Why 3% Monthly Churn Isn't 36% a Year (and Other Churn Math Mistakes)

Churn looks like the easiest SaaS metric: customers lost divided by customers you had. But the way it's usually converted, compared and reported hides several mistakes, and they nearly all make the business look better or worse than it is. Here are the most common ones and how to get each right.

You can check your own numbers with the churn rate calculator, which works out customer churn, revenue churn, NRR and LTV, and converts between monthly and annual rates.

Mistake 1: multiplying monthly churn by 12

If you lose 3% of your customers each month, you don't lose 36% a year. Each month's 3% applies to a smaller base than the month before, because the customers you've already lost can't churn again. Churn compounds:

annual churn = 1 − (1 − monthly churn)^12

At 3% monthly, 97% of customers stay each month, so 0.97¹² = 69.4% are left after a year. Annual churn is 30.6%, not 36%.

The gap grows as churn rises. At 7% a month the shortcut is wrong by 26 points.

The same applies in reverse. If your annual contracts show 20% churn a year, the monthly equivalent is 1 − 0.8^(1/12) = 1.84%, not 20 ÷ 12 = 1.67%. Use the compounding formula whenever you compare a monthly-billed company with an annual-billed one.

Mistake 2: counting customers who signed up this month

The standard formula is:

customer churn = customers lost during the period ÷ customers at the start of the period

Customers who sign up during the month aren't in the starting count. But if some of them also cancel that month, they show up in "lost". Say you start with 1,000 customers, sign up 200, and lose 60, of whom 20 were new signups:

• The naive figure is 60 ÷ 1,000 = 6%.
• Churn of the customers you started with is 40 ÷ 1,000 = 4%.
• New customers churned at 20 ÷ 200 = 10%. That's an onboarding problem, not a retention problem.

Either exclude same-month signups from "lost", or divide by the average customer count across the month, which the calculator offers as the "average customers" basis. Whichever you pick, use the same method every month.

Mistake 3: treating customer churn and revenue churn as the same number

Customer churn (also called logo churn) counts accounts, so every cancellation weighs the same. Revenue churn weights each loss by what the customer paid:

gross revenue churn = (churned MRR + contraction MRR) ÷ MRR at the start
net revenue churn   = (churned MRR + contraction MRR − expansion MRR) ÷ MRR at the start

They can tell very different stories. Take a company with $100k MRR and 1,000 customers that loses 30 small customers paying $50 a month:

• Customer churn: 30 ÷ 1,000 = 3%
• Gross revenue churn: $1,500 ÷ $100k = 1.5%

If the remaining customers also upgrade by $3,000 that month, net revenue churn is −1.5%. That's "negative churn": the existing customer base grows revenue with no new sales at all.

Neither number is the right one on its own. Customer churn tells you how many customers the product fails to keep. Revenue churn tells you what that does to the business. Report both.

Mistake 4: forgetting that NRR compounds too

Net revenue retention is the flip side of net revenue churn: NRR = 1 − net revenue churn. In the example above, monthly NRR is 101.5%.

Investors usually quote NRR annually, and it compounds the same way churn does: 1.015¹² = 119.6% a year, not 118%. An annual NRR of 120% or more puts a SaaS company in the top tier, and above 100% means revenue from today's customers grows even if sales stop.

Mistake 5: underestimating how much churn moves LTV

Average customer lifetime is 1 ÷ monthly churn, so lifetime value is:

LTV = average revenue per customer × gross margin ÷ monthly churn

Because churn sits in the denominator, small changes have a big effect. At $100 a month and an 80% gross margin:

Cutting churn from 3% to 2% raises LTV by 50%, which means you can spend 50% more to acquire each customer. That's usually a better investment than a price increase of the same size.

What is a good churn rate?

As rough rules of thumb for B2B SaaS:

• Under 1% monthly customer churn is excellent and typical of enterprise contracts.
• 1–3% is healthy for mid-market.
• 3–7% is common for small-business and consumer subscriptions.
• Above 100% annual NRR is good, and 120%+ is top tier.

Benchmarks only mean something against companies with similar customers and prices. A $20-a-month tool for freelancers and a $50k-a-year enterprise platform will never have the same churn.

Check your own churn

Enter your customer counts and MRR changes in the churn rate calculator. It shows customer and revenue churn, NRR and GRR, LTV and the SaaS quick ratio, plots how a cohort decays over three years, and converts between monthly, quarterly and annual rates. To see how churn feeds into how long your cash lasts, try the runway and burn rate calculator.