It's a common shortcut: take your monthly churn rate, multiply by 12, and call that your annual churn rate. At 3% monthly, that gives you 36% annual. It's also wrong, and it overstates your actual churn by a meaningful margin.
The reason is compounding. Multiplying by 12 assumes you lose the same 3% of your original customer base every single month, all year. But you don't: the customers who already churned in January can't churn again in February. Each month's 3% applies to whoever's left, not to the original count.
The correct formula is 1 − (1 − monthly churn)¹². At 3% monthly churn, that works out to 1 − (0.97)¹² ≈ 1 − 0.694 ≈ 30.6%, meaningfully lower than the naive 36% estimate.
The gap grows with higher churn rates. At 5% monthly, naive multiplication says 60% annual; the compounding formula says about 46%. At 8% monthly, common for SMB-focused SaaS, naive math says 96% (implying you'd lose nearly your entire customer base every year), while the real figure is closer to 63%.
This isn't just academic. If you're using annual churn to project customer lifetime value or to set a CAC payback target, the naive figure will make your business look worse than it actually is, potentially leading to overly conservative growth or pricing decisions based on a number that was never right to begin with.
Our SaaS Unit Economics Calculator uses the compounding formula by default, so the churn, LTV, and CAC payback figures it returns are already correct, with no manual adjustment needed.
Going the other way
Sometimes you know an annual churn rate and need the monthly one, for example to plug into a monthly model. Dividing by 12 has the same problem in reverse. The correct formula is 1 − (1 − annual churn)^(1/12). For 30% annual churn, that is 1 − 0.7^(1/12), which is about 2.9% a month, not 2.5%.
The difference between 2.5% and 2.9% sounds small, but in a lifetime value calculation it changes average customer lifespan from 40 months to about 34, which lowers LTV by around 15%.