How to Calculate and Lower Churn for SaaS Companies
Churn rate is a word that makes every business owner shudders. And that’s doubly true for SaaS companies.
These companies have a subscription-based payment model. That means they need to retain their clients for a certain period of time to get back the customer acquisition cost (CAC) they initially invested.
If not, that company will go belly-up in the long run. Thus, customer churn is one of the SaaS metrics that are closely monitored in this line of business.
Those who managed to pin down this concept will not only retain their customers but grow their revenue exponentially. So how do you calculate the SaaS churn rate?
SaaS Churn Rate Calculation
Here is the most basic formula. You only need to divide the number of churned customers over the number of customers over a given period.
So let’s say you had 100 customers at the beginning of January but ended with 80 by the end of March.
(100-80)/100 * 100 = 20
In this example, your churn rate is 20 percent. Again, this is the simplest way of calculating customer churn. While a lot of companies include other SaaS metrics in an attempt to make sense of their ever-changing number, it could also screw up their calculations. So stick to this simple process for now.
What’s more, when measuring SaaS churn, do not include new customers that have recently been added to your subscription list. Let’s stick with our example above.
- You’re calculating churn on your company’s Q1
- If you have 100 customers at the beginning of January but ended up with 150 by the end of March, do not count those additional 50
- Those will be included in your Q2 calculation
Keeping the formula simple will help your entire team closely monitor churn rate on a weekly, monthly, quarterly, and yearly basis.
Now that we know how to calculate SaaS churn, let’s proceed to the next topic, which is…
What’s the average churn rate for a SaaS company
If you’re constantly expanding your SaaS business, it’s nearly impossible to bring this number down to zero. There will always be customers who will churn for a variety of reasons. They may not be a good fit from the outset or maybe their company suffered financial losses caused by outside factors in their industry.
Whatever it was, it will still affect your MRR churn.
So what’s an acceptable number here?
According to BareMetrics, your churn rate average should fall between 3-5 percent on a monthly basis. However, this should be adjusted based on your company’s age and the customer you’re onboarding.
For products with pricing of more than $1,000, your monthly churn should be less than one percent. That makes sense since your ideal customers are only limited and competition is going to be heavy.
For SaaS startups, a 10-15 percent churn rate is acceptable for the first year. After that, you’d want to reach the 3-5 percent mark as you continue to adjust based on the reasons why your customers are churning.
But why do customers churn anyway? And more importantly, how can you reduce it?
How to Decrease SaaS Churn Rate
Let’s take a look at 6 strategies to decrease your monthly churn and annual churn.
1. You’re onboarding the wrong customers
This one’s pretty common among new SaaS companies. In an attempt to accelerate their growth, they often close deals to every lead they could get their hands on.
Which makes sense, right? The more customers you have, the higher your MRR (monthly recurring revenue) is going to be.
But look at it this way.
If you’re onboarding the wrong clients, chances are they won’t stay with you for long, maybe a month or two at most.
Eventually, they’re not going to renew their subscription and you’re going to see a spike in your churn rate soon after.
Thus, you essentially spent resources acquiring these clients only for them to churn. That’s a loss on your end. And imagine if you’ve acquired 50 of these clients and they disappear a couple of months later. That’s a revenue churn nightmare waiting to happen.
That’s why you should pay attention to the effectiveness of your sales team. To spot these valuable performers, you can read our piece about that here.
2. Calling your hot leads
Once a lead has been identified and nurtured, it’s time to book a call. This first call will tell you whether or not your lead is the right fit for your company.
Ask questions like the nature of their business and align it to the features of your product. If they’re not the right fit, don’t be afraid to pursue other leads. Remember the revenue churn consequences mentioned earlier.
But if everything checks out, try to book another call. This time, you’re going to show off how your product’s features are going to help their company.
Whether it’ll increase employee engagement, streamline their daily process, or enhance customer relations, your main goal is to convince them that your SaaS product is not an expense but an investment.
The third call is a product demo. We’ll talk more about that next…
3. You need to improve your onboarding process
After getting your right client, you’ll need to onboard them. And onboard them properly at that.
According to Retently, poor SaaS onboarding accounts for 23 percent of customer churn. That’s a huge chunk of your losses piled in a single category.
Oftentimes, a SaaS company doesn’t provide a clear way of using its product. The result is that client gets lost amidst the sea of features and data the tool is feeding them. It can be overwhelming for most.
To address this issue, prepare a handy process that will get your clients up to speed with your product’s features. Here’s where your product demo should shine.
First, ask questions about the client’s business and mentally connect it to your features that could help them. Keep in mind that your demo should be a two-way street.
Ask them questions like:
- What are you hoping to get from our SaaS product?
- What problems are you trying to solve?
- What do your daily operations look like?
- Did you previously use a similar product? Why did you choose to leave?
- What campaigns are you planning to launch in the foreseeable future
- What are the immediate goals you need to achieve?
- Do you have a revenue churn you’re trying to address?
These are just some questions you can ask that will give you a broader idea of how your SaaS product will help your client grow. Questions like these stimulate conversation and will help you build customer relationships as early as possible. (More on that later).
Additionally, your demo should highlight features that will provide the most benefit for your client. The faster your clients can adapt your tool to their daily operations, the more likely they’ll renew their subscription.
To achieve this, you could use an automatic email sequence based on the customer’s behavior. The goal of these emails is to get your customers to take action in your software. After they’ve completed the first task, your email sequence should guide them to the second, and the third, and the fourth.
This creates a methodical process in which your customers are learning how to use your product. Over time, they’ll start discovering other uses for your software that’s applicable to their specific business needs.
Also, remember to create a compelling CTA (call to action) button for your customers. The trick here is to get them to engage with your product. To get them familiarized with the features as soon as they can.
4. Solidify customer relationship
Even if your customers have been using your product for months or even years, you need to continuously nurture that relationship. Why? To foster loyalty, of course.
Loyalty is the lifeblood of a successful SaaS business. Without it, your customer relationship stays on the transactional plane. That’s a bad spot to be in long-term wise.
What if another SaaS company creates a similar product like yours but is priced lower? What happens then? Well, churn is going to happen.
But if your customers are already loyal to your brand, they’ll happily stick with you. Sure, they might get better pricing from Company X.
But they aren’t sure about their:
- Onboarding process
- Customer service
- Monthly/yearly roadmap
Would you risk that sort of change where you’re already comfortable where you are now? Chances are you’re already shaking your head.
So how can a SaaS company foster loyalty? Well, there are a lot of avenues you can explore. One of which has already been mentioned: your SaaS roadmap for the future.
Reveal your SaaS roadmap
No matter how much your customers love your product, there are going to be those who will want to add features to the software. That’s where your SaaS roadmap comes in.
SaaS roadmap can foster loyalty by giving your customers a glimpse of what features are going to be added next. Oftentimes, these features are based on customer suggestions to help them adjust to the ever-changing industry they’re in.
By revealing the roadmap, you’re getting your customers excited for the product’s future. And by extension, for the success of their business as well.
Furthermore, these additions will tell your customers that you’re listening to the feedback they’re giving you. You could even conduct a poll where you’re going to list your planned features and have your customers vote which one to prioritize.
They’re getting the improvements they need for your product, while you’re constantly improving your software’s capabilities. On top of that, you’re decreasing the possibility of monthly churn and annual churn. It’s a win-win for everyone.
5. Collect and analyze churn feedback
Sometimes, your subscriber churn will stem from onboarding the wrong customers. But other times, even the right clients will churn.
Thus, you should always collect churn feedback to analyze why your customers are leaving. While you may be thinking people can’t be bothered leaving valuable feedback since they’re already leaving, you may be surprised. This is exactly what UserSnap experienced when they started collecting this data on their unsubscribe page.
So start compiling this valuable information, segment them, then analyze them. By doing so, you’re going to see the main reason why you’re experiencing MRR churn.
It could be because:
- Your customer isn’t the right fit
- You’re lacking features they need
- Your onboarding process needs improvement
- Your customer support needs improvement
- They’re only using your product for specific campaigns
- The price is too steep
- The interface is too confusing
These are just some of the feedback you’ll receive once you start collecting this information. Do you see how valuable they are?
They give you an idea of what is working and what needs to improve with your SaaS business. Once you fix them, you’re going to slowly see a reduction in your monthly churn and annual churn.
6. Prioritize your most profitable subscription tier
Most companies have a pricing strategy divided into several categories. This ranges from the most basic subscription level that becomes higher with each tier.
Now, when trying to reduce your net churn, you should analyze which subscription tier yields the most recurring revenue.
Following that, focus your attention on this group as they’re the ones bringing in the bacon.
For most SaaS companies, the most profitable group is at the premium or enterprise level. Here’s an example. Say you have 30 customers at the mid-tier paying $25 a month. Then you have 10 customers at the highest tier paying $100 a month.
Which one are you going to prioritize? It’s obviously the highest tier.
30*25 = 750
10*100 = 1,000
These customers also have a bigger budget. Thus, you’re more likely to profit more from them through upsell, add-ons, upgrades, etc.
But wait, this isn’t as black and white as it would appear. While the mid-tier class is giving you less revenue compared to the high-tier class, you shouldn’t ignore them altogether.
Try to segment this group to see which ones you can likely convert from the mid category to the highest category. Is it possible to:
- Raise them to your enterprise-class
- Agree on add-ons that’ll increase your MRR churn and ARR churn
- Commit to a yearly or biennial plan
This is why you should always look at your customers at the granular level to see how they’ll interact with your company in the future, among other things. Don’t just focus on your subscriber churn. Even if you have a high churn but those leaving your service is only at the lower tier, you’re still fine.
Look at your revenue, instead. After all, that’s your main goal, right? You want to decrease net churn to increase your MRR and ARR over time.
Subscriber churn is one of the key SaaS metrics that you should always monitor. Yes, it can be challenging to pin down why an existing customer suddenly leaves.
But always remember that everything that happens in your company should be documented. Think of these big and minute interactions as clues telling you how to tweak your SaaS business. These are opportunities as much as challenges.
And of course, place customer success above everything else. Make it so that your company’s culture is centered on this very idea. If a customer grows their business, you’ll be growing along with them.