As a SaaS company, success is often hard to come by. Keeping the customers intact is even harder and requires you to deliver an unparalleled customer experience over a long period. That being said, there are various reasons that a customer stops using your product (a lot of which cannot be measured/tracked); thus, ‘churn’ is inevitable.
If a business isn’t able to understand the concept of “churn,” it can lead to them having really tough times ahead. However, you can still reduce it to a point where it doesn’t hinder your growth.
So what is churn? And how can you ensure that your SaaS business is working towards reducing the churn rate? This article will explore a few of these concepts in detail.
Let’s dive right in.
What is Churn Rate?
One of the most important product metrics for any SaaS business working with a subscription-based model is its churn rate. But what do you understand by the term: ‘churn rate’?
In simple terms, it’s the percentage of customers who discontinue their subscription or stop using a service over a given period. Understanding the churn rate is critical since it impacts the company’s revenue and growth potential.
A high churn rate indicates that many customers are discontinuing usage of your products or services, directly impacting revenue. It also hurts the company’s bottom line.
In addition, a higher churn rate also indicates a lot of other underlying problems with your product or service. Some reasons here could be poor customer service, inadequate value proposition, or ineffective marketing.
Why is Understanding Churn Rate Important?
- Understanding the churn rate is essential since losing a customer also leads to a loss of revenue. As mentioned, it indirectly or directly impacts the company’s bottom line.
- Finding a new customer is generally more expensive than retaining an existing one.
- A high churn rate often signals to potential customers (or even existing ones) that a SaaS business is not delivering value. This high churn rate often leads to a negative brand reputation. Reducing the churn rate can improve the brand image and strengthen customer loyalty.
- High churn rates often indicate product and service flaws but can also be critical to improving offerings. You can reduce the churn rate by collecting valuable customer feedback and making improvements to your product.
- Reducing your churn rate accounts for more stable revenue and customer numbers. It often leads to more accurate revenue forecasting, helping you plan and invest more effectively toward growth.
What are the Different Types of Churn Rates?
Now that you know the importance of reducing the churn rate, it’s equally crucial to understand the different types of churn rates.
Customer Churn Rate
This is one of the most basic types of churn rates and measures the percentage of customers who discontinue their subscription or stop using the product during a given period. This rate is usually calculated by dividing the number of customers lost during a particular period by the total number of customers at the beginning.
Revenue Churn Rate
Revenue churn is the percentage of subscription dollars up for renewal that a company will lose over a given period. It can also be the ability of your product to keep the contract value of your existing customers. Alongside customer churn, the revenue churn rate provides a 360-degree overview of the health of the company’s customer base.
Gross MRR Churn Rate
This is the percentage reduction in monthly recurring revenue from existing subscriptions, owing to the subscriptions being moved from paid plans to lower or free plans, cancellations, and other services being removed from subscriptions.
This is the net percentage of total MRR lost from existing subscriptions during a given period. It considers the MRR gained from expansions and upgrades from the remaining customers.
How to Calculate the Churn Rate?
Let’s now dive deeper into the process of calculating the churn rate.
To calculate the churn rate, you need to choose a period.
This particular value can be considered both monthly & annually. You’ll also need to know the number of customers at the beginning of the period versus the number of customers lost. Once you have both, divide the number of lost customers by the total customers at the start of the period.
At last, you can multiply this number by 100 to find the churn rate. To explain this with the help of an example, let’s say your software company had 600 customers at the start of the last quarter.
However, you also lost around 60 customers owing to expired contracts, poor customer service, or overall production dissatisfaction.
It implies that your quarter’s customer churn rate would be the 60 churned customers divided by the 600 customers. When we divide 60 by 600, the number would be 0.1%.
After multiplying this number by 100, we’ll get a customer churn rate of 10%.
The formula should look like this:
Customer Churn Rate = (Number of lost customers ÷ Total customers at the start of the period) x 100
= (60÷600) x100
= (0.1) x 100
So, the current churn rate for your business is 10%.
What is a Good Churn Rate?
Every SaaS founder is concerned if their churn rate is too high.
A “good” churn rate for one company might be terrible for another.
While it’s important to keep churn as low as possible, it can be difficult to determine a “good” churn rate, as it can vary widely by industry, business model, and other factors.
Different industries have different churn rates. For example, software-as-a-service (SaaS) companies typically have higher churn rates than businesses in other industries because customers can easily switch to a competitor. According to industry benchmarks, a reasonable churn rate for a SaaS company is typically between 5% and 7% annually.
Overall, a reasonable churn rate is low enough to allow a business to sustain growth and profitability while also considering the unique factors that affect the churn rate in that particular business or industry.
It’s important to regularly monitor the churn rate and improve customer retention, such as improving customer service, offering incentives for customers to stay, and analyzing why customers are leaving.
What are the Reasons Behind Customer Churn?
Customer churn, or the rate at which customers stop doing business with a company, can be a major challenge for businesses of all sizes. Understanding the reasons behind customer churn is critical for companies wanting to retain and grow their customer base.
Here are some common reasons why customers churn:
Poor Customer Service
Customers who feel they’re not getting the desired level of support are more likely to churn. It can include long wait times, difficulty reaching customer support, or unsatisfactory resolutions to their issues.
Competition is Offering Better Value
Customers may switch to a competitor if they feel that it offers better value or meets their needs.
If customers are not onboarded properly, they may not fully understand how to use the product or service, leading to frustration and, ultimately, churn.
Lack of Engagement
Customers who don’t feel engaged with a product or service will likely churn. It can happen if a business does not offer enough opportunities for customers to engage with the product or service, such as through webinars or other educational resources.
Lack of Product-Market Fit
If a product or service doesn’t meet customers’ needs or expectations, they may switch to a competitor. It can happen if the product or service is too complicated, doesn’t offer the necessary features, or simply doesn’t align with the customer’s goals.
Potential Negative Impacts of a High Churn Rate
Company leaders realize it’s much easier to keep an existing customer than to obtain a new one. Yet that doesn’t imply that maintaining a current client is simple. Businesses that don’t invest in keeping solid client relationships risk having high churn rates, which can be dangerous for the future of your business.
Here are four ways customer churn can be devastating to your business :
Churn Helps Your Competitors
Churned clients are often vocal about why they’ve stopped using your services. Negative customer reviews can impact your bottom line and act as a gift to your competitors.
Interestingly, they can even use these experiences from your churned customers to land new clients.
This, in turn, stalls your growth and revenue.
Churn Hurts Your Valuation
High churn rates can signal investors that a business has difficulty retaining customers, making it less attractive as an investment opportunity.
Investors want to see businesses that can retain customers over the long term, as this can signify a strong competitive advantage and a sustainable business model.
Reduced Customer Lifetime Value
High churn rates can reduce the lifetime value of customers. Customers who churn are unlikely to make additional purchases, reducing the potential revenue they could have generated over time.
Increased Customer Acquisition Cost
As mentioned earlier, high churn rates can increase the cost of acquiring new customers. It can result in higher marketing and sales costs, which can strain a business’s resources.
Ways to Lower Your Churn Rate
Customer churn rate is one of your company’s most important SaaS metrics to track.
Many underestimate the numbers as they struggle to calculate the churn rate correctly, but once you’ve worked out your customer churn rate, you have a benchmark from which to make improvements and retain more customers.
Here are a few ways to improve your customer churn rate:
Provide High-Quality Products or Services
Customers want to feel like they’re getting their money’s worth. Ensure your products or services are of high quality and meet the needs and expectations of your customers. Listen to customer feedback, make changes, and improve products and services based on their suggestions.
Increase Customer Engagement
Engaged customers are less likely to churn. Use email marketing, social media, and other channels to engage with your customers regularly. Offer customers exclusive promotions, discounts, and content to keep them engaged.
Make it Easy to Do Business with You.
Make it easy for customers to interact with your business. Optimize your website and mobile apps for ease of use and provide convenient payment options. Minimize the number of steps customers have to take to complete a transaction.
Provide Excellent Onboarding
The onboarding process can significantly impact a customer’s decision to stick around. Provide a comprehensive and easy-to-understand onboarding process that helps customers understand how to use your product or service.
Offer Exceptional Customer Experience
Go above and beyond to provide exceptional customer experience—surprise customers with unexpected gifts, discount coupons, or personalized messages on special occasions. Make your customers feel appreciated, valued, and heard.
Monitor Your Churn Rate
Keep a close eye on your churn rate and monitor it regularly. Analyze why customers are leaving and take corrective action. By understanding the reasons for churn, you can implement effective strategies to address them.
As is evident, customer churn is one of the biggest challenges SaaS companies face today.
A higher churn rate often indicates significant problems with a business and its overall value proposition.
Failure to understand this and manage the churn rate can hinder your long-term success, leading to decreased revenue and customer satisfaction.
Companies must look to identify the root cause of this churn and develop strategies to mitigate it.
By prioritizing churn reduction, you can positively impact your bottom line and achieve sustained growth over some time.
You may also be interested in these free CRM tools to keep your customer engaged.