SaaS Churn: The Myths and Benchmarks, and Strategies to Increase Revenue
This week, I cancelled the annual SaaS subscription (I had three weeks left to renew).
Incredibly, even though I purchased a subscription for the whole year however, the company wouldn't permit me to use the last three weeks ' access to top features.
Once I had started to cancel, a pop-up alerted me that I'd right away end my access to the paid features.
"This action will immediately downgrade your account. Are you certain you wish to keep your subscription?"
I decided to cancel, even though that I wouldn't require the software in the future. As a result, in the terms of SaaS I turned on the engine. This experience led me to thinking:
- Was immediate elimination of features that cost money is the best way to prevent me from turning?
- Was it the day I was officially counted to be "churned"? Was I counted as"churned" the day after I decided to cancel? What if my subscription was due to renew? What if I had downgraded, upgraded, or changed my usage?
- What could they have done better to try to keep me from cancelling?
In this post this article, we give our best chance to answer this and other queries surrounding churn.
In part one, we cover benchmarks and typical churn formulations.
In the second part, we'll cover five churn-prevention strategies that have been successful in different SaaS companies.
And in part three, we'll conclude with a set of definitions you could use to talk about churn with your colleagues along with some additional tools.
If you'd like to use this list of contents as a way to move between the various sections in this article.
Table of Contents
- Part I: SaaS Churn Benchmarks
- Part II: 5 Proven Strategies for Reducing SaaS Churn
- Part III Churn Definitions and Additional Resources
Part I: SaaS Churn Benchmarks
When folks in SaaS speak about churn we're often not doing an adequate job of making sure we're on the identical page.
If someone claims they have a 5% churn rate, are they talking about quarterly, monthly or an annual churn?
Are they including those who have never made it through the trial?
Do you know the churn rate of a SaaS company targeting enterprise customers with one that sells to the general public?
When we set churn benchmarks for SaaS businesses, there's much to consider. In this article, we dissect it into smaller pieces in order to let you run an extensive churn analysis on your own company and be able to better understand the way you're performing.
What is the ideal Churn Rate for SaaS?
I often hear the 5%- 7percent churn rate would be optimal for SaaS firms. But is this purely anecdotal? Is it common for SaaS businesses to be able to meet this benchmark?
That is In other words, 5 to 7% might be the best, but what's the average?
To investigate, Ryan Law, former CMO and co-founder Cobloom, former CMO and cofounder Cobloom, performed an examination of the most recent six churn reports, or studies . The results showed that there's no consensus regarding the average rates of churn for SaaS firms. Half of the reports he studied showed the average annual churn of 10 percent. The three other reports revealed an even larger range of 32% to 61% annual rate of churn.
Why such a wide range? Ryan theorizes that there's not enough data available to provide a better picture of SaaS churn because it's not something that companies would like to share in a transparent manner.
But he sees other common aspects that impact churn: the size of a business, as well as the industry it operates in.
The Churn of a product can vary based on the industry.
Industries may have very distinct values for churn.
"Look through your own technology stack and you'll see tools you think are vital, while others you consider "nice to have,"" Ryan writes. "It's probable that tool for sales or finance will be less susceptible to churn more than marketing tools, due to the fact that it is believed as being more responsible for the revenue."
He adds that niche tools with fewer competitors will also have lower number of customers.
The size of the company can affect common churn Rates
Ryan mentions that a lot of the largest SaaS businesses target customers of enterprise who have contracts with longer lengths, so their churn rate will be lower. The flipside is that SaaS companies targeting smaller or individual businesses that have more customers and shorter contract lengths will naturally experience higher churn rates.
When Ryan analyzes the typical churn rates of large as well as small SaaS firms What he's actually saying is that your churn rates is dependent upon the amount of money you pay your customer and the average value of your contract. The less your ACV, the easier to make churn.
What Is Acceptable Churn?
Hotjar the founder David Darmanin understands that a churn rate doesn't mean much in and of itself. "Ultimately, churn and the volume of it matters as much as the magnitude of your market as well as the speed at which you're bringing on more customers." he explained on an episode of ChurnFM. ChurnFM Podcast.
If your target market isn't large and churn is a major issue, it will matter more. If your market is substantial and you use an approach to sales that is low friction and you are able to withstand a higher churn rate without majorly affecting your business.
The realization caused David to separate churn into two categories acceptable and concerning. A certain amount of churn is normal and perhaps necessary- especially in the case of a traditional B2C sales model.
"Worrying Churn" is when you've found a perfect customerand they're now coming onto the bandwagon, and after which they cease using your product] or quit paying for it." David said.
Also, the churn rate can be a problem if you're losing a large proportion of the ideal clients.
It could be beneficial to let go of users who don't meet your ideal customer profile (ICP). It's not the kind of users you want to spend time supporting or seeking feedback from.
But there's another distinction which is important to David The question is how do the users think about the service after they quit?
"Ultimately, I think what has a much bigger impact in this type of flywheel you're creating (in the case of Hotjar) is if people are exiting or pausing because of a negative feeling it actually has an even greater impact than simply the fact that they stopped paying you. Because word-of-mouth for us is actually much bigger energy than the money that is being collected, churning out or dropping."
This is where gathering feedback from churning customers is crucial (a issue we'll discuss further down).
What is the best Churn Rate Formula?
To measure churn to determine churn, the simplest churn percentage calculation is the number of churns during a given period divided by the total number of customers at the beginning of a time.
The number of churns produced during a time
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Customers at the start of a time
If, for example, you're calculating monthly churn, beginning with 1,000 customers, but drop 27 customers, the churn percentage for that month is 2.7%.
However, this formula is missing the mark on many important specifics.
In particular, it does not take into account the number of users who joined your account over the course of time, and the number of them converted, in comparison to the amount of customers that churned.
The weighting is not based on growth. If you lose the same amount of users each month, but you continue to acquire more clients than you lose, your churn rate will decrease, but there's been any change in the behavior of customers.
If you employ this straightforward calculation to determine the monthly churn, then you could not even realize that the rate at which you churn differ based on the number of days are in a month!
Because of this, the standard churn rate formula does not give you an accurate account of how you're expanding or losing. It's just too simple.
If you're deciding how to determine churn Outlier AI offers two suggestions:
- The formula for churn you select should be in line to your main business goals. Choose the elements that are most important for you to keep track of and refine the formula accordingly.
- Do not make the formula complicated. "The more complex it becomes it is, the greater chance you'll make a mistake making a calculation at some point, and you'll have an inaccurate measurement."
Business analysts have released their own churn-based formulas. Steven Noble's article regarding the way Shopify determines churn levels is an essential read. Also, an Baremetrics post analyzes the churn rate of different types of customers, like users who upgrade or annual plan users leaving.
One more thing: When we talk about churn it's typically about the loss of customers. There are many other kinds of churn you can measure including revenue and transactional (transactional) churn. Look over Outlier AI's post to find out more information about these.
Monthly and Annual. Yearly Churn: Which Should You Keep Track of?
There's a big distinction between annual and monthly churn. If you have 7% less customers who turn over throughout the year this is a distinct number from losing the same percentage of customers every month.
While it's not an ideal idea to track both, your monthly churn rate ought to be much, much lower than your annual churn.
What Is Negative Churn?
When attempting to get the big picture about churn, you shouldn't just consider the number of customers are you losing. It's all about the behaviors of your returning customers, as well.
That's when negative churn comes into play.
People have asked me if negative churn is a myth. It's not actually, but there's a chance that it's not as you believe.
Negative churn happens when revenue gained from upsells and cross-sells exceeds the revenue lost from customers that have been churned for a long length of time.
When you've reached this point, you could continue losing customers with no additional customer acquisition, but still grow your revenues (at least for a while).
According to VC Tomasz Tunguz the pursuit of negative churn must be the goal.
"Combined in conjunction with the annual payment contract, negative churn is a very powerful growth mechanism," Tomasz writes. "When considering your pricing structure and customers' success strategies, it's worth trying to engineer negative churn into your startup."
Next Level Churn Rate Analysis: Who is the Person and What are the reasons
At a high-level the concept of churn analysis simply looking at the speed of loss customers.
Don't end there. The churn rate you see only tells you the what you know, and not the why and the who. In order to truly understand and take action something to stop churn the first step is to find out whypeople are churning and which users are you losing.
SaaS growth specialist Fred Linfjard recommends using a mix of qualitative and quantitative data analysis to discover who's producing the most data, and why and also what actions to take.
Quantitative Data Collection: Website and Product Data
Sample questions to try and answer:
- Which groups of users are most likely to be churning?
- Are there patterns that can be seen in their use of products?
- What documentation for support did they view before the churning process?
Qualitative Data Collection such as exit interviews and surveys
There are many questions to be tried and answered:
- Why did they leave?
- What would make them reconsider?
Hope this provides you with the understanding of how churn is effecting your company. The next step is to consider ways to come up with a churn-reduction action plan.
Part 2: Five Proven Strategies to Reduce SaaS Churn
Ideally, your churn reduction strategy should be guided by the quantitative and qualitative studies you've been conducting as soon as you have a clear picture of who's turning and the reasons, it's more straightforward to decide which tactics will make most impact. It's also beneficial to learn what other companies have done which has been successful.
1. Update Your Dunning Management System
It is commonplace to find between 20 and 40% of customer churn to be voluntary: due to expired cards, issues with the authorization of transactions, etc. Fred Linfjard discusses why making sure you have an advanced dunning system should be your first priority when battling churn.
2. Prove Value as Soon as Possible
Preventing churn starts in the initial stages of the customer journey, and a crucial time is during the onboarding process.
It's obvious how crucial it is to make it easy for SaaS users to start. If there's too much friction right from the beginning it's unlikely that they'll keep using it.
However, there's more and discussions about the importance in providing "quick results." In the words of Lincoln Murphy explains, " Customers who realize that they are getting value fast are those who stick around for the longest."
There are plenty of ways to orchestrate quick wins within the program within the product itself. It's also something that you can do more directly by sending email.
When Christoph Engelhardt worked for Moz He was able to decrease its monthly churn rate for new users by 40% through sending an email that showed the worth Moz could provide to its customers within the first thirt y days. He explains the process which he employed in an extensive blog post.
3. Look for Red Flag Metrics
Examine the behavior of churned customers to uncover patterns. Such behaviors could be red flags alerting you that your customer may be at risk of being churned.
Groove, an inbox shared for businesses, reduced churn by 71 percent using this analysis of data. Groove's team compared the product usage between new users that were churning before 30 days as well as users who continued to use the service. The team found that those who churned had much shorter first sessions and had less frequent log-ins than users who were on for the first 30 days.
4. Customize Your Cancellation Offers
A common churn reduction strategy is to send an automatic offer to users who decide to cancel their subscription, regardless of whether it's a discounted rate, the ability to pause the subscription, or something else.
Wavve, a popular social media tool specifically designed for podcasters has been able to recoup more than 30% of users who clicked the cancel button, by incorporating an offer at the end of a short cancel survey.
This strategy worked so well because attaching the offer to the survey on cancellations allowed Wavve's team to personalize the deal based on the reason users were cancelling.
5. Automate What's Working, including the ability to collect feedback
When you've decreased churn how can you maintain it at a consistently lower rate?
Feedback is collected in an automated way.
The cancellation survey lets you to keep collecting valuable information to keep track of what is making customers churn. "You can automate or systemize your collection of qualitative feedback. You can also at this point, find out why they quit you. So typically, an exit survey would be sent to someone who decides to cancel, by email or even after they click the cancel button. If you could automate the collection, that's going to continually provide feedback to you which means you do not have think about it," Fred explained in our interview.
When your customers and your product alter, so will the motives for churning. Monitoring feedback on a regular basis is an important part of keeping a low rate of churn.
In addition, by automating the feedback collection process, it frees up your time to work on other projects.
Part III Part III: Churn Definitions and additional resources
What Is Churn?
The term "customer churn," also referred to as attrition of customers, refers to the loss of users for a service or product. This is opposite to customer retention.
What is the average SaaS Churn Rate?
There isn't a uniform average turnover rate for SaaS. Per multiple studies The churn rates is ranging from 10 percent to 60 percent based upon the scale of a company as well as its marketplace.
The Churn and Retention KPIs are used to Track
Apart from the annual or monthly churn rates, additional SaaS measures that will give you a fuller view of customer churn as well as retention metrics include:
- Net retention rate based on dollar (NDR)
- Customer lifetime value (CLV)
- Monthly regular income churn (MRR churn) and annually regular revenue churn (ARR churn)