Churn Rate - Metrics for Privately Held Companies

Below is one of the top universally tracked metrics we have seen in the market that strategic acquirers are focused on for privately held software companies. Prioritize this to have an edge during negotiations.

Churn Rate
Churn measures the number of customers who cancel their subscriptions for a given period. This metric indicates the long-term viability of a SaaS or software business, as higher churn means a company is losing out on customers and revenue.

What is the average churn rate?
In SaaS, the average churn rate is around 5%, and a “good” churn rate is considered 3% or less. However, this varies greatly across businesses and industries, so in reality, there is no universal “average” churn rate.

Recurly sampled over 1,500 subscription companies in 2018 from across their customer base using their platform to understand the average churn rate by industry. The average churn rate for SaaS companies landed around 4.8%, with upper and lower quartiles of 8.5% and 2.9%, respectively.

The biggest variations between average churn rate by industry depend on whether services are sold to businesses or consumers. SaaS, for example, includes a higher proportion of B2B products and services, all of which tend to experience lower churn.
Five specific factors that appear to correlate with variations in average churn rate:
·       Industry - Every industry has different factors that affect churn
·       ARPU - Higher ARPU correlates to less churn
·       Contract length - Longer contracts reduce churn
·       Company age -  Older companies experience less churn
·       Company funding - Funded companies have higher churn rates
 
Tip for reducing churn
Increase your proportion of annual contracts - Annual plans are essential when reducing churn, yet KBCM reports that nearly 20% of SaaS companies still have an average contract length of less than one year. There’s no excuse for a SaaS company not to be offering annual contracts—increasing your proportion of annual to monthly plans is one of the fastest ways SaaS companies can reduce churn.