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Churn Rate vs. Retention Rate: How do they Differ?

Churn Rate vs. Retention Rate: How do they Differ?

Chetna Sabharwal
Chetna Sabharwal
October 25, 2022
•
5 min read

Back in college, Tim’s favorite thing to ask for on his birthday, Christmas, and Thanksgiving was - a new pair of high-tops. 

Sometimes he accepted other types of sneakers. 

Or hiking boots. 

But Tim’s parents and most of Tim’s aunts and cousins knew that they couldn’t go wrong if they got Tim a pair of high-tops or overall chunky sneakers. 

Today Tim works as vice president of sales at a leading SaaS company. Tim rarely has an opportunity to wear high-tops anymore.

Tim’s aunts and cousins now give him ties and pocket squares, fragrances, cufflinks, personalized stationery, and patent leather brogues. 

Tim needs to look sharp, not cool, as sales vice president 

Does this mean high-tops are now useless? That nobody wants them? 

Nearly all of Gen Z would beg to differ.

It's just that high-tops aren’t relevant in Tim’s scheme of things anymore. 

You can probably identify with this. It's not that a product or solution stopped having value. Your context changed, and the product or solution was no longer relevant. Or necessary. 

It's the same with your customers. 

They may not need the services they needed a few years ago for various reasons.

Although it’s difficult to digest the truth that some customers are bound to leave your SaaS business no matter how great your solution is, it's inevitable. It is not your fault. Don’t take it to your heart. In fact, this is part of doing business.

That said, you need to keep an eye on that exit door and try and minimize the number of customers walking through it. You want to be sure that low customer satisfaction is not the reason for the loss of customers. 

Every SaaS business - or pretty much any business - would love to achieve a 0% churn rate and 100% customer retention rate. Although this might not be realistically attainable, by monitoring these two metrics, you can maximize your revenue and maintain the growth of your customer base by lowering your churn. 

Let’s dive in and understand the concepts behind these key metrics.

What is a churn rate?

Why go after the customers who left you?

I'm gonna catch you

The customer churn rate is an excellent sales metric that can be used to analyze what exactly is causing the customer churn. When you have your answers, you can utilize that information to actually enhance your product and attract new customers or save existing customers from leaving. The churn rate sheds light on key business operations like your customer service and marketing strategies, but also on the value of your product.

Churn rate helps you build an understanding of your SaaS business’s financial health and its long-term prospects. By analyzing churn rate, you can improve the stability of your SaaS business and create realistic growth forecasts.

Or you would’ve if you’d been watching your churn rate!

How to calculate the churn rate?

Step 1:  

Determining the time frame is the first step in the churn rate calculation. The time frame you choose depends on whether you want to track the churn rates monthly, quarterly, or annually. You can also set a week as your time frame if your business is very large or if you want to track churn rates during a particular week for some reason.

Find the right time frame for your business and sector  

Remember that different time frames generate different churn analyses, so choose the one that suits your business model. For example, if your business requires customers to renew their subscriptions every month, a monthly churn rate analysis is a more sensible metric.

Step 2: 

Count the number of customers your business lost in the given time period. 

Step 3: 

Divide the number of customers lost by the total number of customers you started with at the start of the time frame.

Step 4:

Now, multiply the result by 100 to arrive at your churn rate for the time frame chosen.

Churn rate formula = (lost customers Ă· total customers at the start of time period) x 100

For example, let’s say that when the month started, your SaaS business was catering to 500 customers. At the end of the month, 50 customers canceled their subscriptions.

Using the churn rate formula in the given period, we have,

(50 Ă· 500) x 100 = 10%

Your monthly churn rate is 10%.

In other words, your SaaS business is losing customers at the rate of 10% each month.

What is the retention rate?

The churn rate measures churned customers on the basis of which businesses build strategies - or go about fixing things - to retain customers. But how do we know if our strategies are working?

Of course, a reduced churn rate can be used to infer the above, but there is another metric that works in tandem with this attrition metric.

It is…

Drumroll…

Customer retention rate

Retention rate helps you understand whether your SaaS business is able to maintain customer satisfaction and whether the strategies and efforts that you have put in use are proving to be effective. 

A retention rate that shows an incline over prior time frames indicates an increase in customer lifetime value and customer loyalty. This means that your business optimizes capital and resources in finding new customers and retaining existing customers. 

This way, the overall cost-effectiveness (and potentially also profitability) of your SaaS business can be improved because finding new customers typically calls for a higher investment of time and capital... 

Time AND money saved; wow! 

Retention rate data benefits all the core teams of your business operations, such as marketing, sales, customer service, and product management. This information helps each team optimize its strategies and enhance its overall customer journey.

Here’s a list of customer retention metrics that your SaaS business can keep track of while optimizing its strategies.

  1. Customer retention rate
  2. Customer churn
  3. Revenue churn
  4. Existing customer growth rate
  5. Repeat purchase ration
  6. Product return rate
  7. Days sales outstanding
  8. Net promoter score (NPS)
  9. Time between purchases
  10. Loyal customer rate
  11. Customer lifetime value

How is the customer retention rate calculated?

Just like we saw in our churn rate calculations, the given time period is crucial to retention rate calculation. If you sell a fast-moving SaaS solution, then a weekly or daily customer retention rate will generate an accurate analysis for you. Either way, be mindful of the selected time frame.

Here’s how to calculate your customer retention rate in 4 easy steps 

Step 1:

Choose a time period.

Step 2: 

Subtract the customers acquired over a given period from the number of customers at the end of the period. 

Step 3: 

Divide this value by the total number of customers at the beginning of the period. 

Step 4: 

Multiply the result by 100.

Customer retention rate formula = ((number of customers at the end - number of new customers acquired over the given time)) Ă· total customers at the start of time period)) x 100

For example, let’s say at the end of the month, your SaaS business that caters to 130 customers lost ten customers and gained an additional 20 customers. 

So using the customer retention rate formula in the given period, we have,

Number of customers at end of period = 130 + 20 - 10 = 140

Number of customers at the start of period = 130

Customer retention rate formula = ((140-20)/130) x 100 =

Your monthly customer retention rate is 92.3%.

Here’s some positive news!

We can say that your SaaS business is able to retain customers at the rate of 92.3% each month.

Both the churn rate and customer retention rate are essential metrics that help businesses to set fully informed benchmarks for customer satisfaction. 

Both metrics are useful, and yes, they share the useful quality of telling you if you are losing more than you are gaining. Be wary, however, of using churn rate and retention rate interchangeably.

Churn rate vs retention rate

Churn rate and retention rate aren’t the same; they’re more like twins - similar. 

The key difference between churn rate and customer retention rate is that churn rate calculates the percentage of customers lost in a given time frame, while the customer retention rate calculates the percentage of customers your business was able to retain in the given period. Customer retention rate is the inverse of customer churn rate.

Ideally, your business should aim at achieving a 0% customer churn rate, but in reality, you should target a churn rate lower than or equal to 5% per month. The final churn rate also depends on the size and industry of your SaaS business. If you operate a small business or a startup, then a churn rate of about 5% per month is considered to be a good churn rate. But if your SaaS business is large, then you should aim at a churn rate lower than 5%. If you are in a very competitive industry, then the churn rate could be higher because of the other options available to the customer. But in general, maintaining a low churn rate is better.

In contrast to the churn rate, a customer retention rate aims at achieving 100%, but in reality, businesses aim to hit more than 85%. A good retention rate also depends on the size of your company and the industry of your SaaS business. Your company’s stage in the business lifecycle also matters.  A company that has been in business for a long time and has a strong reputation automatically enjoys better trust and loyalty. In contrast, a  SaaS business that has just entered the market might need to put more effort into achieving a higher customer retention rate.

A beginner definitely struggles more than a reputed business

Despite their distinctions, churn rate and retention rate are equally important metrics that give companies the insights that they need to achieve improved customer satisfaction. 

4 tips that will help you reduce churn and improve customer retention

The next step after your rate calculations

Like all metrics, churn rate and retention rate give you a good idea of where you may need to course-correct. You can draw crucial insights from them: What are the gaps in your solution or customer experience? 

By analyzing the churn rate and starting a dialogue with the customers who left, you can identify the reason behind a canceled subscription. For example, a customer canceled their subscription because he couldn’t get understand your product or found it too complex to use. 

Maybe they don’t hate your product; they just don’t know how to use it. 

Armed with this information, you may be led to introduce onboarding tutorials or how-to videos.  

Has there been a change in the landscape? 

Similarly, retention rate can help you pinpoint effective strategies. If you find that the retention rate eight months ago was higher than what you calculated today, dig deeper! Have you changed your marketing strategies? 

Is this just a seasonal dip? 

Did your contract with a channel partner expire? 

Is there a new player who is eating into your market share? Maybe it's someone you did not even think of as a competitor. 

Like Bob Dylan says in this song - “You can't win with a losing hand”.

Use these metrics to create a sales analytics report that will help you truly turn churn rate and customer retention rate into benchmark KPIs.

Incentivize their stay

At any given time, there are a ton of other brands vying for your customer’s attention, wallet, and loyalty. Incentivize them to stay by offering promotion deals, discounts, monthly giveaways, or coupon codes. 

Provide the support they need 

Be a bro! 


The most dangerous attribute of the market is that there are other options available. If you don’t prove yourself as worthy of your customer’s trust and loyalty, then they may well offer their trust and loyalty to a more deserving party. 

One way of coming across as trustworthy is to provide readily available, genuine customer support. Your support staff should be ready to help your customers with queries, complaints, and concerns. Strong support makes the customer feel strongly about their relationship with your company and gives them the confidence that their concerns matter to your SaaS business and you will address them.

Hear the customer out

The best way to improve your strategies and increase user retention is through listening to the customer. You’re literally getting a ready-made answer on how to be better right from the horse’s mouth. Moreover, customer feedback and NPS score surveys improve the customer’s faith in your product. They can see that you are committed to improving your product and services and surveys also give them a forum to voice any unresolved frustrations or concerns about your solution.

Let your surveys play fist bag 

Wingman is all ears 

Wingman helps you understand your customer by generating insights based on how your customers interact with your business. We are an AI-driven sales intelligence platform that is determined to boost customer satisfaction.

Wingman interprets your sales calls to generate transcriptions and call metrics that help you know more about the customer, what they need, and whether your sales team, product team, and customer service team meet those needs. Wingman helps you bookmark specific durations in your calls and helps you to search across the call transcripts in a keyword-based manner. Using this, when you go back and analyze the retention rate, you have solid data points to rebuild strategies. Did you promise something in the sales call that wasn’t delivered to the customer - for example.

With Wingman, you have actionable insights that you can include all your strategies, churn rate strategy, retention strategy, sales, and marketing strategy to reach your end goal - customer satisfaction.

Book a demo today!

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Exceed your customer expectations with Wingman and improve customer retention.

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