Understanding SaaS churn rate
Churn rate is the percentage of subscribers or revenue that a recurring business loses over a given period. In subscription businesses, churn represents the primary headwind against long-term compound growth.
$$\text{Monthly Customer Churn Rate} = \frac{\text{Customers Lost During Month}}{\text{Customers at Start of Month}} \times 100$$
If you enter January with 1,000 customers and lose 50 by January 31, your monthly churn rate is 5.0%.
Test your cohort figures on our dedicated SaaS Churn Rate Calculator.
Why monthly churn compounds into severe annual loss
A common misconception among early-stage software founders is multiplying monthly churn by 12 to estimate annual losses (e.g., assuming 5% monthly equals 60% annually). In reality, churn compounds every month on a shrinking customer base:
$$\text{Annualized Churn} = 1 - (1 - \text{Monthly Churn})^{12}$$
- A 2% monthly churn results in a 21.5% annual loss.
- A 5% monthly churn results in a 46.0% annual loss.
- A 7% monthly churn results in a 58.3% annual loss.
At 5% monthly churn, nearly half of your customers vanish every twelve months, requiring heavy continuous marketing acquisition just to stay flat.
Customer churn vs. revenue churn
Software businesses must separate customer (logo) churn from revenue churn:
| Metric | Formula | Why It Matters |
|---|---|---|
| Customer Churn | Lost Customers ÷ Starting Customers |
Measures product-market fit and user satisfaction |
| Gross Revenue Churn | Lost MRR ÷ Starting MRR |
Measures the dollar impact of cancellations and downgrades |
| Net Revenue Churn | (Lost MRR − Expansion MRR) ÷ Starting MRR |
Accounts for account expansion and upsells |
When expansion revenue from existing customers exceeds lost revenue from cancellations, net revenue churn becomes negative. This creates Net Revenue Retention (NRR) above 100%, allowing the business to expand even without acquiring new logos.