Churn Rate

The rate at which customers stop doing business with a company, a critical metric for recurring revenue businesses and a key due diligence focus area.

Churn rate measures the percentage of customers or revenue lost over a given period, indicating customer retention and business stability.

Churn Calculations

Customer Churn:

Customers Lost / Starting Customers × 100

Example: 50 lost / 1,000 starting = 5% monthly churn

Revenue Churn:

MRR Lost / Starting MRR × 100

Example: $5,000 lost / $100,000 starting = 5% monthly

Net Revenue Retention:

(Starting MRR + Expansion - Churn) / Starting MRR

Example: ($100K + $10K - $5K) / $100K = 105%

Churn Benchmarks

Business TypeGood Churn (Annual)
Enterprise SaaS<5%
SMB SaaS5-10%
Consumer subscription10-20%
Service businessesVaries by contract

Churn in Due Diligence

Questions to ask:

  • What is customer churn by cohort?
  • What is revenue churn vs. customer churn?
  • What are the primary reasons for churn?
  • How has churn trended over time?
  • Is there seasonality in churn?

Reducing Churn Risk

In acquisitions:

  • Understand why customers leave
  • Identify at-risk customers
  • Plan retention initiatives
  • Consider churn in valuation
  • Structure earnouts around retention

Related Terms

revenue qualitycustomer concentrationrecurring revenue

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