Crealanta Magazine

SaaS Churn: myths, Comparisons, and Strategies to Increase Revenue

Apr 26, 2022

This week, I cancelled my year-long SaaS subscription (I had three weeks left before renewal).

It's interesting that, despite having purchased a subscription for the whole year, the company didn't let me keep the last three weeks ' access to premium features.

When I began to cancel, a pop-up alerted my that I'd immediately lose access to all paid features.

"This step will instantly lower your subscription. Are you sure you want to continue?"

I decided to cancel, even though I didn't need the tool in the future. In the language of SaaS the tool, I churned. This experience led me to thinking:

  • Was immediate removal of paid features is the best way to prevent me from going through the motions?
  • When did I officially count in the official count as "churned"? Did they count me as"churned" the day after I decided to cancel? On the day my subscription would have renewed? Would I have been able to cancel or upgraded my use?
  • What could they have done better to try to stop me from cancelling?

In this post We take the best possible approach to answering the above and many more questions concerning churn.

In the first part the first part, we discuss benchmarks and the most common churn formulas.

In Part Two, we'll cover five churn-prevention strategies that have worked in other SaaS companies.

Then, in the final part of this series the final part, we'll provide a set of definitions you can use when talking about churning with other people along with some additional tools.

If you'd like, you can use this table of contents to navigate between the various sections in this article.

Table of Contents

Part I: SaaS Churn Benchmarks

When folks in SaaS speak about churn we're often not doing an adequate job of making sure we're on the same level.

If someone says they are churning at 5% rate, is it talking about monthly, quarterly, or annual the churn rate?

Do they include those who have never made it out of a trial?

Do you know the churn rates of the SaaS firm that targets enterprise customers with one that sells to the general public?

When we set churn benchmarks for SaaS firms, there's many things to think about. This is why we take it apart in order to let you run an extensive churn analysis of your own business and be able to better understand what you're up to.

What is the ideal Churn Rate for SaaS?

It is often said that a 5% to 7percent churn rate would be optimal for SaaS companies. However, is it just anecdote? What is the average number of SaaS firms to achieve this benchmark?

That is, 5% to 7% might be the best However, what's the median?

To find out, Ryan Law, former CMO and cofounder at Cobloom, performed an examination of six recent churn reports or research studies. He found out that there's not a agreement on the typical churn rate for SaaS firms. Half of the reports he studied showed an average annual churn rate of 10%. The other three showed more and a wider spectrum of 32% to 61% annual rate of churn.

What's the reason for such a broad range? Ryan theorizes that there's not enough information available to provide a better image of SaaS the churn rate because it's an area that most businesses want to share in a transparent manner.

However, he also sees other aspects that impact churn: the size of a business, as well as the industry it operates in.

The Churn of a product can vary based on the industry.

Industries can have very different values for churn.

"Look through your own technology stack and you'll likely see some tools you think are important, while others are deemed  desirable," Ryan writes. "It's probable that financial or sales tool are more resistant to churn as compared to a marketing tool simply because it's perceived as being more responsible in terms of the revenue."

He adds that niche tools that have fewer competitors can experience lower number of customers.

The size of the company can affect common churn Rates

Ryan states that many of the largest SaaS businesses target customers of enterprise who have contracts with longer lengths and therefore their churn rates will be less. This means that SaaS firms that focus on smaller or individual businesses that have a larger customer base and shorter contract lengths will naturally have higher churn rates.

When Ryan examines the churn rates of large as well as small SaaS firms What he's actually saying is that your churn rate will differ based upon the amount of money you pay your customers as well as your average contract price. The less your ACV greater the ease to make churn.

What's the Acceptable Level of Churn?

Hotjar creator David Darmanin understands that a churn rate doesn't mean much in and of itself. "Ultimately the churn rate and volume of it affects the magnitude of your market as well as the speed at which you're getting new customers," Darmanin explained in an interview on ChurnFM. ChurnFM Podcast.

If your target market isn't large in size, then churn will impact your business greater. But if your target market is relatively large, and you employ a low-friction sales approach, then you can withstand the higher rate of churn, and not have it significantly impact the business.

This realization led David to break down the churn process into two groups that are acceptable and alarming. Certain types of churn are acceptable, perhaps even necessary -in particular when you're using a traditional B2C sales model.

"Worrying churn is where you've found the perfect client, and they're getting on board, the moment they quit using your product], or they stop paying for it," David said.

That's why the churn rate can be a problem when you're losing a significant portion of your best customers.

It can even be beneficial to eliminate users who do not fit your ideal customer profile (ICP). They're not the users that you'd like to be helping or getting feedback from.

But there's another distinction that matters to David: How do users feel about the product when they quit?

"Ultimately, I think what is more significant on this kind of flywheel you're creating (in the case of Hotjar) is that if individuals are leaving or stopping with a bitter feeling, that actually has more impact than the fact that they stopped paying the company. Because word-of-mouth for us is a much more powerful fuel than the revenue that is generating or dropping."

This is where gathering feedback from customers who have churned is crucial (a subject we'll explore further down).

What's the most efficient Churn Rate Formula to Use?

To determine churn to determine churn, the simplest churn percentage calculation is to calculate the number of churns during a given period divided by the number of clients in the first period.

Churns per time
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The number of customers in the start of a time

For instance, if you calculate monthly churn starting with 1,000 clients and then only lose 27 of them your churn ratio for the month will be 2.7%.

However, this formula is missing the mark on many vital aspects.

For instance, it doesn't take into account the number of new users you gained in that time as well as the percentage of they churned, versus the number of your existing customers that churned.

The weighting is not based on expansion. If you're losing the same amount of users each month, and you continue to acquire more clients than you lose, your churn rate will decrease however there has been no change in customer behavior.

If you use this simple equation to measure monthly churn, you might even notice that the rate at which you churn vary depending on how many days you have in the course of a month!

For these reasons, the basic churn rate formula doesn't give an accurate account of how you'reyou're increasing or losing. It's just too simple.

When deciding how you're going to determine churn Outlier AI offers two suggestions:

  1. The formula that you pick for churn must be compatible with your business's top priorities. Choose the elements that are most important to you to track 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 which will result in a misleading measurement."

Business analysts have released their own formulas for churn. Steven Noble's blog post about the way Shopify measures churn is an essential read. It also contains an Baremetrics article examines churn for different types of customers, for example, users upgrading or annual plan users leaving.

Another thing to note: when people talk about churn, it's usually referring to the number of customers lost. There are many other kinds of churn to measure including revenue and transactional churn. Check out Outlier AI's post for more on these.

Monthly vs. Annual Churn: Which One Should You Monitor?

There's a huge difference between monthly and annual the churn. If you are losing 7% of your customers who churn over a year, that's a way differently than losing 7percent of your clients every month.

Although it's not an ideal idea to be measuring both your churn rates for the month, it is important to note that your monthly rate ought to be much, much smaller than your annual churn rate.

What is Negative Churn?

When attempting to get the whole picture on Churn, it's not enough to consider the number of customers are you losing. This includes the behavior of your regular customers, and.

And that's where negative churn enters the picture.

People have asked me if negative churn is a myth. It's not actually, but it could be different than as you believe.

Negative churn happens when profit from upsells or cross-sells outweighs lost revenue from churned customers over a length of time.

Once you're at the point where you can keep losing customers, but without new customer acquisition and still grow your revenues (at at least for a time).

According to the VC Tomasz Tunguz the pursuit of negative churn must be an objective.

"Combined together with prepay annual contract Negative churn can be an extremely effective growth tool," Tomasz writes. "When thinking through your pricing structure and strategies for achieving customer success, it's worth trying to integrate negative churn in the startup you're working on."

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

On a high level an analysis of churn is just a way of analyzing the frequency at which you are losing customers.

However, don't stop there. Your churn percentage only tells you the what you know, and not the reasons or what or who. If you want to really comprehend and do something to stop churn the first step is to find out what's drivingpeople are churning and which customers you're losing.

SaaS growth specialist Fred Linfjard recommends using a mix of qualitative and quantitative data analysis to discover who's producing the most data, and why and also how to take action.

Quantitative Data Collection Information from Product and Website Data

Sample questions to try and then answer

  • Which user groups are more inclined to turn?
  • Are there patterns in their use of products?
  • What support documentation did they read prior to churning?

Qualitative Data Gathering: Surveys and Exit Interviews

To try to answer questions:

  • What made them leave?
  • What is the reason they should reconsider?

Hope this provides you with a better understanding of how churn is impacting your business. Let's now look at ways to come up with a churn-reduction strategy.

Part Two: Five Proven Methods to Reducing SaaS Churn

Ideally, your churn reduction strategy should be guided by the quantitative and qualitative studies you've been conducting -- because once you know who is churning and the reasons, it's much easier to prioritize what strategies are going to have the biggest influence. It's also useful to find out the strategies of other businesses successfully.

1. Upgrade Your Dunning Management System

It's common to find 20 to 40 percent of customer churn to be voluntary: the result of expired cards, issues with the authorization of transactions, and so on. Fred Linfjard provides a reason to make sure you have an advanced dunning system should be your top priority in fighting churn.

2. Show Value as Quickly as Possible

To prevent churn, it starts in the initial stages of the customer's journey the most crucial point is when the customer's onboarding process begins.

It's obvious the importance of being able to facilitate SaaS customers to begin. If they experience too much hassle at the start and they're frustrated, they won't keep using it.

However, there's more and discussions about the importance of offering "quick wins." According to Lincoln Murphy explains, " Customers who realize their value in a short time are the ones who stay with the company for the longest time."

There are a variety of methods to organize quick wins inside the software itself. It's also something that you can do more directly via email.

When Christoph Engelhardt worked for Moz the company, he managed to decrease its monthly churn rates for new customers by 40 percent by sending an email that showed the value Moz offered its customers within the first thirty days. He explains the process he used in an detailed article.

3. Look for Red Flag Metrics

Examine the behavior of churned customers to uncover patterns. This behavior could be indicators that the customer could be in danger of churning.

Groove, an inbox shared specifically for companies, reduced churn by 71 percent using this analysis of data. The Groove team compared utilization between the new users who churned before thirty days and those who stayed. They discovered that users who churned had much shorter initial sessions, and had fewer frequent logins than those who remained on after the first thirty days.

4. Customize Your Cancellation Offers

An effective strategy to reduce churn is to automate sending an invitation to those who opt to cancel their subscription, regardless of whether it's a discounted rate, the ability to pause the subscription, or some different.

The Wavve social media tool for podcasters, was able to recapture over 30% of the users who clicked the cancel button, by incorporating an option at the end of a quick cancellation survey.

The strategy was successful due to the fact that attaching the offer the cancellation questionnaire allowed the Wavve team to personalize the deal based on the reason users were cancelling.

5. Automate What's Work, which includes collecting feedback

When you've decreased churn how can you maintain it at a constant low rate?

The feedback you collect is always using an automated method.

This survey lets you to continue collecting feedback to stay on top of why customers are churning. "You can streamline or automate your qualitative feedback collection and, in this case discover the reason why customers decide to leave your company. So typically you would want to send an exit survey be sent out to a person who has cancelled, whether via an email or maybe even on the cancel button. If you could automate the collecting, you'll continuously get you 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 reason they decide to churn. Monitoring feedback on a regular basis is essential to keeping a low rate of churn.

By automatizing the process of collecting feedback it allows you to work on other projects.

Part III of the course: Churn Definitions and Additional Resources

What exactly is Churn?

The term "customer churn," also referred to as attrition of customers, refers to the loss of clients for a service or product. This is opposite to customer retention.

What's the Average SaaS Churn Rate?

There's no standardized percentage of churn for SaaS. Per multiple studies The churn rates can vary from 10 up to 60% based upon the scale of a business and its market.

Churn and Retention KPIs to Monitor

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

  • Dollar-based net retention rate (NDR)
  • Customer lifetime value (CLV)
  • Monthly regular revenue churn (MRR churn) as well as annual recurring revenue churn (ARR churn)

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