The Mystery Of The Annual Churn Rate Formula (And How It’s Different From Monthly One)

The calculation of churn is vital in any SaaS. Its main function in a SaaS is to understand what their customer retention and the loss rate is. It also indicates WHY customers are canceling. Most SaaS prioritize monthly churn analytics as a very vital business measure.

Every business wants to keep customer churn as low as possible. The business can have a key insight into exactly how many customers were lost over the past month with this analytics. With these figures in hand, a SaaS can move into the new month knowing:

  • How many customers are currently on board;
  • How many could potentially churn;
  • What they can do differently this month to keep existing customers on board.

Annual Churn, is, however, a slightly different animal and needs to be treated differently.

Annual churn takes patience. It takes hard work and it takes time. The data will need to incubate over the year until you can start digging into it. Once it is ready, you are open to a plethora of new information that will help you build the right churn strategy.

But, what if you want to start predicting your potential churn rate for the year based on what is happening monthly? We have found the way that allows you to look at what your annual churn rate will be.

We take a look at this annual churn rate formula, what exactly it is, and how it differs from the monthly churn.

Let’s Dig Down Into The Numbers

Right, let’s have a look at the calculations. We have gone through the monthly churn calculation before, but we will refresh your memory.  

The monthly churn formula looks like this:

The number of customers who leave at the end of the period / the number of customers at the beginning of the period.

So let’s say you started with 580 customers at the beginning of the month but you lost 16 on the way.

16/580= 0.0275 which is a 2.75% churn rate.

Not bad!

What you have to keep in mind though, is that you cannot include any new subscribers during the month in this calculation.

This churn rate formula focuses on growth in the organization, and new customers are at a higher risk of churning within the same month.

This all looks quite simple, right?

Well, let’s get a bit more complicated.

Annual Churn Rate Formula

Let’s take a different look at an annual churn model.

Say, for example, that you don’t want to wait an entire year to see and analyze the data. You want to predict what the year is going to be based on what is happening in your business now.

Last month wasn’t too bad and you only had a minor amount of customers dropping out. If you carry on with this trajectory, what will it mean for your full year?

There is a formula that you can use that will be able to predict this.

This formula is not as straightforward as the previous one. With this annual churn rate formula, you can predict what your overall churn rate will be like for the year based on the month’s churn rate.  

First, you’ll need to work out what your customer retention is.

The customer retention formula looks like this:

(1 – the churn rate) ^12 = annual retention rate

So, for this example we are looking at:

(1-.0275)^12= 0.715

This, therefore, means that you have a 71.5% retention rate.

Now, to work out the annual churn rate, your formula is as follows:

1 – Annual retention rate = Annual churn rate

So, for the example:

1- .715=0.285

This translates into a 28.5% churn rate over the year, based on one month churn.

Why did we use this formula? With 12 monthly cycles, (1 – monthly churn rate) ^ 12 tells you what percentage you are left with at the end of 12 months, so the reciprocal is your annual churn rate.

Although this number does seem quite low, it does mean that you will need to be replacing 30% of your customer base every year. And, the higher your monthly churn rate, the more work and money you’ll have to spend on attracting new customers.

If you have a 5.6% monthly churn rate, which is considered the industry standard, that translates into an annual churn rate of 50%!

That means that half(!) of your customers will be lost by the end of the year. That is almost unsustainable. The cost of having to attract a new customer is almost 15 times higher than retaining a current customer. If you have to replace half of your customer base, something is obviously going wrong.

Converting Annual and Monthly Churn Figures

Not only can you predict what your annual churn is going to be, but you can also use the annual churn figure to work out what the monthly churn rate was. With this, you can work out how many customers you lost per month over the year based on the overall annual churn.

If you want to convert annual churn rate or its percentage to monthly percentage, then you can make use of this formula:

1 – ( 1 – annual churn % ) ^ 1/12= monthly churn %

Here’s a simple example to show how it works out:

Assume you start with 100 customers and have 20% annual churn. You would end with 80 after 1 year.   

100*(1-20%)=80.

Now, using this formula,monthly churn % would therefore be 1.84%.  1 – ( 1 – 20% ) ^ 1/12 = 1.84%

You can then track back, and work it out by month.

Month 1 = 100 * ( 1 – 1.84% ) = 98.16

Month 2 = 98.16 * ( 1 – 1.84% ) = 96.35

Month 3 = 96.35 * ( 1 – 1.84%) = 94.57

Month 4 = 92.83

Month 5 = 91.92

Month 6 = 89.44

Month 7 = 87.79

Month 8 = 86.18

Month 9 = 84.59

Month 10 = 83.03

Month 11 = 81.5

Month 12 = 80

Using this formula, you can have a full overview of what is happening monthly as well as annually in your SaaS.

From this, you will be able to start implementing customer retention strategies to keep those customers on board and stop the numbers from becoming too petrifying.

The Difference to your SaaS

So, what does monthly churn mean for your SaaS in comparison to the annual churn?

Not only do you calculate them differently, but you also should have different approaches to what you do with that data.

Annual churn rates can bring out the data that you need to see about seasonality. You’ll be able to look back over the year and pinpoint which were the high months, and which were the low ones.

This can be used to plan for the upcoming years and make sure that the strategy is adjusted to this factor.

Annual churn can also be a huge wake-up call for a SaaS. When you see the percentage of customers that you are losing over year, and it’s up to half of your customer base, you know you need to take immediate action.

Monthly churn allows you to have immediate insight into your customer behavior. Who is churning, why are they churning and what can you do to prevent it? If you can start creating instant reactions and responses to your monthly churn, you will see a significant decrease in your annual numbers.

A high annual churn rate lowers the customer lifetime value, reduces the attractiveness of your SaaS to investors and casts doubt on the sustainability of your business.

As soon as you start controlling churn in your business, you can start focussing on acquisition again. Not only will the shocking churn numbers drop, but you will be able to start gaining some new, loyal customers.  

Lowering monthly churn, and, in the long run, annual, is achievable by integrating tools and buttons onto your site. With these, you can instantly reach your customer, find out why they are not satisfied, and reach out to them with possible solutions to keep them on.

LessChurn offers these kinds of tools that offer customers detours to stay on as customers, and essentially, reduce your overall churn.

Leave a Reply

Your email address will not be published. Required fields are marked *

Back to Top