Retention Rate vs Churn Rate: Definitions, Metrics, and Benchmarks

Customer retention metrics are particularly important for SaaS companies that rely on a subscription-based model. This pricing model tends to require significant spending on customer acquisition and onboarding, and to recoup that investment, you need high retention rates. If your retention doesn’t match or exceed your minimum CAC payback period requirements, you’re losing money.

With very limited outliers, a high retention rate directly correlates with top-line revenue growth for SaaS companies, while a high churn rate puts the brakes on growth.

To be successful, you must understand these metrics and how to leverage them as you make decisions about sales, marketing, pricing, customer service, customer retention strategy, and nearly every other aspect of your business.

What is customer retention rate (CRR)?

Customer retention rate measures the total number of customers you keep over a certain time period. Sometimes referred to as logo retention, customer retention rate is expressed as a percentage of the customers you retained over a given period of time.

A high retention rate indicates a high customer satisfaction rate, and increases your customer lifetime value (CLV).

How to Calculate Retention Rate

To measure customer retention rate, first identify the time period you’re measuring. Then, identify the number of customers at the start of the time period (S), the number of customers at the end of the period (E), and the number of new customers acquired during that time period (N). Then, use this formula to calculate your rate:

((E - N) / S) x 100 = Customer Retention Rate

For instance, if you had 150 customers at the start of the quarter, 25 new customers acquired during the quarter, and 85 customers at the end of the quarter, you would determine your CRR this way:

((85 - 25) / 150) x 100 = 40% Customer Retention Rate

Retention rate benchmark data

The following benchmarks are specific for SaaS companies and based on data from the end of 2020 to the end of 2021, as reported by Key Banc's 2022 Private SaaS Company Survey:

• Median Customer Retention Rate: 87% This number refers to the number of existing customers that businesses retain over a given time period. It shows how well businesses can retain and satisfy their user base.

• Median Gross Dollar Retention Rate: 86% This measures the revenue retained from existing customers over a specific period and shows how well businesses retain and grow their revenue.

• Median Net Dollar Retention Rate: 109% This is the growth or loss of revenue over a certain time period. It considers revenue expansion from upsells as well as losses from churn or downgrades. This metric gives insight into the overall health of the business and its customer base.

When assessing benchmarks and KPIs for SaaS, you have to consider the different ways of looking at these numbers. For example, the gross dollar retention rate doesn't take into account upsells and expansions purchased by existing customers. By taking these numbers into account, you get net dollar retention, which is a median of 109% for the SaaS industry.  

This means that even if you're losing customers, you don't have to lose revenue. But be careful—over a quarter of SaaS companies have a net dollar retention rate of less than 100%, meaning they’re losing customers and monthly recurring revenue. To avoid this risk, you should constantly be improving your revenue retention strategies.

What is customer churn rate?

Churn rate measures the number of customers you’ve lost over a given period of time. Like retention rates, it’s measured as a percentage. Also like retention rates, you can measure churn for any period you choose. Whether you measure monthly, quarterly, or annual churn rates, consistency is key. Always compare results based on similar periods.

A low churn rate is critical for success, and generally indicates high customer satisfaction levels. When people are happy with your product, they’re much more likely to upgrade or select add-ons. They’re also more likely to recommend you to a friend. In other words, low churn can boost your net promoter score (NPS) and monthly recurring revenue (MRR)—often at the same time.

How to calculate churn rate

To calculate your customer churn rate, you’ll only need the number of customers you had at the start of the time period (S) and the number you have at the end of the period (E). The churn rate formula is as follows:

((S − E) / S) × 100 = Customer Churn Rate

Using the same example as provided earlier, if you had 150 customers at the start of the quarter, and 85 customers at the end of the quarter, you would do the following equation to determine your churn rate:

((150 - 85) / 150) x 100 = 43.3% Customer Churn Rate

To measure your revenue churn rate, you should use a similar approach. Simply, look at the revenue you’re bringing in at the end of the period compared to the revenue you were making at the beginning of the period, making sure not to count revenue from new customers.

Churn rate benchmark data

The following benchmarks are specific for SaaS companies and are based on data from the end of 2020 to the end of 2021, as reported by Key Banc's 2022 Private SaaS Company Survey:

• Median Gross Dollar Churn Rate: 14% This shows how much revenue is lost from existing customers over a certain time period, and indicates the financial impact of customer churn.

• Median Annual Logo Churn: 13% This measures the midpoint of the percentage of customers lost during a year. It provides a benchmark for customer attrition and indicates the average customer turnover.

When trying to narrow in on a good churn rate, be sure to consider how certain time frames affect your churn calculations. For instance, if many of your customer's subscriptions end at a similar time, you may have a higher churn rate right before the renewal day than you do in the midst of their contract. Additionally, some software types may utilize month-to-month contracts, whereas others require contracts of several years at a time. All of these factors will weigh in when comparing your own churn rates to generalized industry benchmarks.

Churn rate vs retention rate: What’s the difference?

Churn and retention rates have an inverse relationship. If you start with 100 customers andlose 15, you have an 85% customer retention rate and a 15% churn rate.

It works the same way when you’re measuring gross revenue churn. If your customers are spending $100 one month and only $95 the next month, you have a 95% gross dollar retention rate and a 5% gross dollar churn rate.

With net dollar retention, you have a few more numbers to consider, but the inverse relationship is still there. Say your customers are spending $10,000 per month. One customer cancels their $100/month subscription, but other customers upgrade their plans, which brings in an extra $800 of monthly revenue. In this example, you have a net revenue retention rate of 107% and a churn rate of -7%.

Churn and retention rates are important for all businesses, but they are particularly critical for SaaS startups and ecommerce platforms that rely on subscriptions and repeat purchases. Your specific customer base, price point, and business model, along with other factors, will affect your company’s churn and retention goals. Remember this when comparing your data with industry benchmarks.

Why and how to track customer churn and retention rates

Churn and retention are two customer success metrics that provide a ton of useful information on the and long-term viability as a business. Consider their relationship and how it impacts your profitability:

• Retaining customers is often more cost-effective than customer acquisition

• Retention impacts profitability and repeat purchases

• Customer satisfaction directly affects customer retention rates

• Tracking unhappy clients via Net Promoter Score (NPS) ratings and intervening can minimize the number of churned customers

• Customer churn causes financial loss and decreased revenues

• Revenue churn leads to increased customer acquisition costs

Tracking retention and churn rates, in addition to other SaaS churn metrics, will help uncover problems before they impact the organization financially.

So, how do you track them? The easiest, and most complete, way would be to use a financial operations software like ours. Maxio makes it easy to identify churn and retention issues and make informed decisions to help keep customers happy, whether that means optimizing marketing strategies, adding upgrade features, or offering expansion plans.

We put together this free SaaS metrics template to get you started with a comprehensive set of foundational SaaS metrics (that you can trust).