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There are plenty of fish in the sea and even more products for consumers to choose from in the SaaS market.
Whether or not someone picks your product is influenced by hundreds of factors.
So when you get someone on the hook and into your product, you have to do your best to keep them happy or risk losing them to a competitor.
Churn rate is one way a SaaS company can track how many fish have been caught versus released back into the ocean.
Churn really is the number one killer of all SaaS companies, and it is one of the ways a company can create a positive Net Revenue Retention - a marker of sustainable growth.
It does not matter what your product is, how high your ARPU is, or how many new customers you bring in; if your customers leave at a high rate, your business will go under!
With that in mind, let's look at precisely what churn is, how to calculate it, and, even better, the guiding principles to follow that will reduce customer churn rate.
Customer churn, also known as attrition, is when an existing customer stops paying for your product for any reason.
Depending on the type of product you have, this could present itself in a few ways.
The two primary forms are:
Customer churn rate is the rate at which you lose customers over a certain period of time.
Depending the kind of metric a company is concerned with, churn can be calculated in different ways:
The basic calculation for customer churn rate is:
number of churned customers / total number of customers
Where the number of churned customers is the number of lost customers within a specific period over the total number of customers you had during the same period.
For instance, if your company had 100 customers during May and lost five that same month, your churn rate would be 0.05 or 5% (5/100).
Most companies track this over a span of time - typically monthly, quarterly, or yearly - but you can also track it based on product or segment.
For instance, you could compare rates of different industries. If there's a high churn rate in a particular industry, it's time to do some research.
You should determine if there's additional product functionality required for that specific industry to succeed.
Consider niche-ing down to industries that will generate greater retention.
Regardless of which measure you choose, tracking churn is vital for your business, but reducing customer churn is critical.
This question is a bit harder to answer and is subjective to your industry and company age.
For SaaS companies, average churn rates are anywhere from 2% - 8% of monthly recurring revenue, per churn studies.
In these cases, a rate on the lower end of 2% is considered "good"; however, age also factors in.
Companies 10 years and older have a 2-4% customer churn rate, whereas younger companies are still finding their way in the market and tend to have a higher range of 4% - 24%.
These variations are why it's so essential to track churn continually.
You can't always compare your customer churn rate to another company.
Every product and industry is different; you will get a better idea of how your product is doing when you compare your customer churn rate now to what it was a year ago.
A lower customer churn rate is always better, whichever way you stack them.
The reasons for churn are numerous, and given the differences in industries, segments, etc., that different companies compete in, it's hard to say with complete certainty.
However, broadly speaking, there are a few glaring reasons one of your customers might churn:
The business environment is a bit rocky, and companies are becoming much more stringent in their budgeting.
In addition, many venture-backed firms need to cut their costs and increase their runway to stay viable as a company.
These issues have a direct impact on software and technology providers.
Whether the company is unable or unwilling to pay the listed price or is on the verge of being insolvent and starts having failed card payments, much of what falls into this category is outside of your control.
Yes, you could discount on pricing, but you may end up in a race to the bottom with a competitor.
Competing on pricing alone can be a tough battle.
This is likely well in your control and is one of the biggest drivers of a high churn rate.
Customers who continuously come up against product bugs, have numerous outstanding support tickets, or who have been promised a feature for months and months and have to get access to it are all high risks for churn.
Tracking these issues and the customers who they are impacting, will go a long way to mediating the risks.
But that will only get you so far. If you aren't putting enough resources towards fixing product issues, then even the best support team in the world wont be able to prevent them from churning.
During the sales process, or perhaps as a result of a great customer success manager, you likely established someone who is an internal advocate for your company and product within your customers' organization.
This person was your key to getting internal buy-in and the one who helps sing your praises internally.
But then they leave the company and are replaced by someone with absolutely zero context around your product.
In fact, that person has years of experience using a competing tool and has very little interest in learning something new.
This happens a lot, and, unfortunately, it's one of the most challenging scenarios to try and save a churned customer.
Churn is crucial because it's a reflection of the value that your product is providing to customers.
It costs more to acquire a new customer than to retain one, so you should always work to make your churn rate as close to zero as possible.
Churn also impacts other financial metrics for your business:
You can use your churn rate to measure long-term health, customer retention rates, loyalty between customer segments, and even forecasting performance.
However, it's good to remember that churn is a starting point, not an endpoint for analysis.
Some churn is unavoidable and can even be expected.
If your product moves in a new direction, drop specific functionality, or overall makes a market pivot, you will undoubtedly lose some customers.
That's not necessarily a bad thing.
Customers sign up for a specific service, and if they can no longer achieve their goals using your product, they'll find a different company.
If customers are lost while you transition into a new market segment that is expected to offer more customers or increase the contract price for your product, it's an overall win for the company.
Also, keep in mind the customer segment that is churning.
High churn rates for the free tier customers will result in a different level of urgency than high churn rates from paying customers.
High free-tier churn may mean you need to expand some of the functionality to demonstrate product value and better secure a conversion.
You want your ideal customers to stay on track.
If you're building and marketing a product to a specific group of customers and they need help finding enough value after signing the contract to renew, it's time to hit the breaks and really pay attention.
If there's a hint that customers are unsatisfied, it's vital to determine why.
Is your product not solving their need? Are they unable to get in touch with support or success teams? Is a competitor offering similar functionality at a lower cost?
Many factors could cause an existing customer to churn; understanding those factors helps you mitigate current issues and better prevent future ones.
Churn can be broken down into two measures:
This is a critical distinction. You could have lost 50 accounts that were worth $1 each - your customer churn will look a lot worse than your revenue churn.
So now that you've got an idea of what churn is and its impact on your business let's jump into several ways to keep that churn rate low.
Customer experience, whether that's in the service and support they get or the benefit they get from the product, is one of the things that are most in your control when it comes to customer churn.
The customer experience can be improved across nearly every point of the customer journey.
First impressions matter; the onboarding experience is that first date with your product for customers. Their friends have talked you up, but now they're sitting at the dinner table and hoping for sparks to fly.
The process of getting a new customer to use your software is called Customer Onboarding. In general, onboarding is the responsibility of customer success and one of their core metrics.
But onboarding is the most critical part of the customer journey in terms of a customer retention strategy.
Onboarding can take many forms. For example, in a PLG motion, there is usually an initial "self-serve" onboarding in which the new user is guided through the product from within the product, using tooltips, videos, or product tours.
The goal of these onboarding flows is to decrease the "time to value" - the time it takes for a new user to go from sign up to reach their "aha" moment.
Regardless of if a user has already done a self-serve walkthrough during their trial or freemium usage, a dedicated customer onboarding process is warranted once they become a paid customer.
A new customer is less likely to churn - or leave the date early - if you exceed expectations from the moment they first sit down with your product.
Understand the goals they hope to achieve with your product and provide the necessary resources to ensure they reach every milestone. This way, they won't be tempted to look for other offers.
An engaged customer usually means a loyal customer, and loyal customers are better than lost customers!
Customer engagement is a great strategy for churn reduction because it enables you to add a human touch to the overall customer experience.
While engaging with customers doesn't entirely replace deficiencies in the product experience, it can be a great way to get explicit feedback from the customer.
Listening to customers is one of the best ways to correctly identify which customers are most likely to skip town on you.
If a customer threatens to leave your product because of cost, take the time to listen and understand their experience and try to understand:
When you take the time early on to accept customer feedback and align their goals with their product experience, you can anticipate and prep for objections.
Anytime you get a heads-up that a customer is considering leaving, you have the time to address their concerns and potentially secure a renewal.
It's by no means an easy task, but showing you care what your customers say can save your relationship and keep them around in the future.
Not having a dedicated customer success team is something that companies of all sizes do at their own risk.
Don't believe me? Here are some stats to prove the point.
Companies with a dedicated customer success team see:
Making a cost/benefit analysis of hiring for customer success does not require a lot of thought.
Getting a 10% increase in retention is a huge benefit, but that kind of bump in expansion revenue? In the long run, that's a huge amount of money for the business.
While creating a positive customer experience through customer engagement is good, eliciting actual feedback from a current customer is the best way to understand if their experience is in line with overall customer expectations.
There are two gold-standard methods for this kind of feedback:
You are likely familiar with tools like Marketing Automation, but automation is not the sole domain of marketers anymore.
With greater access to customer data and behavioral signals, success teams can also leverage automation to optimize their daily tasks.
CSMs should spend time on something other than manually writing (and sending) the same email to multiple customers.
They also shouldn't be responsible for poor Customer Experience caused by the wrong emails sent to the wrong person.
You see, CSMs are responsible for providing the right value to the right customer. But with a large customer base, we cannot expect them to do everything manually.
With the right tools in place, CS teams can:
The best way to decrease your churn is to stop it before it happens.
But how can you know that a company is on the verge of churning if they don't explicitly tell you so?
The signal lives in the noise of their product usage behavior; you just have to be able to find it.
Here are a few variables to consider when building your churn-prediction models.
The first step towards customer churn prediction is conducting a churn analysis.
This involves analyzing your entire customer base and comparing lost customers' behavior to those of existing customers.
Conducting this analysis will help you identify the elements that will eventually make up your churn signals.
Predictive models are great, but sometimes you don't need fancy machine learning and AI to spot churn risks, you just have to look for them.
Customer Health Scores will enable you to roll up key metrics on an account basis, including explicit feedback and implicit behavioral signals.
Ok, so now that you've set your customer churn prediction signals, you have to empower the right people on the team to take action at the right time.
Having a playbook for the various churn scenarios - one that can be activated in real-time - is critical to saving customers from churning.
Click here to learn more about Customer Churn Playbooks.
Churn can be looked at from the angle of customer churn and revenue churn.
Would you rather lose ten customers whose combined LTV is $10,000 or one whose LTV is $30,000?
If you only looked at the raw numbers of customers, you would have made the wrong decision from a revenue perspective.
Reducing churn is one of the two ways to increase your Net Revenue Retention - a critical metric for sustainable growth.
There's no beating around the bush here; customer churn is a company killer.
Understanding what churn is and how it's affecting your company is the only way to get ahead of it. It reflects the perceived value of your product to customers that you've spent time, energy, and money acquiring.
The closer you can get your churn rate to zero, the more return on investment every customer has on your business.
