Why Churn is Crucial for SaaS and Tips to Eliminate It

Imagine you own a little shop in a small town and you nearly know all your customers personally.

In this case, it would be easy for you to find out which customers stopped buying from your store.

After realizing that some of these people that you know stopped buying from you, you could also learn from them or the others in the town why they actually stopped buying from you.

Although it seems like such an effortless process when thinking about such a small scale, it can be much harder to identify the number of people and the reasons behind churn on a bigger scale.

No matter how hard it is to identify these numbers and reasons, it is a must for a SaaS company to be well informed about churn and accordingly put effort into eliminating it.

What is a SaaS Churn Rate?

what is customer churn

The percentage of customers who cancel their subscriptions in a given period of time is referred to as SaaS churn rates.

In order for a SaaS to grow and thrive, its growth rate (i.e. new sign-ups) must surpass its churn rate (canceled subscribers).

Churn rates are an important metric for measuring sales and growth forecasting since they are a key indicator of performance. When it comes to forecasting, SaaS churn is described as the probability rate of subscribers canceling their subscriptions.

Churn formula:

To calculate your churn rate, divide the number of customers who leave within a given period by the number of customers who join at the start of the period.

While the formula is simple, SaaS churn can be difficult to measure and define in practice.

SaaS churn, for example, may be defined in a variety of ways, such as:

Customer level churn. 

The loss of a customer, regardless of a subscription level or schedule, is measured by this churn metric. Simply put, when a customer cancels your product, this metric is relevant.

Subscription level churn. 

This measure is related to the actual subscription level of the consumer. You may not lose a customer, but they may want to downgrade their service level instead.

Recurring revenue. 

The measured recurring revenue (ARR or MRR) as it relates to churn is included in this metric.

To make things a bit more complicated, churn may include the following:

Varying churn rates. For example, you might notice that churn rates fluctuate during particular months or seasons.

Varying growth rates may have an effect on churn measurement and optimization. Growth initiatives that result in a large influx of new customers may cause data to be skewed.

Customer demographics and customer types may also play a role. You may discover that some types of customers have lower or higher churn rates than others. This may be due to the fact that some prospects are more suitable for your products and services than others.

It’s not uncommon to find that some subscription levels have a higher retention rate and a lower churn rate than others. Lower-tier service lines typically have a higher turnover rate than higher tiers.

Variable contract levels and durations are other factors that are often ignored. Month-to-month contracts, for example, can have a higher rate of churn than annual or bi-annual subscriptions.

Why SaaS Churn Happens

why churn is crucial for saas

You won’t be able to please everyone, no matter how hard you try. Churn, like taxes and death, is an inevitable part of our SaaS lives.

Here are a few examples of why customers usually cancel their subscriptions:

  • Finance issues
  • Customer’s needs have changed
  • Customer fails to see the value proposition of your product in the long term
  • Your SaaS fails to meet or exceed expectations
  • Poor customer service or response rates
  • The customer has switched to a competitor’s product or service.

As you might assume, some of these variables are under your influence, while others are dependent on external factors that are beyond your control.

How To Deal With Churn

When we talk about churn, we’re actually talking about the customers’ overall satisfaction, as calculated by NPS scores, and how you can work proactively to help them.

Here are a few tips:

Help your users in getting the most value and usability out of your SaaS. You can do this by communicating consistently and effectively, actively listening, collecting and implementing feedback, and striving to improve the user experience.

Communicating with your customers to uncover problems. This information can be integrated into the customer success strategies and support programs, as well as used to prevent common problems from becoming bigger problems.

User engagement and usage should be monitored and measured. Identify the key points in your SaaS where engagement drops or decreases, and work to improve those aspects.

Identify what makes your SaaS product “sticky.” What makes your product a “must-have” in your customers’ businesses’ day-to-day operations. How can you integrate the product more deeply into their processes so that it becomes the key component for them?

When it comes to drop-offs, assign the top reps to “save” struggling accounts. Above all, keep testing, monitoring, and improving the systems’ features, pricing, and all other aspects.

Deep analysis and deep understanding of churn will likely lead to:

  • Inclusion of new features
  • Elimination of unnecessary elements
  • Improved streamlining of processes
  • Improved support
  • And more…

Although some churn is inevitable, that doesn’t mean you can rest on your laurels as your revenue and growth rates fall through the cracks in the system.

In reality, some churn reasons that seem to be “out of your control” can be addressed with innovative solutions.

A Few Measures To Address Common Causes Of SaaS Churn:

The customer goes out of business or can’t afford it.

Businesses struggle, they experience financial difficulties, and budgets can tighten at any time. Although you may not be able to directly affect your client’s bottom line, you can classify the types of companies that are most likely to succeed. If you’ve created a profile based on the success of these companies, you can tweak your marketing and outreach to attract a “better” customer, lowering your total churn over time by simply targeting the “right” customers.

A customer needs a feature that you do not have.

It’s a reality that you’ll never be able to satisfy everyone…

and, contrary to popular belief, the consumer isn’t always right. Will the long-term ROI of introducing the function be worth it? Will it benefit other users?

If, on the other hand, you discover that a large number of subscribers have requested that feature over time, you will need to re-evaluate your feature pipeline and move this feature higher on your developers’ priority list.

Customer cancels without giving the product a fair chance.

Any SaaS founder will undoubtedly go through this unpleasant experience. A potential customer buys or signs up for a trial of your SaaS, but they don’t use it to its full potential and cancel immediately.

You can lead a horse to water but not force it to drink, right? That’s one way to look at it. Taking a problem-solving approach, on the other hand, can lead you to reconsider your onboarding process. You will be able to identify drop-off patterns at particular stages as a result, enabling you to revamp your processes in order to fix the issues you’ve identified.

While not every instance of churn can be avoided, taking a solutions-oriented approach rather than an “it’s out of our control” approach always wins.

Negative Churn – The End Goal

“Negative churn” is every business owner’s dream. Cross-sells, up-sells, and subscriber growth offset and outpace any revenue loss caused by churn rates.

One of the following factors usually leads to a “negative churn” rate:

1- Growth/expansion efforts

2- Up-sells and promotions

3- Cross-selling to your existing customer base

The first 12-24 months of your SaaS launch are critical for establishing a core set of features and a simple pricing model that covers the core elements of your product while still leaving space for innovation and feature expansion.

Negative Churn – When Is The Right Time?

Negative churn is important, but all good things come to an end in time. Early-stage companies aren’t often the best candidates for addressing and testing a large number of products, packages, and pricing variations.

In order to further improve your product and gather all the necessary data to make informed decisions about your future path and development pipeline, the first one to two years of your SaaS should be focused on user acquisition and feedback.

Maintaining a low overall churn rate should be a priority during these first 12-24 months, not reaching a “negative churn.”

Key Takeaways

  • Churn isn’t good, but it is inevitable
  • Track, measure, analyze and improve
  • Your approach to reducing churn will refine over time as your product matures
  • Churn rates may vary per industry
  • Negative churn is a best-case goal later on
  • Focus on improving your product and customer satisfaction rates

Tips & strategies you can use to Reduce Customer Churn

tips to eliminate churn for saas companies

1- Analyze why churn occurs

Yes, this may seem self-evident, but it needs repeating: you should simply find out why your customers have decided to leave.

The simplest way to do this is to speak with the customer.

And when I say “speak,” I mean “actually talk”: calling your customers is the best choice. This way, you will show that you truly care while at the same time being able to quickly determine what went wrong.

FACT: 68% of consumers abandon a business because they believe it is uninterested in them.

Don’t be lazy and just give customers exit surveys; instead, call them and ask why they left. This will provide you with direct customer feedback on whether your product solves or causes problems for your customers.

Communicating with customers works well when it comes to churn analysis. And you should be using all platforms to do so: phone, e-mail, website, live chat, and social media. A phone call, an e-mail, or a survey will provide you with valuable feedback about how well you serve your customers. It’s that simple.

2- Engage with your customers

Another way to prevent churn is to keep your customers actively engaged with your product.

Give your consumers reasons to keep coming back by demonstrating the day-to-day importance of using your products.

So, how can you do it?

To begin with, provide adequate and versatile content about your product’s key functional benefits, as well as daily news updates such as deal announcements, special offers, or upcoming upgrades.

As we said, you should connect with your customers throughout all platforms.

Email marketing is the most effective customer engagement channel for B2B businesses to reach out to their existing customer base.

When it comes to identifying when you should contact your customers, begin by analyzing their journey.

Throughout every step of the consumer lifecycle, the customer journey gives you a clear picture of all customer interactions across all platforms, devices, and touchpoints, allowing you to be present with the right content in the right place and at the right time.

Another approach is social listening, which is the process of searching for and participating in online discussions about your company by looking for brand mentions, unique keywords or phrases, and comments. This will allow you to stay on top of what’s going on in terms of customer satisfaction.

3- Educate the customer

The above point naturally leads to this churn-prevention technique.

You should have sufficient high-quality educational or support materials to help increase retention and decrease churn. Provide free training courses, webinars, video guides, and product demonstrations – whatever it takes to make the customers feel comfortable.

In other words, you must not only provide them with useful tools but also provide clear instructions on how to use these tools efficiently. This way, you’ll be able to show the full potential of your products and services, as well as ensure that consumers have a smooth onboarding and implementation.

4- Know who is at risk

One of the most common churn strategies for B2B companies is to identify at-risk customers. In fact, 35% of B2B companies have used this strategy to reduce customer churn.

There is often a group of customers who are more likely to leave than others, so it’s in your best interest to figure out who is on the verge of leaving. You’ll be able to contact them in time to persuade them to stay.

But I have some good news for you! 

It’s easy to identify the customers who are at risk. Find out which customers haven’t been contacted for a long time. Or maybe they requested a price list, a quote, or simply more information, and you didn’t follow up?

Knowing all this will allow you to be more proactive in your churn prevention efforts.

Additionally, after analyzing the causes of churn, you become conscious of certain actions, or maybe the lack of it, taken by your churned customers. This information will help you in predicting whether someone behaving similarly is likely to leave your company soon.

5- Define your most valuable customers

As deceptive as it may sound, you should separate your most valuable customers from the rest and go above and beyond to ensure that they get at least what they signed up for.

Why? Let’s face it, these are the customers you most want to keep. Since valuable customers generate the most revenue, they must be treated with special treatment.

A record of your interactions with customers will show how involved they were at each point, whether they had any issues with the product, and whether these issues were resolved.

So, divide your customers into groups based on their profitability, willingness to leave, and probability of accepting your offer to stay. You’ll be able to forecast consumer churn more accurately this way.

6- Target the right audience

If you’re attracting the wrong audience, no matter how great your retention techniques are, they could all be useless.

What I mean is that if your first contact with a customer revolves around the words “free” and “cheap,” you risk attracting customers who aren’t interested in the value you offer. These types of customers are the ones that are most likely to leave.

It’s better to go after people who recognize the products’ long-term value. Focus on them.

7- Always try to give a better service

You already know this. But it is, without a doubt, the most obvious way to keep consumers by your side. 

Bad customer service is, in reality, the most common cause of customer churn. Incompetent and rude employees, as well as unbearably slow service, are the two key reasons why customers leave a company, according to an Oracle Customer Experience Impact Study.

According to Forum Corporation’s research, 70% of churn is due to poor service. Do not underestimate the negative impact of bad customer service!

According to some studies, 58% will never use a product again after having a bad experience, and 48% of those who have had a bad experience will tell 10 or more other people about it.

And we are not talking here about really bad service. Sometimes an average customer experience, or what can be called a “meh” experience, is a trigger for churn. You simply showed nothing to hook that customer on.

So, make sure that you provide “best in class” customer service that makes customers, above all, happy.

8- Get your best people deal with cancellations

To save a customer who is about to churn is certainly not mission impossible.

But you will have to call on your best sales experts to achieve good results in keeping them.

Find out who your best, most vocal, and convincing B2B sales reps are and give them the task to talk to those who decided to leave, and in this way – prevent customer churn. At this point, you can certainly make use of their charisma and experience in dealing with difficult situations and dissatisfied customers.

Often all it takes is a good listener who is able to put themselves in the shoes of the customer to turn things around. According to the Customer Service Group’s customer satisfaction survey, the majority of respondents said that being understood and valued is more important than getting their problem resolved.

9- Flaunt your competitive advantages

What sets you apart from your competitors? What separates you from the others? What would your customers lose if they decided to stop using your product?

Answering these questions will assist you in identifying your competitive advantages and promoting them more effectively. 

Analyze what it is that you do better or what makes you unique. Now think – do your customers know about it?

If not, it might be the right time to tell them.

10- Offer long term contracts

Finally, what about extending the commitment of your customers?

Consider offering a longer subscription model instead of month-to-month contracts. Your consumers will have enough time to put the product into practice and see the benefits of doing so.

Conclusion

Now that we’ve established that you can’t afford to lose customers, it’s time to focus on keeping them. That means your customers must clearly understand why it is better to keep you and stay with you rather than leave.

Furthermore, you should be proactive in preventing customer churn by creating conditions in which consumers can easily see and use the benefits your products offer.

All in all, you don’t need magic to keep customers. It all comes down to identifying the cause of churn and then taking action. Improve your customer service rate, communicate with consumers and include them in your products, and make sure they understand the benefits of staying with you rather than going elsewhere.

Selman Gokce

Selman Gokce is the Senior Inbound Marketer of UserGuiding. He is highly invested in user onboarding and digital adoption, especially for SaaS, and he writes on these topics for the UserGuiding blog. When he's not writing, you can find him either listening to LOTR soundtracks while cooking or getting angry because he lost in a video game.

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