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SaaS Churn: Myths, Comparisons, and Strategies to Retain More Revenue -

Apr 26, 2022

The week before, I cancelled an annually renewed SaaS subscription (I had three weeks left to renew).

Interestingly, even though I purchased a subscription for the whole year, the company didn't permit me to use the last 3 weeks' worth of top services.

As soon as I started canceling, a popup warned my that I'd immediately be denied access to the paid features.

"This action will immediately downgrade the subscription you have purchased. Do you really want to continue?"

I decided to cancel, even though that I wouldn't require the software going forward. As a result, in the terms of SaaS, I was churning. The experience made me thinking:

  • Did an immediate elimination of features that cost money the most effective way to stop me from turning?
  • What date did I count as "churned"? Was I counted as"churned" on the day that I cancelled my subscription? What if my subscription was due to renew? Was it the case if I had downgraded or upgraded my subscription?
  • What would they have done differently to prevent me from canceling?

In this article, we take our best chance to answer the above and many more questions surrounding the churn process.

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

In part two we'll go over five churn prevention strategies that have worked across other SaaS companies.

In the third part in part three, we'll wrap up with some definitions that you can use when talking about churn with your colleagues along with some additional sources.

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

Table of Contents

Part I: SaaS Churn Benchmarks

If people in SaaS speak about churn we're often not doing a good job of making sure we're on the identical on the same page.

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

Are they excluding customers who never made the cut in trials?

Do you know the churn rate of a SaaS business that is targeting customers of enterprise with one that sells to consumers?

If we are setting benchmarks for churn for SaaS firms, there's much to consider. And in this section, we break it all apart in order to let you perform a comprehensive churn analysis of your own business and get a clearer picture of what you're up to.

Does There Exist a Perfect Churn Ratio for SaaS?

I often hear the 5%- 7percent churn rate would be ideal for SaaS businesses. However, is it just anecdote? What is the average number of SaaS companies to meet the requirements?

That is 5 to 7% might be the ideal, but what's the average?

For research, Ryan Law, former CMO and cofounder of Cobloom, performed an analysis of six recent churn reports or research studies. He found out that there's not a consensus on the average churn rate for SaaS firms. The majority of the reports he studied showed an average annual churn rate of 10%. The three other reports revealed a larger and wider range between 32% and 61% annual rate of churn.

What's so different about this? Ryan suggests that there's not enough information available to provide a better image of SaaS churn because it's not something that companies would like to share in a transparent manner.

He also observes some other aspects that impact churn: a company's size, and its industry.

Chunks of the same product may differ by industry

Industries have a variety of churn benchmarks.

"Look through your own tech stack, and you'll likely see some items you consider important, while others are deemed 'nice-to-have,'" Ryan writes. "It's likely that a finance or sales tools are less prone to being discarded as compared to a marketing tool due to the fact that it is believed to be more directly responsible for revenue."

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

Company Size Impacts Common Churn Rates

Ryan points out that many of the most reputable SaaS businesses target customers of enterprise which have longer contract durations and therefore their churn rates will be less. So the flip side is that SaaS businesses that target smaller or individual businesses that have a larger customer base and contract lengths that are shorter will naturally be more churn-prone.

When Ryan analyzes the typical churn rates of large and smaller SaaS companies, what he's really saying is that your churn rate will differ based on the size of your client as well as your average contract price. The lower the ACV greater the ease to make churn.

What is acceptable Churn?

Hotjar the founder David Darmanin understands that a percentage of churn doesn't necessarily mean anything by itself. "Ultimately it's churn, and the amount of churn you have matters as much as the size of your market and how fast you're getting potential customers" Darmanin explained in an interview on The ChurnFM show.

If your market is small and churn is a major issue, it will matter greater. If your market is substantial using an approach that does not require any friction to sell and you are able to withstand an increase in churn without it dramatically impacting your business.

The realization caused David to divide the process of churn into two types that are acceptable and alarming. A certain amount of churn is normal, perhaps even necessary -particularly if you're using a more traditional B2C sales model.

"Worrying Churn" is when you've found a perfect customerand they're now coming on board, after which they cease using your product] or quit paying for it." David said.

Also, the amount of churn you receive will be an issue in the event that you're losing a substantial proportion of the ideal clients.

In fact, it could be a good thing to let go of users who don't match your ideal profile of customers (ICP). It's not the kind of users you want to spend time supporting or seeking feedback from.

There's a second distinction that matters to David: How do users think about the service after they quit?

"Ultimately the thing that is more significant in this type of flywheel that you're making (in our instance, Hotjar) is that if people are exiting or pausing in a state of anger this can have an even greater impact than the fact that they have stopped paying the company. Because word-of-mouth for us is much greater energy than the money that we're collecting or churning or dropping or whatever."

That's where the collecting of feedback from customers who have churned comes in (a issue we'll discuss more in the future).

What's the Best Churn Rate Formula?

To measure churn The simplest churn rate calculation is the amount of churns that occur during a specific period divided by the number of customers who have churned at the start of a time.

The number of churns produced during a period
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Customers at the beginning of a period

For instance, if you're calculating monthly churn, and you start with 1,000 customers, but only lose 27 of them your churn rate for that month would be 2.7%.

This formula leaves out on several vital specifics.

It doesn't include the number of users who joined your account over the course of time, and how many of they churned, versus the amount of customers who churned.

It's also not weighted for expansion. If you're losing the same amount of users each month, yet you manage to gain more clients than you lose, the churn rate is likely to decrease, but there's been little change in how customers behave.

If you employ this straightforward equation to measure monthly churn, you might be surprised to find that the rate at which you churn depend on the number of days are in a month!

This is why the basic churn rate formula does not give you an exact picture of how you're expanding or losing. It's too easy.

If you're deciding how to measure churn Outlier AI suggests two options:

  1. The formula for churn you select is one that aligns with your top business priorities. Choose the elements that are crucial for you to monitor and tweak the formula in line with that.
  2. Make sure that the formula isn't excessively complicated. "The more complicated it gets it is, the greater chance one will fail in making a calculation at some point, and you'll have a misleading measurement."

Business analysts have published their own churn-based formulas. Steven Noble's blog post about how Shopify determines churn levels is worth reading. And a Baremetrics post analyzes the churn rate of diverse types of customers like users who upgrade or annual plan users leaving.

A final note: when you hear people speak about churn it's typically about the number of customers lost. However, there are different types of churn that you can track like revenue or the transactional churn. Take a look at Outlier AI's post for more on these.

Monthly vs. annual Churn: What One Should You Monitor?

There's a big contrast between annual and monthly churn. If you are losing 7% of your customers to turn over over a year this is a differently than losing 7percent of your clients each month.

Although it's not an ideal idea to track both, your monthly churn rate ought to be much, much lower than your annual churn rate.

What is Negative Churn?

When attempting to get the full picture of churn, you shouldn't just consider the number of customers are you losing. It's all about the behaviours of your existing customers, and.

This is where the negative churn comes into play.

I've heard people ask whether negative churn really is a myth. The truth is that it's not, however, it might not be what you think.

Negative churn happens when revenue gained from upsells and cross-sells outweighs lost revenue from customers that have been churned for a long duration of.

When you've reached this point, you could keep losing customers, but without additional customer acquisition, but still grow your revenues (at at least for a time).

According to the VC Tomasz Tunguz that achieving negative churn must be the goal.

"Combined in conjunction with the annual payment contracts Negative churn can be an effective growth strategy," Tomasz writes. "When you are pondering the pricing strategy and strategies for achieving customer success It's worthwhile to incorporate negative churn into your startup."

Future Level Churn Rate Analysis: Who is the Person and Why

On a high level the concept of churn analysis simply looking at the speed at which you are losing customers.

Don't end there. Your churn rate just gives you an idea of what's happening you know, and not the reasons or what or who. To really understand and do things about it you'll have to understand what's drivingpeople are leaving and the users you're losing.

SaaS growth specialist Fred Linfjard suggests a combination of quantitative and qualitative data analysis to determine who's turning and for what reason and what actions to take.

Quantitative Data Gathering: Website and Product Data

Try out some sample questions and then answer

  • Which of the user groups is more likely to be churning?
  • Do they have patterns in the use of their products?
  • What documentation for support did they read prior to the churning process?

The Qualitative Data Gathering Method such as exit interviews and surveys

There are many questions to be tried and answered:

  • What made them leave?
  • What could make them reconsider?

I hope this helps you gain a better comprehension of how churn effecting your company. Let's now look at ways to come up with a churn-reduction strategy.

Part Two: Five Proven Strategies for Reducing SaaS Churn

The ideal churn-prevention plan is based on your quantitative and qualitative research that you've conducted as soon as you know who is churning and the reasons, it's more straightforward to decide which tactics will make the greatest effect. It's also beneficial to learn what other companies have tried which has been successful.

1. Upgrade Your Dunning Management System

It is commonplace to find 20 to 40 percent of customer churn to be voluntary: the result of expired cards, technological issues approving transactions, etc. Fred Linfjard explains why making sure you have an advanced dunning system is the top priority in fighting churn.

2. Demonstrate Value as soon as Possible

The process of preventing churn begins from the start of the customer's journey and a crucial time occurs during the process of onboarding.

It's obvious how crucial it is to ease the process for SaaS customers to get started. If they experience too much hassle from the get-go, they're not going to use it for long.

But there's also more and increasing discussion about the significance of providing "quick successes." As Lincoln Murphy explains, " Customers who realize that they are getting value fast are those that stick around the longest."

There are plenty of ways to create quick wins in the product it self. But it's also something which you can achieve more direct through emails.

In the past, when Christoph Engelhardt worked for Moz, he was able reduce the monthly churn rates for new users by 40% through sending an email that showed the value Moz offered its customers in the initial thirty days. The process that which he employed in an extensive blog post.

3. Look for Red Flag Metrics

Look into the behaviour of churned customers to uncover patterns. Such behaviors could be indicators that your customer may be in danger of churning.

Groove, a shared inbox that is designed for business, reduced churn by 71 percent by analyzing the data. Groove's team has compared usage between new users that were churning before 30 days as well as users who continued to use the service. The team found that those who were churning had shorter initial sessions, and had fewer frequent logins than those who remained on after the first 30 days.

4. Customize Your Cancellation Offers

An effective strategy to reduce churn is to send an automatic offer to users who decide to cancel their subscription, be it a coupon or the option to stop the subscription, or something other.

The Wavve social media tool specifically designed for podcasters has been able to recoup the more than 30 percent of the users who clicked the cancel button by adding an offer at the end of a quick cancel survey.

The strategy was successful because attaching the offer to the cancellation survey allowed Wavve's team to customize the offer based on why users were cancelling.

5. Automate What's Working, including Collecting Feedback

When you've decreased churn how can you maintain it at a consistently lower rate?

You keep collecting feedback using an automated method.

This survey lets you to keep collecting valuable feedback to stay on top of the reasons customers keep coming back. "You can streamline or automate the collection of qualitative feedback and for this instance, find out why they decide to leave your company. In most cases the exit questionnaire would be sent out to a person who cancels, either by email or even when they hit the cancel button. If you could automate the survey, it will constantly provide you with feedback and you won't need to think about doing it," Fred explained in our conversation.

As your product and customers alter, so will the reason they decide to churn. Monitoring feedback on a regular basis is a crucial aspect of keeping a low rate of churn.

By automatizing the process of collecting feedback, it allows you for other work.

Part III of the course: Churn Definitions and additional resources

What Is Churn?

Customer churn, also known as customer attrition is the losing of customers to a product or service. It's the opposite of customer retention.

What's the Average SaaS Churn Ratio?

There's no standardized percentage of churn for SaaS. Per multiple studies The churn rates can vary from 10 percent to 60 percent based according to the amount of a business and the market it is in.

In addition, the Churn and Retention KPIs can be used to Track

Apart from the annual or monthly churn rate, other SaaS metrics that can help you get a better image of customer churn retention include:

  • Net retention rate based on dollar (NDR)
  • Customer lifetime value (CLV)
  • Monthly Recurring income Churn (MRR churn) and annually the recurring revenue churn (ARR churn)

What Can help?