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SaaS Churn: myths, Comparisons, and Strategies to Retain More Money -

Apr 26, 2022

Last week, I canceled my annually renewed SaaS subscription (I had three weeks left until renewal).

Incredibly, even though I paid for a year-long subscription but the company refused to let me keep the last 3 weeks' worth of premium features.

As soon as I started making a decision to cancel my subscription, a popup informed me I'd instantly lose access to the paid features.

"This move will instantly reduce your account. Are you sure you want to continue?"

I canceled anyway, knowing that I would not need the tool going forward. With the terminology of SaaS I was churning. The experience made me thinking:

  • Did immediate elimination of features that cost money the most effective way to stop me from churning?
  • Was it the day I was officially counted as "churned"? Do they consider me to be"churned" the day after I cancelled my subscription? The day that my subscription was due to renew? Was it the case if I had downgraded or upgraded my usage?
  • What would they have done better to try to prevent me from canceling?

In this article We take the best possible approach to answering these and many other questions surrounding the process of churn.

In the first part the first part, we discuss benchmarks and typical churn formulations.

In the second part in this second installment, we'll discuss five churn-prevention strategies that have been successful across other SaaS business.

And in part three, we'll conclude with the definitions to use in discussions about churn with your colleagues as well as some other sources.

If you prefer to use this table of contents to jump through the sections in this article.

Table of Contents

Part I: SaaS Churn Benchmarks

In the event that people from SaaS talk about churn, we're not always doing well in making sure we're on the same level.

If someone claims they have a 5% churn rate, are they talking about quarterly, monthly, or annual Churn?

Do they include clients who did not make the cut in the trial?

Are you able to compare the churn rates of the SaaS company targeting enterprise customers to one selling to the general public?

In setting churn benchmarks for SaaS firms, there's much to take into consideration. This is why we take it apart to allow you to perform a comprehensive churn analysis of your own business and have a better idea of the way you're performing.

Does There Exist a Perfect Churn rate for SaaS?

I often hear that a 5 to the churn percentage of 7% is optimal for SaaS businesses. But is this purely anecdotal? How common is it for SaaS companies to meet the requirements?

In other words In other words, 5 to 7% could be the best, but what's the average?

To find out, Ryan Law, former CMO and co-founder at Cobloom, performed an study of six recent churn reports or studies . The results showed that there is no consensus regarding the average number of customers churned for SaaS firms. A majority of the studies the researcher studied had the average annual churn of 10%. The other three showed an even larger range: from 32% to 61 percentage annual the rate of churn.

What's so different about this? Ryan suggests that there's not enough data available to get a more accurate view of SaaS churn because it's not something that companies would like to make transparent.

However, he also sees other elements that influence churn such as the size of a business, as well as the industry it operates in.

Chunks of the same product may differ by industry

Industries may have very distinct benchmarks for churn.

"Look through your own technology stack and you'll see items you consider essential, and others deemed "nice to have,"" Ryan writes. "It's probable that financial or sales tool are more resistant to being discarded more than marketing tools, due to the fact that it is believed to be more directly responsible for revenues."

The author adds that niche applications that have fewer competitors can experience lesser the rate of churn.

The size of the company can affect common churn Rates

Ryan mentions that a lot of the largest SaaS businesses target customers of enterprise which have longer contract durations and therefore their churn rates will be lower. The flipside is that SaaS companies targeting customers who are small or individuals with more customers with shorter contract durations are likely to experience higher churn rates.

While Ryan analyzes the typical ratio of churn of big as well as small SaaS firms the truth is that your churn rate will vary based on how big your customer and the average value of your contract. The lower the ACV is, the more easy it is to churn.

What Is Acceptable Churn?

Hotjar founder David Darmanin understands that a the churn percentage doesn't really mean anything in and of itself. "Ultimately the churn rate and amount of churn you have matters as much as the amount of customers you have and the speed with which you're bringing on potential customers" he explained on an episode of ChurnFM. ChurnFM Podcast.

If the market you are targeting is tiny and churn is a major issue, it will matter more. However, if the market you are targeting is relatively large, and you employ an approach that does not require any friction to sell that is, you will be able to handle an increase in churn without majorly affecting your company.

The realization caused David to divide churn into two categories: acceptable and worrying. Certain types of churn are acceptable, perhaps even necessary -particularly when you're using a B2C-style sales approach.

"Worrying the churn happens when you've found the perfect client, and they're getting onto the bandwagon, and the moment they quit using your product], or they quit paying for it." David said.

In other words, the amount of churn you receive will be an issue in the event that you're losing a substantial proportion of the ideal clients.

It can even be a good thing to let go of users who don't fit your ideal customer profile (ICP). These aren't the customers whom you'd prefer to spend your time asking for feedback or support from.

There's a second distinction that matters to David What do customers feel about the product when they exit?

"Ultimately, I think what is more significant in this type of flywheel that you're developing (in our instance, Hotjar) is that if customers are leaving or stopping because of a negative feeling it actually has a much bigger impact than simply the fact that they stopped making payments to your. The reason is that word-of mouth for us is a much more powerful fuel than the revenue that is being collected, churning out or dropping or whatever."

This is where collecting feedback from customers that have already churned can be helpful (a issue we'll discuss more in the future).

What is the best Churn Rate Formula to Use?

For determining churn rate to determine churn, the simplest churn percentage calculation is the number of churns that occur during a specific time period multiplied by the total number of customers in the first time.

The number of churns produced during a period
-------------------------------------------

Customers at the start of a time

In this case, for instance, if you're calculating monthly churn, beginning with 1,000 customers, but only lose 27 of them the churn percentage for that month would be 2.7 percentage.

However, this formula is missing out on a lot of crucial details.

In particular, it does not take into account the number of new users you gained in that time as well as the percentage of they churned, versus the amount of customers that churned.

The weighting is not based on the growth of your business. If you're losing the exact number of customers each month, and you continue to attract more clients than you lose, your churn rate will decrease however there has been no change in customer behavior.

If you use this simple equation to measure monthly churn, you might even notice the rate of churn can differ based on the number of days in the month!

Because of this, the standard churn rate formula isn't an exact picture of how you're increasing or losing. It's simply too simplistic.

If you're deciding how to calculate churn, Outlier AI recommends two things:

  1. The formula that you pick for churn should be in line with your business's top priorities. Choose the elements that are most important for you to keep track of and then refine the formula to suit.
  2. Do not make the formula complicated. "The more complicated the formula becomes, the more likely someone will make a mistake when calculating it which will result in a misleading number."

Business analysts have created their own formulas for churn. Steven Noble's post regarding the way Shopify measures churn is an essential read. And a Baremetrics article analyzes the churn rate of diverse types of customers for example, users upgrading or monthly plan customers quitting.

A final note: when you hear people speak about churn it's typically about the loss of customers. However, there are different types of churn that you can track like revenue or the transactional churn. Look over Outlier AI's post to learn more about these.

Monthly and Annual. annual Churn: What One Should You Monitor?

There's a big contrast between annual and monthly the churn. If you lose 7% of your customers who turn over throughout the year it's a distinct number from losing the same percentage of customers each month.

Although it's not an ideal idea to be measuring both your monthly churn percentage should be much, much smaller than the annual churn rate.

What Is Negative Churn?

If you're trying to figure out the whole picture on the churn rate, don't only consider the number of customers you're losing. It's all about the behaviors of your returning customers, and.

This is where the negative churn is a factor.

People have asked me if negative churn is a myth. The truth is that it's not, however, it might not be as you believe.

Negative churn happens when profits from upsells and cross-sells outweighs lost revenue from churned customers over a length of time.

If you're at the point where you can keep losing customers, but without any new customers and grow your revenues (at at least for a time).

According to VC Tomasz Tunguz that achieving negative churn should be an objective.

"Combined with annual prepay contract negative churn has the potential to be an effective growth strategy," Tomasz writes. "When you are pondering your pricing structure and customers' success strategies, it's worth trying to engineer negative churn into the startup you're working on."

Future Level Churn Rate Analysis: Who and Why

At a high-level the concept of churn analysis simply looking at the speed that you're losing customers.

But don't stop there. The churn rate you see only gives you an idea of what's happening is happening, but not the reason as well as who who. To really understand and do things about it, you'll need to know the reasonspeople are turning away and what users you're losing.

SaaS growth expert Fred Linfjard advises the use of a mixture of quantitative and qualitative data analysis to discover who's churning and why, as well as how to take action.

Quantitative Data Collecting Web and Product Data

Questions to test and answer:

  • Which user groups are more likely to be churning?
  • Are there patterns that can be seen in their use of products?
  • What support documentation did they review prior to turning?

Qualitative Data Collection by Exit and Surveys

To try to answer questions:

  • The reason they left?
  • What would make them reconsider?

I hope this helps you gain an understanding of how churn is effecting your company. The next step is to consider how to develop a churn-reduction strategy.

Part II: Five Tested Strategies for Reducing SaaS Churn

The ideal churn-prevention strategy is led by the qualitative and quantitative research you've been conducting as soon as you have a clear picture of who's turning and why, it becomes easy to determine which strategies will have the biggest influence. However, it's useful to find out what other companies have done which has been successful.

1. Update Your Dunning Management System

It's common for 20 to 40% of the churn experienced by customers to be involuntary: the result of expired cards, issues with the authorization of transactions, and so on. Fred Linfjard provides a reason to make sure that you've got a sophisticated dunning process should be the first priority when battling the churn.

2. Show Value as Quickly as you can

Preventing churn starts from the start of the customer's journey and an especially critical time occurs during the process of onboarding.

You're undoubtedly aware of the importance of being able to facilitate SaaS customers to begin. If the user experience isn't smooth from the get-go and they're frustrated, they won't keep using it.

However, there's more and discussions about the importance in providing "quick wins." According to Lincoln Murphy explains, " Customers who realize their value in a short time are the ones that stick around the longest."

There are plenty of ways to orchestrate quick wins within the software it self. But it's also something you can accomplish more easily via emails.

When Christoph Engelhardt worked for Moz the company, he managed to decrease its monthly churn rate for new users by 40% through mailing an email that demonstrated the importance Moz was providing to its clients within thirt y days. He describes the method which he employed in an extensive blog post.

3. Look for Red Flag Metrics

Look into the behaviour of customers who have been churned to find patterns. Such behaviors could be indicators that a customer is in danger of churning.

Groove, which is a shared email inbox for businesses, reduced churn by 71% through this data analysis. The Groove team compared use between users who churned before thirty days and users who continued to use the service. They found that the users who were churning had shorter initial sessions, and had fewer frequent logins than those who were on for the first thirty days.

4. Customize Your Cancellation Offers

An effective strategy to reduce churn is to automatically send an offer to users who decide to terminate their subscription regardless of whether it's a discounted rate, the ability to pause the subscription, or some other.

Wavve, a popular social media tool for podcasters, was able to recapture the more than 30 percent of those who hit the cancel button by adding an offer at the end of a brief cancellation survey.

This strategy worked so well because attaching the offer to the cancellation survey allowed Wavve's team to personalize the deal based on the reason users were cancelling.

5. Automate What's Work, which includes Collecting Feedback

When you've decreased churn how do you keep it at a consistently lower rate?

The feedback you collect is always in an automated way.

The cancellation survey allows the company to collect valuable feedback so that you are aware of what is making customers churn. "You can automate or systemize the collection of qualitative feedback and, in this case, find out why they quit you. So typically, an exit survey would be sent to someone who has cancelled, whether via an email or maybe even after they click"Cancel. If you are able to automate this collecting, you'll continually provide feedback to you and you won't need to think about doing it," Fred explained in our interview.

If your products and clients change, so will the reason they decide to churn. Continuously evaluating feedback is an important part of keeping a low rate of churn.

And by automating the process of collecting feedback, you can free up time for other work.

Part III of the course: Churn Definitions and Other Resources

What is Churn?

Customer churn, sometimes referred to as attrition of customers, refers to the loss of users towards a particular product or service. This is the reverse of retention.

What's the Average SaaS Churn Rate?

There isn't a uniform average churn rate for SaaS. Per multiple studies The churn rates can vary from 10% to 60% depending upon the scale of the company and its market.

Churn and Retention KPIs to Follow

Besides monthly or annual customer churn rates, additional SaaS measures that will give you a fuller image of customer churn retention include:

  • Dollar-based net retention rate (NDR)
  • Customer lifetime value (CLV)
  • Monthly Recurring revenue churn (MRR churn) and annual the recurring revenue churn (ARR churn)

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