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.
1. Bad from the beginning and unhappy end
In this scenario, your customer buys your product and problems start arising throughout his/her first interaction with you. Probably they don’t understand your product’s full potential, maybe fail to achieve customer success or face other challenges that are out of your control.
2. Good from the beginning and unhappy end
In this scenario, your customers manage to get a grasp of your software and use it for some period but again something goes wrong. Maybe their interaction with you doesn’t satisfy them, your software lacks specific features or the needs of their company change.
3. Happy end for your customer, unhappy for you
In this scenario, your customers churn not because of internal or external problems but because their company achieves the final result they wanted to with your software.
Your customers are happy and satisfied but they already don’t feel the need to continue with you. For you, it’s still unhappy as you lose a paying customer.
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:
1. Your customer’s company stops feeling the need in your product
2. Your customer’s company suffers financial problems
3. Your customer’s company stops existing at all
Internal factors that result in churn:
1. You promise more than you can give
2. You don’t improve your software features
3. You don’t educate how to use your software
4. You don’t build a relationship with your customers
5. Your customer success/support team works at a low level
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:
– Your customer didn’t finish the onboarding process and a bunch of software usage-related questions remain unclear.
– Your customer hasn’t been active for X time and consequently hasn’t seen actual results from your software.
– Your customer writes a negative comment on your website or social networks and shows dissatisfaction regarding your services.
– Your customer’s NPS (Net Promoter Score) is quite low and he/she belongs to the group of detractors – the ones who rate your company under 6 score and are neither happy nor will recommend you to others.
– Your customer has visited the cancellation page in order to understand what the “goodbye” process will look like.
All of these activities are signs of disappointment and warn you to be alert.
The second group includes:
– Your customer suffers from cash flow decrease and is in a financially unstable situation.
– Your customer was affected by negative word-of-mouth as someone told him/her you are not the right company to work with.Your customer hasn’t been active for X time and consequently hasn’t seen actual results from your software.
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
1. Identify MAR (Member-at-risk)
Dan Martell, a SaaS growth specialist, an investor says that you should permanently follow the activities of your customers. When you see that they have not logged in for a long time, contact them to ask if they need your assistance.
2. Ask for feedback
If you tried every single method and couldn’t retain them, at least try to understand why they left you. Ask what is the reason not to continue with you and what complaints they have. You will be able to learn from your mistakes and prevent similar churns in the future.
3. Engage your customers
Engagement is provided beyond the borders of social media. Ask them to subscribe to your newsletter and send them interesting updates, offer special discounts or invite them to participate in your upcoming webinar.
4. Create a positive onboarding experience
This is the root of your success or failure. If a company doesn’t know what range of problems they can solve with your software or how to leverage it, the rest is not even important. Find time to create both written (guides, user manuals) and visual (screenshots, videos) content to help them use your software more easily.
5. Have a responsive and attentive customer support team
Even when everything is crystal clear on the guides and tutorials, people may have additional questions or face technical issues. Be ready to not only answer their questions/complaints but ask for clarifications, initiate conversion and offer the best and fastest solutions.
6. Demonstrate your product with its whole potential
Introducing your product’s features and benefits in the right way is super important but benefits play a much more significant role. Show your customers what your software does and don’t forget to add how it will facilitate your customer’s daily efforts.
7. Follow the latest market trends
Imagine that new companies enter the market with a similar product like yours. If their version offers more advanced features, answers more questions, then you should consider reviewing your existing software. Always think about updating your product so it continues to provide value.
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.
1. Mixpanel – Product and User Behavioral Analytics
With Mixpanel’s free plan, you can track 1.000 users monthly, have access to 5 employee accounts and 90-day data history. Core features that are available in all plans include reports on user behavior, automatic monitoring, and alerts. Paid plans with more advanced features are also offered.
2. Churnly – Customer Success Software
Designed especially for SaaS, Churnly helps predict which customers have the likelihood to churn and how much revenue will probably soon be lost. Features include monitoring customer engagement and activities too, providing 90%+ accuracy.
3. InnerTrends – Customer Engagement Scoring Software
Having only paid plans, InnerTrends aims at improving customer onboarding, engagement, and retention. Plans include custom tracking, customer engagement scoring, user onboarding insights, retention insights and more valuable features that will provide you with correct data.
4. Natero – Customer Success Software
With products called Customer success platform and Customer data integrations, you will be able to monitor customer health, analyze their behavior and scale customer success operations. You can see the comparison between Natero and other similar tools like Gainsight and Totango.
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?