rage quitting. When customers face support issues or problems that go unresolved, they cancel the contract or decide not to renew. In high-touch SaaS, this can be avoided by a great customer success and support team.
Or you can just ghost your customer completely.
3. Functional churn is when your product no longer does what your customers need it to do because their scope changed. It’s a customer behavior problem.
Let’s say you were using Calendly to book meetings for your reps, and then decided you needed a strong routing solution as well. If they can’t do that well and you decide to leave, that’s functional churn.
Avoiding this type of churn is a job for your Product Management and Product Marketing teams. By anticipating what new features the market will need and building it as part of the product roadmap, they can prevent functional churn.
4. Economic churn is one everyone’s been seeing more lately. When budgets get cut, your contract could be in jeopardy.
The only way to avoid this is to deliver a high return on investment. A great account management process and team can help sell the value of your product to customers who are on the fence, thereby reducing economic churn.
5. Acquisition churn happens as a result of discounting or expiring introductory offers. You see this all the time with “commodity” products.
For example, let’s say I signed a deal with Gong for two years and got a multi-year discount. When the price increases in Year 3, I may shift my spending to a similar solution like Chorus.
You can’t really do much about this except to avoid discounting. But once again, are these customers you even wanted to begin with?
6. Early churn is when customers leave right after the deal is signed. You don’t see this often if there’s a binding agreement in place, but there are instances where a customer starts with a proof of concept or trial run.
They could get cold feet or decide “it’s not a priority right now”. This is where an early onboarding process and stakeholder buy-in can save the deal.
Involuntary churn or passive churn
There’s also involuntary churn.
7. Involuntary churn, also called passive or delinquent churn, is a sneaky type of customer attrition. It’s a silent killer because it’s when customers are forced to stop using the product, without making the decision to end their contract.
How does involuntary churn happen? When a card expires, there’s a false positive in fraud prevention, or another issue pops up with credit card processing.
Another common one in high-touch SaaS is not being able to get in touch with your buyer at the time of contract renewal.
It sounds like something you can patch up quickly, but delinquent churn gives “your customer a decision point and extra friction”.
In fact, Paddle’s research found that delinquent churn can account for up to 40% of a SaaS company's overall customer attrition rate. Even the smallest amount, let’s say 2%, can compound over time and hurt your business.
How to calculate customer churn rates
Your customer attrition rate is a window into the health of your business and a yardstick for customer satisfaction beyond NPS.
But without context, calculating your churn rate is pointless. It’s literally just a number.
Before walking through the formula and calculations, let’s start with the endgame in mind.
What we want to gain from these calculations is to:
- be able to predict and prepare for emerging churn patterns
- determine what changes to make to our product or GTM to reduce churn
- narrow down on our best-fit customers and take action to get more of them
Then, we can start mapping out our analysis.
1. Choose our date range: First, we have to decide what period of time we want to look at. A specific month, last quarter, or year-over-year changes.
2. Overlay notable changes: Then we overlay specific moments where we changed something. Events such as new pricing plans being announced, a product having critical bugs for a month, or a competitor launching a discount program.
3. Split customers and revenue: Finally, we need to differentiate between customer churn rate and revenue churn rate, or gross churn rate. Customer churn rate focuses on number of customers lost while revenue churn rate is focused on the number of dollars lost due to churn.
Both are important, but I think revenue churn rate is the winner for most high-touch SaaS businesses. It prioritizes the right customers and saves you from falling into a trap
Remember how I said not all customers are the same? Treating an account on your premium plan the same as a free trial customer is a dangerous game.
Let’s look at an illustrative example.
Company ABC started June with $100K in monthly recurring revenue (MRR) and 10 customers. In July, the company lost 2 customers worth $35K in contractual MRR.
The customer churn rate formula is:
Customer Churn Rate = (Customers Lost / Total Customers at the Start of the Period) x 100%
So their monthly churn rate is (2 / 10) x 100 = 20%.
The revenue churn rate formula is:
Revenue Churn Rate = (MRR Churn / MRR at the Start of the Period) x 100%
For our example, revenue churn rate is ($35K / $100K) x 100% = 35%
That’s a big difference! As a business, you may have only lost two customers at a churn rate of 20%. But losing $35K when you’re at $100K is a huge hit to the bottom line.
Processes and tools for measuring customer churn
In the abstract, the formula seems simple enough. The reality is it can quickly get complicated.
That’s why it’s important to follow a structured process. What we want to avoid is going on a wild goose chase for metrics without actionable insights.
Markus Rentsch, the CEO of Remark-able, gives us a solid starting point. I’ll paraphrase and remix his framework below:
- Filter down churn to lost customers that fit your ICP and have the highest ACVs
- Segment them based on industry, size, use case, buyer personas, etc.
- Learn exactly why they churned by asking the 5 Whys
- Find recurring patterns by analyzing historical data and calculating your churn rate
- Build a “churn funnel” to prioritize churn reduction by stages of the customer journey
Unfortunately, most companies do the exact inverse. They start by crunching some numbers and saving any true customer insights for the end.
A good churn analysis involves finding and testing hypotheses. It’s detective work that requires tools for conducting the autopsy.
There are an insane amount of solutions that focus on solving for churn, and rightfully so. I’ll focus on a few examples of what I’ve seen or heard of at the last three startups I’ve worked at.
CRM and Business Intelligence
Not all churn is the same. Some customers were never really a good fit for your business.
They whine a lot, have a low customer lifetime value (LTV), barely use your product, and aren’t even the type of accounts you go after these days. They aren’t receiving value, and it’s honestly not worth your time giving it to them.
Bad-fit customers are bad for business. In fact, Gartner predicts that 2 years from now, 75% of companies will have to find ways to “break up” with bad-fit customers.
This means it’s critically important to focus your attention on good customers. The ones that fit your ICP and get the most value out of what you’re selling.
Some will still churn, and those are the companies you’ll learn the most from.
Customer Insights and Qualitative Data
Talking to different buyer personas and decision-makers at churned accounts is a key element of the churn analysis process.
This is how you learn exactly why a customer chose to not renew. Most reasons were probably discussed behind closed doors, they don’t show up in a Salesforce report.
That’s why it’s important to follow up with accounts that churned and convince them to have a brief, honest conversation with you. You need real customer feedback.
Gong calls are a good starting point. Before an account churns, the buyer leaves hints with their account management or customer success team through their messaging.
- “We’re looking into other solutions” = they found a competitor they’re exploring
- “We’re barely using it” = they need more enablement or are just confused
- “We just don’t have the budget” = they’re not able to measure the ROI
Still, many cases go unsolved and need to be reopened. That’s where surveys (Typeform) and automations come in handy.
Once an opportunity is marked as “Closed Lost” in Salesforce, RevOps can help trigger a Hubspot workflow to reach out to the buyer and schedule time for a quick call. It’s important to have these conversations shortly after the churn date, so the experience is still fresh in the ex-customer’s mind.
At a scrappy startup, someone is probably going to stand up the churn analysis program on their own. Luckily, companies don’t have to do this on their own and can outsource most of this work.
The benefit of working with a third party is objectivity. The churned customers feel less pressure to hold back or say nice things about their rep. On the other hand, the external partner isn’t necessarily influenced by internal biases or preconceptions.
In high-touch SaaS, the customer isn’t a monolith.
The customer is a complex organization with many different types of users, all who have different needs and “jobs to be done”.
A cohort analysis allows you to compare groups of users based on customer behavior and attrition rate to see where they drop off, or churn, from the product.
Understanding how users progress through your product helps identify friction points. You figure out if certain customer segments have higher or lower churn rates, and find common behaviors or actions that precede churn so you can get in front of them.
Optimizing the product experience helps users advocate for your product in a bottoms-up sales motion, especially when they’re a part of accounts that are already customers.
Churn Prediction and Customer Success Analytics Software
SaaS is playing catch up in the area of customer churn prediction. We don’t work with nearly as much customer data as an e-commerce, retail, or DTC business.
Companies like Walmart and Amazon are building sophisticated churn analytics models and algorithms that are forecasting which customers are likely to leave in real time.
In theory, the concept is simple. You gather insane amounts of historical data, find a way to structure the dataset, and then drag and drop it into a machine learning churn model that can output valuable insights and visualizations.
Akkio, for example, can pull data from Hubspot and Salesforce to find churn signals.
Right now, SaaS companies are oftentimes limited to working with NPS scores and recent product usage. That’s why most solutions fall into the category of “customer success analytics”.
Ways to reduce churn using a churn analysis
It might seem like churn happens at renewal, but the decision is usually made long before then.
Somewhere along the journey, the value of your solution begins eroding in the customer’s mind. Churn analysis helps pinpoint where these critical moments are so you can stop them from happening.
Once the contract is signed, champions are eager to get started.
They have to learn how the product works and derive tangible value to justify the spend to their C-suite.
That’s why SaaS companies measure time to value, or how quickly a user gets their first “win”. If customers can’t figure out the benefits quickly, they will churn the second they can.
A good onboarding experience gets customers excited about ways they can leverage the product in their business. It prevents buyer’s remorse.
You know there’s a problem if the time to onboard varies significantly by customer. It needs to be scalable.
Churn analysis improves the onboarding experience by revealing at-risk customers and reasons for low activation.
Let’s say your analysis shows that customers who churn are most likely to do so in the first 30 days. That means your team can prevent it from happening by getting customers up and running right away.
Or you learn that one of the reasons some of your top customers churned was because they couldn’t measure ROI. That could inspire you to teach customers how to track ROI and have your customer success team schedule additional business reviews.
A smooth handoff from sales to customer success sets the stage for your customer relationship. You want your buyers to feel like they’re going to receive a personalized experience that has been battle-tested.
Unfortunately, most companies manage onboarding and implementation through messy spreadsheet checklists and project management tools. These tools don’t give the premium-feeling experience that most CS teams are looking for.
That’s why every high-touch SaaS motion can benefit from using Dock as a customer onboarding portal.
By embedding all your onboarding materials—like implementation checklists, how-to resources, and shared goals—in one place, customers can always find what they’re looking for.
Since adopting Dock for onboarding, Loom has found that customers who engage with their Dock workspaces during onboarding have 20% higher seat allocation and 10% higher active users compared to those who don’t.
It’s simple math. For larger customers with hundreds of users, time alone can cost thousands of dollars.
Faster time-to-value saves companies money, which makes it easier for you to drive stickiness and reduce churn.
Higher adoption means people are actually using the product. It’s the easiest way to increase your stickiness.
How do SaaS companies get high adoption?
Empowering users to the point at which they can discover value within the product themselves. This can be difficult because different personas have different reasons for using your product, and general training tutorials don’t always cut it.
The role churn analysis plays here is finding the reasons for low adoption and segmenting what types of users struggle most.
For example, you might find that managers aren’t implementing the product because they’re scared to press publish on a complicated workflow that could affect their workers.
Gabe Miller-Smith, SVP of Customer Success at Procure, tackled the problem by “building out a better certification program that had badges that you could get based upon your role.” This allowed customers to educate themselves at their own pace and feel confident in using the product effectively.
The customer renewal process used to be easy.
Budgets weren’t under as much scrutiny. A happy champion could just sign or hit the renew button without needing approval from finance.
As Chris Orlob, Director of Sales at Gong, puts it, “Retention meant a freebie or a routine renewal.” Now “retention is a selling event that includes complex decision making, economic buyers, business pain, ROI, and so on.”
The economic buyer is the one with the bag. They hold the keys to the safe, and today that’s typically the CFO or COO. Instead of looking for reasons to renew, they’re looking for reasons to cancel.
So the same lofty value proposition of “your employees are happier now” or “we’re saving you time” won’t cut it. They’ll want to see hard data, historical proof, and a quick path to ROI.
This is where churn analysis informs account managers on how to navigate the process. They identify at-risk customers early on, map out buying committees, then insert the product into the customer’s strategic plan and key performance indicators (KPIs) for the next year.
Before you lose the renewal, there’s always a window to win them back or at least set up an exit call to gather churn data. Being proactive pays off.
That’s where automation comes into play. Sending early reminders helps avoid delinquent churn, whether it’s through email or within your product through Pendo.
Seems like a counterintuitive play in the game of churn.
But if you can convert buyers into customer advocates, they’re much less likely to leave.
At Beekeeper, we learned this first-hand through churn analysis. Customers who stayed with us the longest were the ones who received a white-glove experience.
That’s why we now have an executive visit program where senior leaders make every effort to meet customers on-site, even though they’re located across the globe. When you’re serving mid to high-ACV clients, this goes a long way in building trust and customer loyalty.
That’s why it’s called high-touch SaaS, after all.
If you can’t show up physically, show up virtually. Host a webinar together, have your executive team pop in for a quarterly business review, or just run well-being checks on LinkedIn.
Another way is through a customer advisory board. Making your customers feel special and included in the decision-making process makes them less likely to churn. The human community aspect brings customers together to learn how others are getting value, making it even harder for them to leave.
Summary: Churn analysis is a necessity, not a nice-to-have
Most churn is preventable through preparation and proactive conversations.
There are really only two overarching reasons it happens: either the customer feels like they’re not getting value fast enough, or the overall ROI isn’t high enough.
Churn analysis is about finding the underlying root causes across the customer lifecycle, then patching up the problems. This in turn improves customer relationships and directly impacts net revenue retention (NRR).
The exercise can become the foundation to your competitive advantage and long-term growth strategy. When competitors announce new features, they look the other way. If the customer undergoes budget cuts, you’re the last one on the chopping block.
If you conduct your churn analysis and find holes in your sales handoff or onboarding, Dock might be the help you need. Try it for free here.