Churn Rate

What it is

Churn rate is the percent of customers (or revenue) that leaves in a given period. If you start the month with 100 customers and 5 cancel, monthly churn is 5%. Simple enough.

Two flavors matter:

• Customer churn: percent of accounts that cancel. Counts every cancellation equally, even when one was a $20 hobbyist and another was a $2,000 enterprise contract.
• Revenue churn (or “net dollar retention” inverted): percent of revenue lost from existing customers. A single enterprise downgrade can wreck this even if the customer count stays flat.

Customer churn = customers lost ÷ customers at start of period Revenue churn = revenue lost from existing customers ÷ revenue at start of period

A healthy SaaS business reports both. If only one is reported, it’s usually the flattering one.

Why it matters more than you think

Lifetime value falls off a cliff as churn climbs. The formula is LTV = (ARPU × gross margin) ÷ monthly churn rate, so doubling churn cuts LTV in half. Here’s what that looks like at constant pricing:

Monthly churn	Average customer lifetime	LTV (at $100 ARPU, 80% gross margin)
1%	100 months (~8 years)	$8,000
3%	33 months (~3 years)	$2,667
5%	20 months (~1.5 years)	$1,600
8%	12.5 months (~1 year)	$1,000

A B2B SaaS at 1% monthly churn ($8,000 LTV) and a consumer app at 8% monthly churn ($1,000 LTV) at the same ARPU are not the same business. They cannot afford the same CAC.

What it is NOT

What churn actually is	What people confuse it with
A loss-rate, computed against the starting cohort	Net change in customer count
Two different metrics (customer vs revenue)	One number
Compounds across months	A single annual percentage

A SaaS reporting “5% annual churn” is misleading; that’s barely 0.4% monthly, which is unusually low. The two scales are not interchangeable.

Worked example

A subscription startup starts March with 500 customers paying $40/month. During March:

• 12 customers cancel
• 1 customer downgrades from $40 to $20
• 2 customers upgrade from $40 to $80

Customer churn: 12 ÷ 500 = 2.4% monthly

Revenue churn: starting MRR was 500 × $40 = $20,000. Revenue lost from churned and downgraded customers = (12 × $40) + ($40 − $20) = $480 + $20 = $500. Revenue churn = $500 ÷ $20,000 = 2.5%.

Net dollar retention (the opposite view) factors in the two upgrades: net revenue change = upgrades ($80 each, +$40 each above their old plan = +$80) − revenue churn ($500) = -$420. Net dollar retention = ($20,000 − $420) ÷ $20,000 = 97.9%.

Common mistakes

1. Conflating monthly and annual. “5% churn” is dangerous to quote without the period. Always specify monthly or annual; the two differ by an order of magnitude.

2. Tracking customer churn only. A SaaS losing five $50 customers and gaining one $1,000 customer looks bad on customer churn and great on revenue churn. You need both views.

3. Excluding voluntary cancellations. Some teams exclude trial-end drop-offs or downgrades from the churn number to make it look better. The number then doesn’t reflect actual revenue dynamics. Be honest about what’s included.

4. Optimistic churn in early-stage forecasting. A pre-launch founder modelling 2% monthly churn (typical of best-in-class B2B SaaS) when their product is a consumer app produces fantasy unit economics. Use a benchmark anchored in your category.

Further reading

• David Skok, SaaS Metrics 2.0. Defines the churn metrics used industry-wide.
• LTV glossary. Churn is the dominant variable in the LTV formula.
• ARR/MRR glossary. Churn is what makes ARR real or imaginary.