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A Fresh Look at How to Measure SaaS Churn Rates

by
Dave Kellogg
Kellblog
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Details matter in calculating SaaS metrics because rates compound over time.

Sales pours Annual Recurring Revenue (ARR) into the company, while the Customer Success organization tries to prevent revenue from being wasted. - A basic equation for any SaaS company’s financial statements is: - Starting ARR + new ARR - churn ARR = ending ARR It is more efficient to use churn rates rather than renewal rates as it is more consistent and directly applicable.

Key Terminology:

  • Shrinkage: anything that makes ARR decrease
  • Expansion: anything that makes ARR increase

Key Questions:

  • What should be counted for both the numerator and denominator, and when?
  • Should we think at the product or account level?
  • To what extent should we offset shrinkage with expansion?
  • Should we use original or current Available to Renew (ATR) values?

What should be counted:

  • Logos - provides gross indication of customer satisfaction
  • ARR - provides indication on value of SaaS annuity

Guidelines for calculating SaaS Metrics:

  • How you calculate your churn affects them and reported upsell
  • Offsetting shrinkage is OK within accounts, and account-level churn rates should be reported over net or gross
  • Renewals bookings should always be taken in the period in which it is received
  • To handle ARR expansion along the way, base everything on the ATR entering the period and use retention rates

Rate Calculations:

  • Simple churn rate = net shrinkage / starting period ARR * 4
  • Logo churn rate = number of discontinuing logos / number of ATR + logos
  • Retention rate = current ARR / time-ago ARR
  • Gross churn rate = gross shrinkage / ATR+
  • Account-level churn rate = account-level churn / ATR+
  • Net churn rate = net shrinkage / ATR+
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