Churn rate measures how quickly you are losing customers or subscribers. It is one of the most important metrics for any subscription business, and it has an outsized effect on long-term growth that is easy to underestimate.
The Basic Formula
Monthly churn rate = Customers lost in a month ÷ Customers at the start of the month
For example, if you start January with 500 customers and lose 25 during the month:
25 ÷ 500 = 5% monthly churn rate
An annual churn rate measures the same thing over a full year:
Annual churn = Customers lost in a year ÷ Customers at the start of the year
Note that you cannot simply multiply monthly churn by 12. A 5% monthly churn does not equal 60% annual churn, because the customer base is shrinking each month. The compounded annual loss is:
1 − (1 − 0.05)^12 = approximately 46% annual churn
Why Churn Compounds Against You
Small differences in churn rate lead to dramatically different outcomes over time. At 2% monthly churn, a cohort of 1,000 customers shrinks to about 785 after one year. At 5% monthly churn, the same cohort shrinks to about 540. At 8%, you are left with roughly 370.
Every customer you lose needs to be replaced just to stay flat, and acquired again at whatever your current CAC is. High churn turns growth into a treadmill: you are running fast just to stay in place.
Churn Rate and Customer Lifetime
Your churn rate implies an average customer lifetime:
Average customer lifetime = 1 ÷ Monthly churn rate (in months)
At 5% monthly churn, the average customer stays for 20 months. At 2%, they stay for 50 months. This matters directly for customer lifetime value (LTV) calculations.
Revenue Churn vs. Customer Churn
Customer churn counts the number of customers lost. Revenue churn counts the revenue lost, which is more meaningful if your customers pay different amounts.
Gross revenue churn: Revenue lost from cancellations and downgrades, divided by starting MRR.
Net revenue churn: Gross churn minus expansion revenue from upsells and upgrades. A negative net revenue churn means your existing customers are growing revenue faster than you are losing it, which is a very strong position.
What Is a Good Churn Rate?
Benchmarks vary significantly by industry and market:
- Consumer SaaS: 3–7% monthly is common; top performers aim for under 2%
- SMB SaaS: 3–5% monthly
- Mid-market / enterprise SaaS: 1–2% monthly; some achieve under 1%
- E-commerce subscriptions: 5–10% monthly is typical; this segment has inherently higher churn
If you are early-stage and still finding product-market fit, high churn is expected. Once you have a stable core audience, churn reduction is often a higher-ROI investment than new customer acquisition.
Common Reasons for High Churn
- Poor onboarding: Customers never reached their first "aha moment" and disengaged early
- Misaligned expectations: Marketing attracted customers who were not a good fit
- Product gaps: A competitor offers something you do not
- Price sensitivity: Especially common in consumer and SMB segments
- Involuntary churn: Failed payment methods (this is often 20–30% of all churn and is largely fixable with dunning tools)
Segment your churn by cohort and tenure. Early churn (customers leaving in month 1–3) usually indicates an onboarding or fit problem. Late churn (customers leaving after 12+ months) usually indicates a product or value gap.