SaaS Churn Rate Guide: Running a Health Check on Your SaaS Business
Your SaaS churn rate is the last thing you’d like to see skyrocketing. The higher it is, the more work you have to do to better your software, customer success or support processes. We want your churn rate to be the lowest metric among all your SaaS metrics and that’s why we prepared this comprehensive guide for you.
We will cover topics from what is the churn rate, how to improve your customer retention and what tool to use to predict churn quickly. Let’s get started right now!
What is Churn Rate?
Customer churn rate (or attrition rate) is a widely used term in business, mostly referring to the subscription-based service model. It shows what percentage of your customers stopped using your services in a given period.
Why is it an important SaaS metric?
The first answer is the lower churn rate, the higher the SaaS ROI and LTV.
The second answer is acquiring new customers is always more expensive than retaining existing ones.
When you develop mechanisms to retain your customers and create referral programs, they not only continue to pay you but will also share their positive and successful experiences with others.
Churned customers can give the most valuable feedback you can ever expect. Why are they dissatisfied? What made them walk away from you?
Once you have sincere answers, do your utmost not to repeat the mistakes again and make your customers leave you because of the same issue. Ask them for review via email, send a direct message or ask to fill in a short form.
SaaS companies usually offer services based on a monthly or annual subscription model. It’s not about making a one-time payment, buying a product and coming back after a year. Your SaaS customers pay for services every month and if you lose them, they will hardly come back to you.
How to calculate the SaaS Churn Rate? (formula+example)
Churn rate calculation is one of the simplest SaaS metrics to calculate. The formula is the total number of customers who left you in a given period divided by the number of customers you had in that given period multiplied by 100%).
(# of customers who left / # number of total customers) * 100%.
For example, in the first half of 2019, the total number of your customers was 250. But in the same period, you lost 18 of them. Your churn rate is 7.2%.
This SaaS metric is very flexible as you can calculate it on a monthly, quarterly or annual basis.
It’s also important to take into account what campaigns you ran in that given period to attract those customers, what loyalty programs you offered to understand the reasons behind your company’s performance.
The monthly calculation is more preferable as it allows you to react to customer decision fast, understand the main reasons for churn and immediately start working on improvements.
SaaS Churn Rate: What's Reasonable?
It depends on several factors, like for which niche your software is envisaged, how much is your revenue or how have you been operating in the industry.
If you want to know the average numbers, then the reasonable rate is about 5-7% annually. But examples will be more helpful to you.
For example, if your SaaS company is relatively new (1-3 years), then you can expect up to 20% annual churn rate.
But in the case of a mature company, it’s supposed that you should already have your loyal customer base and the annual churn rate for SaaS should not exceed 5% (answer to the question of what is a “good” SaaS churn rate).
3 Types of Churn
There is no exact list of churn types. But we are going to divide them into 3 groups based on logic.
8 factors that result in churn...
Customer churn stems from internal or external factors. Let’s look at the possible scenarios one by one.
External factors that result in churn:
Internal factors that result in churn:
Leading and lagging indicators of SaaS churn: What are they all about?
Churn indicators are usually categorized under leading and lagging indicators. What’s the difference? The first group includes:
All of these activities are signs of disappointment and warn you to be alert.
The second group includes:
The second group includes:
You become aware of these factors mainly after the churn happens as you probably don’t have the resources to monitor your customer’s company’s performance.
If you can’t control and prevent the indicators in the second group, you don’t need to invest much in tracking the activities in the first group. An email or a phone call can lead to a constructive conversation where you can try to reach a win-win situation.
7 steps to reduce SaaS churn rate
What is SaaS churn prediction and how to predict SaaS churn with tools?
With the rise of AI, more and more tools are developed to address specific problems businesses face online. And churn prediction tools are great examples of them. Note that the tools can be named differently, like customer engagement software or user behavioral analytics software but the end goal is the same.
Let’s have a look at these 4 tools that will contribute to your customer retention efforts.
We are sure that these tactics will help you be more confident in your SaaS activities and offer stronger products and services to your customers.
How do you deal with your customers who are likely to churn? Are you pleased with your customer retention rate?