Whether you’re a SaaS (software as a service) start-up founder or part of a team at a large enterprise, the last thing you want is high customer churn. While some degree of churn is inevitable, you should thrive to keep it as low as possible.
But don’t worry – a high customer churn rate for SaaS companies is not a death sentence. On the contrary, it’s a chance to take a close look at your business and figure out ways to make it even better for both your customers and your bottom line.
In this guide, we’ll show you how to reduce your customer churn rate and keep your business growing strong.
What is SaaS customer churn?
The term “churn” refers to the rate at which customers stop using a product or service. In the case of SaaS platforms, this typically refers to user accounts that are cancelled or deactivated before they are renewed.
There are four main types of churn that SaaS businesses should be aware of.
SaaS user churn
This is the number of customers or users who cancel their subscription or do not renew it. Here is a reminder of the formula used to calculate customer churn:
For example, if you have 1,000 paying customers at the beginning of the month and lose 100 of them by the end of the month, your user churn rate would be 10%.
User churn can be further divided into two distinct types:
- Voluntary churn: This is when a user chooses to cancel their subscription. This could be for any reason, such as not liking the service, not being able to afford it anymore, or finding an alternative.
- Involuntary churn: This is when a user’s account is cancelled by your company, either because they’ve failed to pay or because they’ve violated your terms of service.
This type of churn refers to how much money a SaaS company loses when customers end or cancel their subscriptions. To get this figure, simply subtract the recurring revenue from cancelled contracts from the total recurring revenue at the beginning of the period.
Gross churn is the total amount of revenue lost from all cancelled contracts, regardless of whether those customers were replaced by new ones. This is the most basic and easy-to-calculate churn rate, but it doesn’t give you the full picture.
Net churn is a more accurate measure of how much your business is actually losing from customer churn. To determine your net churn, get the total amount of revenue you’ve lost first. Then, subtract any revenue you’ve gained from expansions, reactivations, and updates. This will give you your net churn rate.
How to calculate customer churn
To calculate, you need to use different formulas depending on what type of churn rate you want to get. For the most basic churn rate, use this one:
- Churn rate = number of customers lost / number of remaining customers x 100
To illustrate, let’s say you lost 100 customers in one month. You still have 10000 customers left in that same time period. The formula would look like this:
Your churn rate during that period is 1%, aka 1% of your customers left.
So what does this mean?
What is a good SaaS churn rate?
It doesn’t matter how amazing your SaaS product or service is – it won’t be the right fit for everyone.
A certain amount of customer churn is to be expected, and there’s no such thing as a typical churn rate.
Of course, the lower your churn rate, the better. If you can keep your churn rate below 5%, you will be above the average SaaS organisation. Organisations that manage to maintain a customer churn rate between 3% and 1% will find themselves as a leading organisation for this metric.
On the other hand, churn rates of more than 7% to 10% or higher should raise some concerns and cause an organisation to take action as soon as possible.
The first step to fixing it is to understand why customers churn in the first place.
The 6 Reasons for SaaS Customer Churn
Your customer churn rate is just the tip of the iceberg – you need to dive into the data to find out what the actual cause of the problem is.
There are a variety of reasons why customers may choose to no longer use your product and here are 6 key reasons you need to be aware of:
1. Your customers don’t need your SaaS product anymore
First, it’s essential to understand that customer needs change over time. What they needed when they first signed up for your service may be different a few months or years down the road.
There will be some users who sign up for your SaaS product to solve a specific problem. Once that problem is resolved, their need for your product has also been resolved.
2. Your SaaS product wasn’t fulfilling their needs in the first place
In other cases, customers may leave because they never really found your SaaS product helpful in the first place.
Your product may have failed to meet their expectations, or their expectations were incorrect, to begin with. Maybe they misunderstood what your product did, or they thought it would do more than it actually does.
3. The customer doesn’t recognise the long-term benefits of your SaaS offering
Customers will sign up for your product after reviewing all of the benefits it provides them. These are usually the instant benefits such as saving time on tasks, having all their resources in one place, integrating multiple platforms, etc. What your customers will not take into consideration is the time needed to see these benefits or the more long-term benefits that these can provide.
Many SaaS companies will only showcase the instant benefits and not provide users with information on how to improve their usage of the product over a longer period of time. This has a seriously negative impact when customers look to reduce budgets or cut down on costs. SaaS products are often some of the first to go as many will see their value of them diminishing or feel they are not as useful as first believed.
4. Your customer service is subpar
90% of consumers consider customer service to be an important factor in their decision to do business with a company. Pay attention to the subtext: Most people don’t care about how good your product is, if your customer service is bad, they’re out.
5. Your product isn’t developing
Your customers may have bought your product for certain features but what keeps them invested in the product is by adding new ones or developing the existing ones. With SaaS being as competitive as it is, there are new products being created all of the time to meet untapped needs.
If you fail to develop your product, you will soon find your customers jumping over to another that provides them with everything you do and more. To stay relevant in this highly-competitive space, it is important to develop your existing features to meet new demands along with exploring new avenues and features.
6. Your customers are switching to a competitor
Finally, it’s possible that your customers are just leaving for a competitor. As we previously mentioned, your competitors may be offering products that provide the same features as you do as well as additional ones. This makes it very easy for your customers to find other options available and base their decisions on price, additional features available, customer service, reviews, etc.
This is a totally natural and expected part of doing business, but again, your job is to dig into the data and find out why it’s happening.
How to reduce SaaS customer churn
It’s easy to get discouraged when you see customers leaving your business. But as we mentioned earlier, this is a golden opportunity if you’re willing to take a step back and learn from it.
Here are a few ways you can reduce SaaS customer churn:
1. Identify and analyse the key reasons why customers are departing
Aside from the typical reasons we discussed above, it can be beneficial to get honest feedback from departing customers themselves.
There are many ways to do this, such as:
Not everyone will say yes, but you’ll be surprised at how many people are willing to give feedback if you just ask.
2. Improve onboarding and new customer engagement
The onboarding process is one of the first impressions your new customers will have of your business. Is it easy to use? Do they understand what they need to do? Are they getting value out of it? Is the process itself engaging?
You can use customer feedback to improve your onboarding process and make it more effective. The next steps to take will be to find common pain points within the onboarding process and use the feedback to improve them.
For example, if the onboarding process is often too long or slow for customers, remove sections that repeat information or do not add value. You can then test this as part of a new process and by gaining feedback on the new process you can begin to review whether the changes have worked.
3. Examine tell-tale metrics
There are certain metrics that can give you clues about which customers are at risk of leaving. These include things like:
- Decreased usage of your product or service
- Reduced logins or activity
- Less engagement with your brand
- Non-payment of invoices
- Failure to upgrade to a paid plan
- Not taking advantage of features
If you see any of these red flags, reach out to the customer and check if there’s anything you can do to help them get more value out of your product. It may be something as simple as providing a walk-through of a particular feature or offering a discount on their next month.
4. Provide education and guidance
Many customers churn because they don’t fully understand how to use your product or service. This is especially common with new customers who may not be familiar with the software or the industry itself.
You can reduce churn by providing educational materials, such as video tutorials, blog posts, case studies, infographics, and so on. These resources should be easily accessible from your website or app so that people can find them when they need them.
5. Never stop adding value
Your customers are always looking for ways to improve their businesses, so it’s crucial that you never stop adding value to your product or service. This could include releasing new features, integrating with other platforms, or expanding your customer support.
In addition, make sure you’re regularly communicating these updates to your customers. This will keep them engaged and remind them of the value they’re getting by doing business with you.
6. Use effective customer segmentation
Customer segmentation is the process of dividing your customers into groups based on common characteristics. This will allow you to identify your churn rates by segment which in turn will provide you with valuable information on why you are losing customers and at what stage is it occurring most often.
Examples of segments you may want to look at for churn rate include users in a trial period or users in the first month of paying for your product. Each of these areas can give you a different bit of insight.
If with a free trial, you aren’t giving access to the full software then users may not be able to try out the area they want to the most and are no longer interested in paying for it.
If customers are leaving after the first month of paying for your product, then you will need to know why that is. Maybe it’s not right for them, maybe they are trying lots of different products, maybe the expense is too much for them, etc. By looking into this segment, you can reach out to them to understand why and better improve what you are offering.
There are many different ways to segment your customers when we’re talking about churn. Some important criteria may include:
- The stage of their customer journey
- How long they’ve been a customer
- What kind of product or service they’re using
- How much they’re paying
By segmenting your customers, you can more easily identify which ones are at risk of churning and take action to prevent it.
7. Recognise and reward customer loyalty
Loyalty programs are a great way to show your appreciation for your best customers. They also give people an incentive to stick around.
There are many different ways to structure a loyalty program, but some common elements include points, rewards, tiers, and exclusive access.
The best way to create a loyalty program that is effective is by working with your customers to see what they want. If customers are mainly interested in receiving discounts and offers on your products, then you should not be offering them shopping vouchers or gift cards for general use.
When creating a loyalty program, speak to some of your biggest, most long-standing customers and ones you have great relationships with to see what they would want from a loyalty program, if you were to set one up.
8. Establish and build a customer community
This is by no means an easy task but one that is well worth investing in. This is because a community will provide a space for customers to ask questions, give feedback, and connect with other like-minded individuals.
You can use social media platforms, and online forums, or even create a private community for your most loyal customers. It is important that your brand is seen as being active as much as possible. Make sure your social media team is engaging with your community and actively responding to its members on every channel. Otherwise, you will find that your community has died off very quickly.
9. Monitor your competitors
Reviewing what your competitors are doing will help you gain incredible insight as to why you are seeing customer churn. By delving into easy-to-access information such as their customer reviews, you begin to see what they might be providing that you aren’t or what areas of their service they are highlighting over others.
Monitoring your competitors can show you information about what your target market is looking for. This allows you to also highlight these areas as well as the additional value adds you offer.
This can also be done through social media, where you can easily find what they are actively promoting as well as the feedback they are receiving on it and the interactions they are having with their customers. This is information that can immediately impact your marketing decisions, social media use, and the way you begin to interact with your customers.
Make the most of your customer churn
Customer churn is a key metric for any SaaS company. High customer churn is often the result of poor customer service, the product not meeting customer needs, or customers moving over to a competitor.
The key to identifying customer churn is to look at what stage of the product life cycle users are leaving and spot reasons as to why this can be. An effective method of doing so is segmenting your customer churn and looking for feedback in high-churning segments.
If you can continue to add value to your product, build customer loyalty through things such as rewards programs and user communities and monitor your competition to ensure you stay ahead, you will begin to see your customer churn decrease.