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SaaS Churn: The Myths and benchmarks and strategies to Increase Revenue

Apr 26, 2022

Last week, I canceled my annual SaaS subscription (I had three weeks left to renew).

Interestingly, even though I paid for a year-long subscription but the company refused to allow me to keep the final 3 weeks' worth of its top features.

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

"This move will instantly reduce your account. Are you certain you wish to keep your subscription?"

I did cancel the program, even though I knew that I would not need the tool going forward. With the terminology of SaaS I turned on the engine. And the experience got me thinking:

  • Was the immediate removal of paid features the most effective way to stop me from going through the motions?
  • Was it the day I was officially counted to be "churned"? Did they count me as"churned" on the day that I canceled? The day that my subscription was due to renew? Would I have been able to cancel or upgraded my subscription?
  • What would they have done differently to stop me from cancelling?

In this article this article, we give our best shot at answering these and many other questions surrounding churn.

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

In the second part, we'll cover five churn-prevention strategies that have worked in other SaaS companies.

Then, in the final part of this series in part three, we'll wrap up with a set of definitions you could use to talk about churn with your colleagues along with some additional tools.

If you'd like to use this table of contents to jump through the sections in this article.

Table of Contents

Part I: SaaS Churn Benchmarks

When folks in SaaS talk about churn, we're not always doing well in making sure that we're on the same on the same page.

If someone claims they have a 5% churn rate, is it talking about monthly, quarterly, or annual the churn rate?

Are they including customers who never made the cut in a trial?

Are you able to compare the churn rates of an SaaS firm that targets enterprise customers with one that sells to consumers?

In setting churn benchmarks for SaaS firms, there's many things to think about. This is why we break it all apart in order to let you run an extensive churn analysis of your own business and be able to better understand how you're doing.

Is There an Ideal Churn rate for SaaS?

It is often said that a 5 to 7percent churn rate would be perfect for SaaS companies. Is this just anecdotal? Is it common for SaaS companies to meet this standard?

In other words In other words, 5 to 7% could be the ideal However, what's the median?

To find out, Ryan Law, former CMO and co-founder at Cobloom, performed an study of the most recent six churn reports, or research studies. He found out that there's no consensus regarding the average rates of churn for SaaS businesses. A majority of the studies he studied showed the average annual churn of 10%. The three other reports revealed more and a wider spectrum between 32% and 61 percent annual churn.

What's so different about this? Ryan suggests that there's not enough data out there for a clearer image of SaaS turnover because it's not an area that most businesses want to make transparent.

He also observes some other factors that affect churn, including a company's size, and its industry.

Chunks of the same product may differ by industry

Industries can have very different values for churn.

"Look at your personal technological stack and you'll probably find tools you think are vital, while others you consider 'nice-to-have,'" Ryan writes. "It's likely that a financial or sales tool are less prone to losing customers more than marketing tools, since it's believed as being more responsible for revenues."

He also says that niche products that have fewer competitors can experience lower the rate of churn.

The size of the company can affect common churn Rates

Ryan points out that many of the largest SaaS companies target enterprise customers which have longer contract durations, so their churn rate will be lower. So the flip side is that SaaS firms that focus on smaller or individual businesses that have a larger customer base and contract lengths that are shorter will naturally experience higher churn rates.

While Ryan analyzes the typical ratio of churn of big and smaller SaaS firms What he's actually saying is that your churn rate will vary based on the size of your client and the average value of your contract. The less your ACV greater the ease it is to churn.

What's the Acceptable Level of Churn?

Hotjar creator David Darmanin understands that a percentage of churn doesn't necessarily mean anything in and of itself. "Ultimately, churn and the quantity of churn matters as much as the magnitude of your market as well as how fast you're bringing on potential customers" Darmanin explained in an interview on The ChurnFM Podcast.

If your target market isn't large in size, then churn will impact your business more. If your market is relatively large, and you use an approach that does not require any friction to sell, then you can withstand the higher rate of churn, without majorly affecting your company.

The realization caused David to divide the process of churn into two types acceptable and concerning. A certain amount of churn is normal, perhaps even necessary -particularly in the case of a traditional B2C sales model.

"Worrying the churn happens when you've found a perfect customer, and they're coming on board, after which they cease using your product], or they quit paying for it." David said.

Also, the churn rate can be a problem in the event that you're losing a substantial percentage of your ideal customers.

It could be beneficial to lose users that don't meet your ideal customer profile (ICP). They're not the users that you'd like to be supporting or seeking feedback from.

There's a second distinction that matters to David The question is how do the users think about the service after they leave?

"Ultimately the thing that can have a greater impact in this type of flywheel you're making (in the case of Hotjar) is if individuals are leaving or stopping with a bitter feeling, that actually has a much bigger impact than the fact that they stopped payment to the company. Because word-of-mouth for us is a much more powerful source of revenue than any money we're collecting or churning or dropping or whatever."

This is where gathering feedback from customers that have already churned comes in (a subject we'll explore farther below).

What's the most efficient Churn Rate Method to use?

To measure churn The simplest churn rate calculation is to calculate the number of churns in a particular time period multiplied by the total number of customers who have churned at the start of a time.

Churns per period
-------------------------------------------

Customers at the time of the first day of the period

If, for example, you're looking at monthly churn and you start with 1000 customers and drop 27 customers, the churn percentage for that month would be 2.7 percent.

But this formula misses the mark on many crucial details.

It doesn't consider the amount of brand new customers you acquired during that period and the number of these were churned out, as compared to the number of your existing customers that were churned.

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

If you employ this straightforward equation to measure your churn rate in the month, you may not even realize the rate of churn can depend on the number of days you have in the course of a month!

Because of this, the basic churn rate formula does not give you an accurate account of how you'reyou're increasing or losing. It's too easy.

In deciding on how to measure churn Outlier AI suggests two options:

  1. The formula for churn you select must be compatible with your top business priorities. Choose the elements that are most important to you to track and tweak the formula in line with that.
  2. Do not make the formula excessively complicated. "The more complicated the formula becomes and more complicated, the higher the chance that one will fail in making a calculation at some point which will result in an incorrect measurement."

Business analysts have published their own churn formulas. Steven Noble's blog post about the way Shopify measures churn is an essential read. It also contains a Baremetrics blog post examines churn for various types of customers such as users downgrading or monthly plan customers quitting.

A final note: when people talk about churn, it's typically about the number of customers lost. However, there are different types of churn you can measure, such as revenue and the transactional churn. Look over Outlier AI's blog post to learn more about these.

Monthly in comparison to. annual Churn: What to Keep Track of?

There's a significant difference between monthly and annual turnover. If you lose 7% of your customers to the churn throughout the year, that's a way distinct number from losing 7% of your clients each month.

While it's not good to measure both of them, your monthly churn rate ought to be much, much lower than your annual churn.

What exactly is negative churn?

When attempting to get the full picture of the churn rate, don't only take into account how many customers you're losing. It's all about the behavior of your regular customers, and.

This is where the negative churn is a factor.

People have asked me if negative churn really is a myth. Actually, it's not. However, there's a chance that it's not as you believe.

Negative churn is when the revenue gained from upsells and cross-sells is greater than the loss of revenue due to churned customers over a length of time.

If you're at this stage, you may lose customers without any new customers and increase your revenue (at at least for a time).

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

"Combined with annual prepay agreements negative churn has the potential to be an effective growth strategy," Tomasz writes. "When you are pondering your pricing model and your customers' success strategies It's worthwhile to integrate negative churn in your startup."

The Next Level Churn Rate Analyze: Who and What is the reason

In a broader sense the concept of churn analysis simply looking at the speed that you're losing customers.

But don't stop there. Your churn percentage only provides the information you know, and not the why as well as what or whom. To really understand and do something about churn, you'll need to know the reasonspeople are turning away and what users you're losing.

SaaS growth specialist Fred Linfjard advises the use of a mixture of quantitative and qualitative analysis to understand who is turning and for what reason, as well as the best way to respond.

Quantitative Data Collecting Web and Product Data

Try out some sample questions and then answer

  • Which user groups are more inclined to turn?
  • Are there patterns in their product usage?
  • What documentation for support did they review prior to churning?

The Qualitative Data Gathering Method such as exit interviews and surveys

Questions to try and answer:

  • Why did they leave?
  • What is the reason they should reconsider?

Hopefully this gives you a better knowledge of how churn impacting your business. Next, let's look at ways to come up with a churn-reduction strategy.

Part 2: Five Tested Strategies for Reducing SaaS Churn

The ideal churn-prevention strategy is led by your quantitative and qualitative research that you've conducted -- because once you understand who's churning and the reasons, it's much easier to prioritize which tactics will make the biggest influence. But it's always beneficial to learn what other companies have done that has worked well.

1. Update Your Dunning Management System

It's typical to find 20 to 40 percent of customer churn to be voluntary: caused by expired credit cards, technical issues authorizing transactions, and so on. Fred Linfjard provides a reason to make certain you've got an effective dunning system is the top priority in fighting customer churn.

2. Show Value as Quickly as Possible

Preventing churn starts in the initial stages of the customer journey, and a crucial time is during the onboarding process.

It's obvious how crucial it is to make it easy for SaaS customers to begin. If the user experience isn't smooth right from the beginning and they're frustrated, they won't continue using the service.

But there's also more and more talk about the importance of providing "quick successes." In the words of Lincoln Murphy explains, " Customers who realize that they are getting value fast are those who stay with the company for the longest time."

There are a variety of methods to organize quick wins inside the software within the product itself. However, you can do more directly through emails.

In the past, when Christoph Engelhardt worked for Moz, he was able to decrease its monthly churn rate of new users by 40% by posting an email that highlighted the value Moz could provide to its clients within thirt y days. He describes the method the company 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. These behaviors can be red flags alerting you that your customer may be likely to churn.

Groove, an inbox shared that is designed for business, reduced churn by 71 percent through this data analysis. Groove's team has compared use between users who churned before thirty days and those who stayed. They discovered that users who had churned were less productive in their initial sessions, and had fewer frequent log-ins than users who continued to use the service after the first 30 days.

4. Customize Your Cancellation Offers

The most common strategy for reducing churn is to automatically send an offer to users who decide to terminate their subscription whether it's a discount or the option to stop the subscription, or something else.

The Wavve social media platform for podcasters has been able to recoup more than 30% of those who hit the cancel button. This was done by adding an incentive at the conclusion of a brief survey on cancellation.

This method worked because attaching the offer to the survey on cancellations allowed Wavve's team to personalize the offer based on why the user decided to cancel.

5. Automate What Works, Including the ability to collect feedback

Once you've reduced churn, how do you keep the churn rate at a consistent lower rate?

You keep collecting feedback through an automated process.

The cancellation survey allows the company to collect valuable information to keep track of what is making customers churn. "You could automate or streamline the collection of qualitative feedback and for this instance discover the reason why customers quit you. In most cases you would want to send an exit survey be sent out to a person who has cancelled, whether through an email, or even when they hit"Yes" to cancel. If you could automate the collection, that's going to constantly provide you with feedback, so you don't have to think about doing it," Fred explained in our interview.

As your product and customers evolve, so do the reasons they churn. Monitoring feedback on a regular basis is an important part of maintaining a low churn rate.

In addition, by automating the process of collecting feedback, it allows you for other work.

Part III: Churn Definitions and additional resources

What Is Churn?

Customer churn, sometimes referred to as attrition of customers, refers to the loss of clients for a service or product. This is opposite to customer retention.

What Is the Average SaaS Churn Ratio?

There is no consistent average percentage of churn for SaaS. Per multiple studies, the average churn rate can vary from 10% to 60% depending upon the scale of the company as well as its marketplace.

The Churn and Retention KPIs are used to Follow

Apart from the annual or monthly churn rate, other SaaS measures that will help you get a better picture of customer churn and retention metrics include:

  • Net retention rate calculated in dollars (NDR)
  • Customer lifetime value (CLV)
  • Monthly recurring revenue churn (MRR churn) as well as annual regular revenue churn (ARR churn)

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