SaaS Churn: How to measure and reduce customer churn and contraction

Churn is the silent killer of growth. Even with strong new sales, high SaaS churn can flatten annual recurring revenue (ARR) and drag down your company’s valuation.

At Viking Growth, we differ between logo churn and contraction. When customers leave completely, it is logo churn. While contraction is when customers reduce the number of users, sites, or modules they pay for. Both can silently inhibit your growth. That’s why it’s critical to measure both logo churn and contraction, to know how to react on it and what “medecine” you should use to prevent it.

Retaining existing customers isn’t just good for growth; it’s also good for your bottom line. It’s far more cost-effective to keep a customer than to win a new one. In this guide, we’ll break down how to measure churn, what “good” looks like in B2B SaaS, and the practical steps you can take to reduce it.

Written by: Ingvild Farstad, Head of Operational Excellence (header image)

What is churn and how to calculate it?

Churn measures how much business you’re losing over time. Accurately measuring churn is the first step to improving it. Below are several types of churn in SaaS you should understand, the core formulas and what they mean in practice.

Logo Churn:

The percentage of customers who cancel their subscriptions in a given period. This metric tells you how many customers you are losing.

• Formula: Logo Churn = (Number of customers lost during period) ÷ (Number of customers at start of period)
• Example: If you started the month with 100 customers and lost 4, your logo churn is:
  4 ÷ 100 = 4%

Revenue Churn:

The percentage of recurring revenue lost during a period, including customer cancellations and contraction.This shows the financial impact of churn, which may be higher or lower than logo churn depending on account size.

• Formula: Revenue Churn = (ARR lost from contraction + ARR lost from customer cansellations) ÷ (Starting ARR)
• Example: If you started the month with $200,000 in ARR and lost $10,000 due to cancellations and contraction: $10,000 ÷ $200,000 = 5% revenue churn

Contraction:

A subset of revenue churn. Contraction occurs when existing customers reduce their spend. For example, by removing users, downgrading plans, or canceling add-ons. Important to monitor to understand the underlying reasons for the contration, even if the customer hasn’t fully churned.

Renewal Rate:

The percentage of customers or revenue that is successfully renewed at the end of a subscription term. It’s the inverse of churn and a strong signal of customer health.High renewal rates mean indicates healthy and profitable growth by telling us what percentage of our customer base actively choose to renew their subscriptions when given the chance. In other words, a great measure of customer satisfaction.

Renewal rate is a very important KPI because churn might be artifically low if it is based on the total customer base. This especially applies to fast-growing companies or companies with customers on longer contracts. This is due to the fact that many of your customers might not be able to churn even though they may wish to.

Renewal rates can be measured in absolute terms (ARR) and # of customers. Both are valuable measures to track to fight churn.

Understanding these different dimensions of churn gives you a more complete picture of customer retention and helps you decide where to take action.

Monthly vs. annual churn rate

When evaluating churn, it’s not just about the number but about the timeframe. Many SaaS companies report churn on a monthly basis, but doing so can obscure the true impact over time. Understanding the difference between monthly and annual churn is critical for accurately assessing customer retention and business sustainability. What looks like modest monthly churn can quickly become a serious threat when compounded over the course of a year.

Monthly churn is helpful for spotting short-term trends, especially in high-velocity, self-serve SaaS. A 5% monthly churn rate might seem small, but it compounds to nearly 46% annually, a red flag for long-term growth.

Annual churn matters more in B2B, where contracts are longer and customer relationships are strategic. Use monthly churn to detect issues early. Use annual churn to assess long-term retention health.

Churn Benchmarks in B2B SaaS

Understanding where your churn stands relative to the market helps you identify whether you’re in a healthy range or at risk of revenue leakage. Here’s how typical churn metrics vary by segment:

Logo Churn (Annual)

➤ Logo churn measures how many customers you’re losing each year. It’s naturally higher in SMBs, where contract sizes are smaller and customer lifespans are shorter.

Net Revenue Retention (NRR)

➤ NRR reflects the net effect of churn, contraction, and expansion. A strong NRR means you’re growing revenue from existing customers, a critical metric for valuation and long-term scalability.

Why SaaS churn matters for valuation and Investors

Churn isn’t just a customer success metric. It has a direct impact on your company’s growth rate, revenue quality, and ultimately, your valuation. Investors closely track churn because it affects key SaaS performance indicators.

Churn impacts ARR Growth

High churn limits your ability to grow, even as you add new customers. If you’re losing revenue or customers faster than you’re adding them, your net growth stalls or worse, reverses. High logo churn may signal a poor product fit, lack of onboarding, or competitive pressure.

➤ Example:

• $1M in new ARR
• $600K in churned ARR
• Net new ARR = $400K → growth rate is cut nearly in half.

Churn pulls down Net Revenue Retention (NRR)

NRR reflects how much recurring revenue you keep and grow from existing customers. High churn drives NRR down, which sends a negative signal to investors.

As investors, we view NRR as a proxy for product-market fit and long-term scalability. Best-in-class companies often have an NRR of 120% or more. If your NRR is below 100%, it means your existing customer base is shrinking.

Valuation multiples reflect churn risk

SaaS companies with strong retention and expansion (low churn, high NRR) often receive higher revenue multiples because they’re more predictable and efficient to grow.

• High churn = low predictability = lower valuation
• If churn exceeds growth, investors may discount the company heavily or walk away entirely.

Even with strong sales, high churn kills momentum and valuations. To build a scalable, investable SaaS business, you must proactively understand, monitor, and reduce churn.

How to reduce churn in SaaS

Reducing churn isn’t a single fix. Build a retention engine that starts on Day 1 and extends across the entire customer journey to reduce churn. Here are six proven strategies B2B SaaS companies use to keep customers longer and grow revenue from their base:

1. Sell to your ICP customers

Selling to your ICP customers is key to avoid churn. Customers who match you ICP have the specific problem you are trying to solve, which means they are more likely to see the ROI, stick around and expand because the solution is built for them. This is the best way to create predictable revenue over time by having healthy customer relationships, a more efficient commerical team and better product development because product feedback becomes more relevant.

2. Improve onboarding

A smooth, outcome-focused onboarding process is one of the most powerful tools for preventing churn.

• Shorten time-to-value by making it clear and fast for new users to achieve early success.
• Define and measure first-use success to determine whether onboarding is working.

3. Invest in customer success

Dedicated Customer Success teams help drive long-term value and prevent churn before it happens.

• Use proactive outreach, not just reactive support.
• Run regular QBRs (Quarterly Business Reviews) to align with customer goals.
• Implement health scoring to track customer engagement and satisfaction
• Make sure to segment your customer base for efficient interaction with all customers

4. Monitor customer health signals

Track key indicators like usage frequency, feature adoption, and support interactions to spot churn risk early. Learn how to build a customer health score →

5. Align pricing and packaging to value

Ensure your pricing reflects the value customers receive, not just what they’re willing to pay up front.

• Avoid over-discounting just to close deals.
• Offer modular packaging that fits different customer segments and maturity levels
  ➤ More on segmentation and packaging strategies →

6. Drive expansion revenue

The best defense against churn is a strong offense. Focus on growing your accounts through expansion revenue.

• Identify opportunities for upsells and cross-sells.
• Use feature add-ons to increase product stickiness and lifetime value.
• Track expansion revenue as a core KPI alongside NRR.

Conclusion: SaaS churn is everyone’s business

Churn is more than a customer success challenge; it is a growth inhibitor, a valuation risk, and a leading indicator of product-market misalignment. Whether you’re seeing logo churn, revenue contraction, or simply a lack of expansion, the impact is real. High churn leads to reduced ARR growth, lower NRR, and declining investor confidence.

However, churn can be measured, understood, and systematically reduced. With the right metrics, proactive retention strategies, and a company-wide focus on delivering value, SaaS companies can transform churn from a silent killer into a managed lever for growth.

Start by understanding your numbers. Benchmark your churn. Diagnose the drivers. Then act decisively and early.

Want to benchmark your churn against leading Nordic SaaS companies?