Saturday, October 16 , 2021

Calculation of churn rate for saas platform

In its simplest form, customer outflow can be calculated as the number of customers you have lost to the total number of customers. By dividing one indicator by another, you get a “customer outflow” as a percentage of the total base.

Using this formula, you can calculate the outflow for the entire life of your saas platform. The resulting value will help you answer the following question:

Of all the users that my service attracted all the time, how many did not want to return and make a repurchase?

How to understand that the client has left? It all depends on your business. To do this, you must evaluate the information about your customers. Typically, the monetization of SaaS services is based on a subscription model, so it’s easy to calculate: the user has not renewed the subscription, which means he has left.

For online stores where payment is not done on time, but “by the piece” (in this case, we are talking about cart abandonment), making this a little more difficult. First, segment customers by frequency of purchases, and then find the moment when your data says that if the user did not buy at a particular moment, most likely he left forever.

For example, you segment your users by purchase frequency and find that about 95% of customers who have not purchased within a year never return to purchase. Then, based on the data, you can use the year as a starting point for calculating the outflow. This is not an ideal assessment, but an excellent option for a quick check of system performance. This is also useful information to reduce the outflow, but more on that later.

Outflow for the period

The outflow of customers for all time is a powerful statistical metric, but for the convenience of constant analysis it is easier to consider outflow for a period.

Outflow for a period depends on the number of users who left in a particular period. This is often easier to formulate than to calculate. For this, you may find the following formula useful. In it, you express the customers who have left as the difference between the number of users for this period and users for the past period, taking into account new users.

To make it clearer, let’s imagine that you had 100 customers in the last quarter, and this one – 125. 30 of them are new users. You want to calculate the outflow for the period. You start the calculation with the number of users left:

Despite the fact that your subscriber base has grown from 100 to 125 this month, 5 users are still gone. Some analysts are distracted by figures showing growth, and cannot investigate the outflow.

It is important to note that you may have an outflow even during growth. In fact, your growth is the difference between attraction and outflow, so reducing the outflow has a big impact on your growth and revenue, and sometimes this effect is even greater than attracting new users.

Returning to our example, we calculate the level of outflow for the quarter:

That’s all. Easy and fast. Now that you have an outflow indicator, you have opened the door to a few more related indicators of your business growth.

What metrics is affected by the churn rate in saas platform

Average Customer Lifetime (ACL) – Average customer lifetime

The outflow rate is inversely proportional to the lifetime of the user on your site. Divide 1 by the outflow indicator for the period and estimate how many periods (months, quarters or years) the average customer will be with you.

For example, if your average annual outflow rate is 20%, then the average customer lifetime is 1 / 0.2 = 5 years. Similarly, if 4% of users leave every week, then the ACL will be 25 weeks (1 / 0.04).

The average client lifetime is a very useful variable that can be used to calculate other user metrics, including LTV.

Customer Lifetime Value (LTV) – income from the client for the entire period of his life in the service

One way to calculate LTV is to split ARPPU at Churn Rate.

ARPPU is revenue per one paying user.

Outflows directly affect your income. The lower the churn rate, the longer users will stay in the product and, accordingly, carry more money. That is why all companies strive to minimize churn and keep the user longer. Let’s see how this can be done.

Which outflow is considered acceptable for Saas platform?

It all depends on your business, its reputation, “maturity”, market and other factors.

For SaaS services, a churn rate of less than 3% is considered good.

At first, many startups have difficulty with the outflow. Its indicator can be 15% or more. This is normal, since the product only adapts to the market and is constantly “twisted” according to the requirements of the audience. Then this indicator should decrease and stabilize.

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