Reducing SaaS churn rate: The what, why, and how?
Keys points
According to a study on SaaS growth and churn, churn rate costs companies worldwide a collective $1.6 trillion every year. If an SaaS business can keep its customers happy, their chances of building a thriving business are much higher. This is where customer churn rate comes into play – it’s a critical metric in determining the overall business success.
The SaaS (Software-as-a-Service) market has had a truly transformative impact on the business world. By offering various digital solutions in exchange for a subscription fee, this technological innovation has enabled companies to acquire flexibility, productivity, and affordability benefits that would not have been possible through a traditional approach of software delivery.
One of the biggest challenges SaaS businesses face is customer churn – a process of losing customers, usually through discontinuation of subscription services. What those companies often don’t realize is that it takes from 5 to 25 times more resources to acquire new customers than to retain existing ones (source). Therefore, if an SaaS business can keep its customers happy, their chances of building a thriving business are much higher. This is where customer churn rate comes into play – it’s a critical metric in determining the overall business success.
WHAT IS SAAS CUSTOMER CHURN?
“SaaS Customer churn” occurs when customers of SaaS companies decide to stop engaging with the business and unsubscribe from their software services, causing the churn rate to increase. The types of customer churn can include things like:
- Subscription cancelation.
- Non-renewal of a contract/service agreement.
- Account closure.
- Competitor customer base increase.
The following questions can help you understand if you are currently experiencing a growing churn rate – if you answered “yes” to at least one of them, keep on reading to learn about ways to reduce the churn rate:
- Are you losing an unusually large amount of customers every month?
- Is customer retention a big challenge for your SaaS company?
- Is customer engagement with your software/platforms decreasing significantly?
WHY IS CHURN CRITICAL IN SAAS?
SaaS businesses across the globe are constantly adding and losing customers at the same time, and as the company grows, customer churn is inevitable. However, any significant imbalance between newly acquired and leaving customers can damage your business.
When churn is not being addressed, it:
- Can ruin your acquisition efforts.
- Can reduce revenue and lower your profit margins.
- Can slowly bankrupt your business.
- Up to 70%: is the probability of making a sale to an existing customer. With new prospects the chances fall down to 5-20%.
- Up to 80%: is the amount of your future profits that will come from just 20%< of your existing customers.
- Up to 65%: amount of a company’s business that comes from existing customers.
- Repeat customers spend 33% more than new customers
WHAT IS A NORMAL CHURN RATE?
As it was already stated before, some customer churn is completely normal. But at what churn rate a business should be worried? In general, a churn rate of 5-7% per year is considered pretty low, whilst any rate above 20% is high. An acceptable customer churn rate depends on various factors, including the value brought in by the retained customers, versus customers lost, new acquisitions over the same period, and your customers’ lifetime. Obviously, the lower your churn rate is, the better.
It is important to look at the churn rate together with the other factors as already mentioned. A 10% annual churn rate could seem high, but if your company is growing rapidly by adding more customers, and the retained ones are paying more and more for the services, then the 10% churn rate doesn’t seem so surprising and is only natural at this stage. You may also measure the churn rate on a monthly basis, but keep in mind the customer losses over the whole year, as the monthly rate number might seem small at the first glance.
Your churn rate will also vary depending on:
- Whether you are B2B or B2C focused.
- The characteristics of your target market.
- The onboarding process you use.
- The primary business model, e.g., free trial, freemium, paid.
Do set a goal, however, to achieve a single-digit annual churn rate.
SIGNS THAT YOU HAVE A CHURN PROBLEM
Since there’s no universal number for a normal churn, what are some big warning signs to look out for? Thankfully, there are some red flags that you should watch out for, so here are some tips that you may have a churn problem:
- Your churn is exceeding new customers: As obvious as it is, if you lose more customers than you acquire, it is a huge red flag, especially if you don’t upsell the current clients.
- Lifetime value is declining: Generally, the longer your customers stay with you, the higher your average customer’s lifetime value (LTV) should be. So, if customers are constantly churning, you will likely see a downward trend in your LTV.
- Your churn rate surpasses 10%: As previously mentioned, 5-7% is considered an average churn rate. But when you start seeing double digits, it’s usually a sign that something deteriorated. For example, it could be how you acquire customers, your onboarding process, or something else. But if more than 10% of your customers are canceling, it will be difficult to grow long term at that rate.
- More downgrades than upgrades: If you offer different plans or add-ons for your product, you need to have more customers upgrading than downgrading. Otherwise, you may face a churn problem.
KEY CAUSES OF CUSTOMER CHURN AND GENERAL TIPS ON REDUCING THE CHURN RATE
Now that we know how dangerous churn can be for any SaaS business, and how to identify that there’s a problem, let’s examine what causes churn. Look at it this way – an SaaS user decides to buy a product because they think it will help them achieve a goal. However, if the tool doesn’t meet expectations, they will abandon the boat, and as always, the devil is in the details.
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1. Poor onboarding – the #1 reason for customer churn
Onboarding is essential. According to a study from Harvard Business Review, successful onboarding procedures can significantly improve revenues, client renewals, and client referrals. Therefore the company has to make sure that their onboarding process is seamless, minimizing the amount of questions the customer might have about the software and its use.
2. Weak customer relationships
Engaging with your customers and maintaining healthy relationships with them should be an ongoing process. The key is to make them feel appreciated and sought after. Therefore, you need to follow a proactive approach and connect with your customers in every possible way through multiple channels.
3. Poor customer service
Excellent customer service should be a vital component of any company’s strategy to build long-term customer loyalty. Unfortunately, many companies perceive customer service as an unnecessary expense rather than an investment in retention rates. Almost 9 in 10 customers leave a business due to poor customer service. In contrast, 86% of customers are willing to pay more just for a better customer experience.
4. A challenging user experience
User experience starts with the onboarding process, and is followed by customer support. These two points were already covered and they have a direct impact on the churn rate, However, the usability of the software/platform offered, and its first-user friendliness is equally as important, since if the customer is unable to understand how to use the service, they will cancel it.
5. Consider your customer’s complaints
If a customer is reaching out with regards to a certain issue, there is a good chance that other customers have experienced a similar problem, but didn’t say anything about it. For every customer who complains, 26 other customers remain silent. Agents need to empathize with customers and take immediate steps to rectify the problem. Once the problem is considered resolved, follow-up is key to making sure the customer remains satisfied.
Conclusion
Historically confined to the entertainment and telecommunications industries, subscriptions are now highly popular with consumers looking for new ways to consume digital products. This is particularly true for video games and PC software industries and mobile applications that are more flexible and better adapted to their needs. As a result, the move to subscription represents a tremendous opportunity for growth. Still, it also constitutes a challenge for digital publishers and retailers because it requires fundamental changes in how they design and market their digital products.
Churn is a critical metric directly linked to revenue and provides statistical data about your retained customers. That’s why every business must understand the issues that lead to churn and fix them. Remember, you need to solve churn before it becomes a significant issue. It will help if you are proactive in nurturing your existing customers throughout their journey.
In a nutshell, the companies that will successfully meet this challenge can deliver a high-value proposition and a first-class user experience.
Some tips on reducing the churn rate include:
- Understanding the reasons behind the churn rate
- Improving the onboarding process.
- Improving the customer relationships.
- Improving customer service.
- Improving the user experience.
- Listening to customer complaints.
- Providing high-quality services.
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