Saravana Kumar is the founder & CEO of Kovai.co, a company that is into Enterprise Software & Knowledge Management Space.
Churn is the process of losing customers. While any business hates losing customers, it is part and parcel in a SaaS business for customers to close their accounts or stop subscriptions for various reasons.
Because of this, tracking churn is extremely important in SaaS, and if you keep losing customers as you add new ones, your business can stall and may even lose revenue. Churn is usually tracked by calculating the churn rate.
Churn rate is the percentage of customers who leave your business during a given period—month, quarter or year. A simple equation for churn rate is the number of customers who left divided by the total number of customers you had at the beginning and then multiplied by 100.
You can also calculate the revenue churn rate, which is the extent of revenue you are losing due to churn. The equation for revenue churn rate is the monthly recurring revenue (MRR) at the beginning of the period divided by the MRR at the end of the month (minus additional revenue or upgrades from existing customers) and then multiplied by 100.
Why SaaS Companies Focus On Churn
It’s one of the biggest challenges for SaaS companies; customer churn tends to happen these days because it has become extremely easy to opt for a new product, especially with migration teams that will easily help you move all your data. A rule of thumb in business is that it costs five times more to acquire a new customer than to retain an old one. Thus, if a SaaS business can keep its customers happy, its chances of building an overall thriving business are much higher.
In fact, your business can grow by retaining your customers because your chances of upselling annual contracts, new features, upgrades and new products are higher. They may also tend to recommend your product to other customers if they are satisfied. In fact, statistics show that the probability of selling to an existing customer is much higher than to a new one because people are more responsive to individuals or companies that they’re already familiar with. It has also been found that with just a 5% increase in customer retention, profits can increase by more than 25% over time.
Impact of Churn
While Churn is inevitable, a negative imbalance between newly acquired customers and existing customers can ruin customer acquisition efforts, reduce revenue and lower profit margins, slowly bankrupting businesses due to high customer acquisition costs.
Acceptable Churn Rate
After reviewing multiple surveys and having discussions with other entrepreneurs, I understand the average churn rate to be about 5% in the industry. For established big SaaS companies, the average churn rate can be larger.
That said, for early-stage SaaS companies, the numbers could be all over the place. But once the product-market fit is obtained, I think 4.5% to 5% is a number that you should aim for.
Remember that pricing also has a big impact on the churn rate. I have seen my company’s products with higher average revenue per user (ARPU) see a lower churn rate compared to products with a lower ARPU.
Ways to Reduce Churn
1. Ensure your customer derives value from the product.
A customer will continue with your business only if they get the value from the product as advertised by your sales and marketing. For the most part, if they are getting value, a customer is unlikely to churn. One way to achieve this is by investing in customer success teams and customer success software.
2. Have a customer retention strategy.
Customers often churn involuntarily for reasons including their card payments getting declined—the customer’s card expires, they haven’t updated a payment method or they are getting billed for services they didn’t subscribe to. One way to avoid this is through smart payment tools that can handle expired cards, retry payment renewals and automatically update payment information to prevent payment failures.
3. Investing in a customer success team.
As the customer bought the product believing they are going to solve a problem with it, handholding the customer with training, data migration and real-time feedback and addressing any other issues are important steps in ensuring the customer succeeds in solving the problem with your product.
The customer success team needs to have in-depth knowledge about the product and the value it adds to different customers. One way to do this is to have them study high-value customers and find out what they love about the product and the features they use the most. Try replicating this with newer customers so they achieve the same success.
4. Handhold new customers.
As alluded to earlier, handholding is often necessary, especially at first. This can include getting new customers to use a popular feature, identifying problem areas for them and planning a set of activities to correct these problems. It is advisable to start with high-value customers, learn more about them and then slowly focus on the rest of your customers.
5. Utilize customer success tools.
It’s important to get real-time data on customers’ use of your product. There are plenty of third-party tools to support business including Segment for data collection, Freshservice for helpdesk, Pipedrive for CRM, HubSpot for marketing, etc. However, if you need software to give you data from all these tools in one place, a customer success platform does just that job.
I find that presenting data in a usable manner like this can help your customer success team focus on solving the issue rather than data analytics. By tracking these things you can predict the features customers regularly use, the frequency with which they use your tool, what they use your tool for and where they usually face blocks or errors. Some tools even perform repetitive tasks like giving subscription reminders, suggesting new features or sending out emails.
Optimizing your customer success teams and software is vital for successful SaaS companies. You can start small by focusing on high-value customers and slowly expand as your team grows.