What is Churn Rate?

‍Churn rate is the percentage of customers (or revenue) a subscription business loses during a period.

For a subscription business, churn rate is one of the clearest signals of retention health. At scale, even a small churn percentage can turn into many lost customers. This happens because the absolute number of cancellations grows with the customer base.

Key takeaways

• Churn rate is the number of customers lost during a period divided by customers at the start of that period.
• Customer and revenue churn diverge when churning customers aren't average-sized accounts.
• At 5% monthly churn, the compounding formula gives 46% annual customer loss, not 60%.
• Recurly's 2023 study of 1,200+ subscription businesses found an overall median monthly churn of 3.27%
• Structural churn comes from segment volatility, not product failure. The fix is market selection, not better onboarding.

What is the churn rate formula?

The basic customer churn formula is:

Customers lost during the period / customers at the start of the period x 100

Here’s how that’d look:

In this example, the business started the month with 500 customers and lost 25 customers. The churn rate is 25 / 500 x 100, or 5%.

For monthly-to-annual conversion, don't multiply the monthly churn rate by 12. That overstates churn since it treats every month as if the same customer base is still available to churn.

The correct compounding formula is:

Annual Churn Rate = 1 - (1 - Monthly Rate)^12

At 5% monthly churn, annual churn is:

1 - (1 - 0.05)^12 = 46%

That means 5% monthly churn becomes 46% annual customer loss, not 60%.

The denominator also matters. Using customers at the start of the period versus the average during the period could change the result by 10–20%.

For the full calculation walkthrough, see How to Calculate Churn Rate.

Customer churn rate vs. revenue churn rate

Customer churn rate counts the percentage of accounts that cancelled. Revenue churn rate counts the percentage of MRR lost from cancellations and downgrades. This is also called monthly recurring revenue churn (or MMR churn).

They diverge when your churning customers are not representative of your average account. Here's a common scenario:

Revenue churn can be negative when expansion from remaining customers outpaces losses. That's why investors and CFOs often watch MMR churn more than customer churn. Customer churn shows how many accounts left. Revenue churn shows the dollar impact.

For the expansion mechanics behind this, see net revenue retention. According to SaaS Metrics 2.0, the distinction between these metrics is key to measuring SaaS health.

What’s a good churn rate?

A good churn rate depends on billing cycle, customer segment, and business model. There's no single churn benchmark that works for every subscription business.

Recurly's 2023 churn study analyzed 1,200+ subscription businesses over 12 months using median values to eliminate outliers.

It found an overall median monthly churn of 3.27%: 2.41% voluntary (customer-initiated cancellations) and 0.86% involuntary (failed payments).

Segment matters more than that headline:

At 5% monthly churn, 1 - (1 - 0.05)^12 = 46% of your customer base is gone each year. The percentage feels manageable, but the annual reality is not.

Across our monthly-billed accounts churn at 3-5x the rate of annual-billed accounts. That's a reason we recommend annual pricing discussions early in the customer lifecycle.

You can model the impact with our churn rate calculator. As a practical B2B SaaS threshold, below 2% monthly churn often means the business isn't bleeding customers. Still, the best benchmark is your own cohort trend over time.

Structural vs. operational churn

Structural churn and operational churn happen for different reasons. That means they need different fixes.

Operational churn happens when something goes wrong with the product or customer experience. A customer may leave because setup was confusing, support was slow, billing failed, or the product didn't help them enough.

Structural churn happens because of the type of customer you serve. Some customers are more likely to leave because their business is unstable. For example, the following can happen to startups, restaurants, and new ecommerce stores:

• They may close
• Change direction
• Lose budget even if customers like the product.

Happy customers who still cancel are a warning sign. If customers say they were happy but still leave, the problem may be the customer segment, not the product.

The fix for structural churn is choosing more stable customers. A business may need to sell to customers with longer track records or stronger budgets. Better onboarding can help with operational churn, but it can't fix churn caused by unstable customer segments.

See root causes of churn

Run this with Churn.io. Churn.io pulls your Stripe data, segments churn by plan tier, billing frequency, and cohort. It then surfaces the customer vs. revenue churn split automatically.

No CSV exports or manual calculation needed.

See how it works or book a 20-minute walkthrough.