As SaaS companies strive for growth, there is a need to keep churn rate under control by putting their efforts into churn reduction. Losing too many customers means your customers are unhappy and your product is failing to meet their needs. If your churn rate gets too high, then your company will soon go out of business.
Every SaaS business is aiming to create happy and loyal customers that actively want to use their products and services. In this guide, we will consider what customer churn is, why it’s important, and strategies you can use to keep churn down.
Customer churn is one of the most important SaaS metrics to measure. It tracks the percentage of customers that cancel or fail to renew their subscription over a given time frame, such as a month or a year.
Churn rate is crucial for SaaS companies whose customers pay on a recurring model. Customers on monthly plans are much more likely to churn than those on annual plans, because they have 11 more decisions to make on whether they want to keep doing business with you.
Churn reduction should be the focus of all growth-oriented SaaS companies. You have to convince your customers repeatedly that your product is worth the license fee.
There are many reasons for churn:
Whatever the reason for customer churn, businesses need to know what type it is so they can stand a chance of correcting it.
Voluntary churn is when the customer makes the conscious decision to actively cancel their subscription with your SaaS business. They no longer want to be a customer of your company. Involuntary churn, on the other hand, happens when a customer fails to pay for their subscription and the business cancels the service. Customers might fail to pay when there is a lack of funds in their account or their card has expired.
Hard churn happens when there is a single event that causes customers to cancel their subscription, while soft churn is when there are a range of factors causing customers not to want to renew. Hard churn, for example, might be when a customer encounters a stage in your product where it is not a good fit for their use case. In soft churn, maybe customers decide over a period of time that your product represents less value than your competitor, so then they decide to switch.
Dollar churn is your churn rate measured in dollars or whatever your particular currency is, while customer churn is the number of customers who leave your business. It’s worth looking at both as certain customers are worth much more to your business, so if they churn this will have a much bigger impact on your monthly recurring revenue (MRR) or annual recurring revenue (ARR).
Proactive churn occurs when your customer proactively goes out of their way to terminate their subscription, whereas reactive churn is when a customer passively lets the account cancel, perhaps through failing to update their payment details. Accounts who have reactively churned can be easily recovered whereas proactive churners are a lot harder to win back.
Happy churn happens when your customer uses your software for a specific timeframe and then cancels your service because they don’t need it anymore. The customer has a positive experience and would consider returning to your business in the future. This type of churn may cause your business to look at whether your software has repeatable value.
Fake churn is when customers cancel your software during the money back guarantee period, which you might want to consider separately.
A SaaS business cannot only acquire new customers. Retaining existing customers is equally, if not more, important. Customer retention is the flip side of customer churn: a 3% churn rate equals a 97% retention rate.
A 1% reduction in churn could mean a 38% increase in your ARR over three years. The impact of churn reduction management cannot be overstated.
Customer retention is typically managed by your customer success team – they ensure that your customers continue to return value from your product, and ensure that they will repeatedly renew their subscription.
Just a 5% increase in customer retention can result in a 25-95% increase in overall revenue. When you reduce churn, you significantly enhance your company’s profits in a powerful way than simply acquiring new customers.
Recurring customers spend more with your company over time and have a higher lifetime value. Loyal and satisfied customers have a bigger value to SaaS companies than fickle and disloyal customers.
There are a few signs that you need to be aware of that indicate customers might be about to churn.
Direct feedback from your customers about how unhappy they are with your product or service is a strong indication that they are about to churn. They might post negative reviews online or leave angry social media comments. Even if they don’t overtly mention leaving your company this doesn’t mean they aren’t considering it.
If a customer has little to no support tickets this could mean that they aren’t fully engaged in your product, and haven’t spent time trying to work it out. This could then lead to your product being abandoned later down the line as a solution that never worked properly for them.
If your customer has too many support tickets, it could mean they are having a hard time learning to use your product. Maybe they are encountering a lot of bugs, or the product just isn’t working well for them.
Either way, too few or too many support tickets may signal that your customer is at risk of churn.
Surveying your customers is a good way to find out how they feel about your product or service. If your customer gives you a detractor or even a neutral score on your NPS survey, you know it’s time to contact them to see how you could help. When your customer gives you a low score, this means they are at risk of churn and you have to intervene to find out why this is.
When customers get in touch with you asking about discounts or changes in the contract just before they are up for renewal this might suggest they are in danger of churn. They might be having to justify why your product is necessary to their superiors or they may have found a competing product that seems to offer the same service for less money. Taking action and reminding customers why your product is valuable is key here.
The good news is there are a lot of proactive strategies you can take to reduce customer churn.
The experience your customers have with first using your product has a big impact on whether they are likely to churn later down the line. You need to reduce your customer’s time to value which is the point where they start to find success with your product.
Focus on a single way to guide your users to success and then optimize your onboarding process to funnel users towards their end goal. When showing users around your product, keep details to a minimum to avoid inundating them with too much information.
Welcome emails have some of the best open rates of any emails. Take this opportunity to welcome your users to the product and strike while the iron is hot. Send them recommendations of what they can do with their new product, how it will benefit them, and explain how they can get started.
Make sure your welcome emails are from a real human, like your customer success manager. Enable customers to reply to the email in case they have questions and make it clear that you are keen to hear from them personally.
When customers are very used to using your product they often aren’t aware of product features that could really benefit them. They can end up using your product for a very narrow use case and ignoring other ways in which they could use the software.
It can be hard to break user habits and foster new behaviors but it’s important to try and make users aware of all your core functionality. Ensure that customers are getting the full use out of your software by using tooltips that can highlight features they are not yet using.
When a customer first starts using your product they’ll be excited to explore all the new features, but as time goes on the shine starts to wear off and customers are less interested in your product. You need to fan the flames and retain their interest before they start thinking that the grass is greener elsewhere.
Follow their journey and celebrate milestones they hit with your app, whether that’s setting up their first integration, completing a product tour or inviting their coworkers to join the account. Send them congratulatory emails when they meet your success criteria to show customers you are tracking their progress.
One really powerful way to engage customers and ensure you continue to retain them is by providing helpful content. Show your customers you care about them outside of using your product and deepen their connection with your brand. Content that helps customers achieve their goals and learn more about relevant topics means you are adding value to their experience.
Users that are highly engaged in your blog, social media and newsletter content are much more likely to stick with your company than if you didn’t provide this content for them.
When your sales team is trying to attract new customers, there is often a lot of personal contact as your sales reps get to know your customers and find out what they want from your product. This valuable knowledge often gets forgotten about after customers sign up and start using your product.
That’s why you need a dedicated customer success team to work closely with your customers and develop human relationships with them. You need a thorough handoff with your sales team so your CSMs are armed with the knowledge collected in the first stage of the customer journey.
When customers are regularly speaking with your customer success managers, you can head problems off early and minimize churn.
When companies reduce churn, metrics across the board start to improve. Retaining customers over the long-term is the key to sustainable growth and should be the focus of all your customer success efforts. Loyal, satisfied customers are the key to a successful SaaS business that will survive in the future.
Churn reduction software like Churn360 can help you monitor your customers’ health and catch churn before it becomes a problem. You can check whether customers are meeting important milestones and keep track of how they are moving through the customer journey. Health scores monitor different parameters of your customers to come up with a score that tells you the likelihood of the customer churning, so you can do something about it.
Keep funneling your customers towards success and you’ll be able to keep your churn rate under control. Offering a great product is only one component of the entire picture of retaining customers, as factors like onboarding and customer success come into play. Invest in your customers across the board, and you’ll see your churn rate begin to drop.
Churn refers to the rate at which customers are canceling their subscription to your SaaS product.
To work out your churn rate, pick a certain amount of time, such as yearly, quarterly, or monthly. Find out the number of customers you had at the start of the period of time and the number who canceled during the same period. Divide the two numbers: Lost Customers ÷ Total Customers at the beginning of the time period. Finally, multiply the number by 100.
It’s important to reduce churn because it has a big impact on your company’s revenue. It’s much cheaper to retain an existing customer than it is to acquire a new one. Without retaining a substantial customer base, it’s impossible for your business to grow and meet its full potential.
Churn is a problem because it means your product is not sustainable. Customers aren’t finding value in your software or maybe your business isn’t fulfilling the promise you made to them during the sales and marketing phase. A high churn rate could be a sign of a deeper problem with your software that needs to be addressed immediately.
Users churn for all sorts of reasons, which could range from being dissatisfied with your product or service or simply having their needs changed. Some churn can be recovered from, such as reaching out to users who have had a negative experience with your brand, while other churn is not recoverable. If a user simply doesn’t like your software or has no need for it, you won’t be able to win them back.