What Is A Good Churn Rate?
Factors & Churn Rate Benchmarks For SaaS Businesses
“Churn” is one of the most dreaded words in the software-as-a-service (SaaS) industry. After all, it indicates a loss both in your customer base and revenue.
And the sad truth is that churn is inevitable in any SaaS business. You can’t possibly please everyone. There will always be customers who decide to cancel their subscription or who simply stop using your product.
But what is a good churn rate for SaaS businesses?
If we were to give a quick answer to that question, an acceptable churn rate would be around 5% to 7% annually.
But of course, things are never that simple. The standard churn rate for your business will depend on a number of factors, which we will discuss in more detail throughout this article.
First, let’s learn more about the different kinds of churn that a SaaS business should know.
Two Kinds Of Churn In SaaS
There are generally two types of churn that a SaaS business will experience: customer churn and revenue churn.
Customer Churn
Customer churn, also called logo churn, is what we traditionally think of when we, in the SaaS industry, think of the word “churn.”
It’s when a customer’s subscription gets canceled. And it can be a voluntary or involuntary churn.
Voluntary churn is when the customer cancels their subscription on their own accord. They might be dissatisfied with your product or they might have simply found a better solution for their needs.
Involuntary churn, on the other hand, is when the customer’s subscription gets canceled because of an error in renewing their subscription. This usually happens because of a failed credit card transaction.
In any case, you measure it using the customer churn rate, which is the percentage of customers who have canceled in a given period of time. It can be a monthly churn rate or an annual churn rate.
Revenue Churn
Revenue churn is the amount of revenue you lose as a result of a churned customer. In other words, it’s what you lose when a customer cancels their subscription or stops using your SaaS product.
The main metric for revenue churn rate is the ARR or MRR churn rate, which is the percentage of the annual or monthly recurring revenue you lose because of logo churn.
Another way to measure it is the net revenue churn. With this metric, you also take into account your expansion MRR, which is the recurring revenue you get from upselling.
The net revenue churn can give you a more holistic and accurate view of how much profit you are bleeding out as a result of lost customers.
Factors That Affect SaaS Churn Benchmarks
Now that we’ve defined what customer churn and revenue churn are, it’s time to discuss what factors affect the acceptable churn rate for your SaaS business.
Your Target Market
Different markets will have different churn benchmarks because of various reasons.
For example, business-to-business (B2B) SaaS companies tend to have lower churn rates than business-to-consumer (B2C) companies.
This is because it takes more time and effort for a business to find the right SaaS solution for their needs.
They also usually have longer subscription terms, like annual or biennial plans. Even longer if they have a white label or customized solution for enterprises.
That being said, they’re not going to just cancel their subscription at the drop of a hat.
On the other hand, regular consumers are more likely to try out new products and services on a whim. And if they’re not satisfied with what they see, they’ll be quick to unsubscribe.
According to Messaged, the average churn rate for B2B companies is 4.67%, while B2C SaaS businesses experience a higher churn rate of 5.06%.
Your Industry
The industry you’re in will also affect what your churn rate should be.
You see, SaaS isn’t the only industry that dreads the word “churn.”
The telecommunication, entertainment, healthcare, and a lot more industries rely on continuous relationships with their customers.
The media and entertainment industry has an average churn rate of 5.23%, while healthcare generally has a 7.55% churn.
As for the SaaS industry, it’s at 4.79%, which is still close to the prior benchmarks we mentioned earlier.
SaaS Company Maturity
The maturity of your SaaS company will also play a role in what’s considered an acceptable churn rate.
For example, a startup with 5,000 customers and 10% churn means it is losing 500 customers per year.
And that’s not so bad. In fact, it might even be considered normal, since it’s just getting on its feet as a business.
On the other hand, a more established company with, say, 500,000 customers and 10% churn means losing 50,000 customers every year. For a well-established SaaS business, that is definitely bad news.
Generally speaking, the more mature your company is, the lower your churn should be
This is because as your business grows, it becomes harder and more expensive to acquire new customers.
At the same time, it becomes easier to retain the ones you have. This is because you now have more data and resources to work with.
Messaged says that a good annual churn rate for SaaS startups and small to medium-sized businesses (SMBs) is around 10% to 15% for their first year. And the monthly churn should be around 3% to 5%.
More mature companies, however, are more likely to target enterprise markets. They usually have longer sales cycles and higher customer lifetime values (CLV).
For larger SaaS businesses earning an ARR of $10 million or more, the churn rate is usually 1% to 4%.
How To Lower Churn Rates
Knowing your SaaS churn benchmarks is a big step, but it’s not the end goal.
After all, the whole point of finding the acceptable churn rate is to make sure that yours is well below it.
So how do you lower your churn rates?
Here are some tips:
1) Ensure You Have Product-Market Fit
Having an ironclad product-market fit is the most important thing you can do to lower your churn rate.
Make sure that your target market actually needs and wants your SaaS product.
If they don’t, then it doesn’t matter how good your customer retention strategy is. They’re just going to cancel their subscription eventually.
Here are some things you can do to achieve product-market fit:
Talk to your target market: Find out what their pain points are and what they’re looking for in a SaaS solution.
Create buyer personas: This will help you better understand your target market’s needs, wants, and motivations.
Analyze your competition: See what they’re doing right and wrong, then use that information to improve your own offering. Just be careful not to infringe on any proprietary technology.
2) Make Onboarding a Breeze
The customer onboarding process is critical to ensuring that your customers get the most out of your SaaS product.
If it’s too complicated or time-consuming, they’re going to get frustrated and cancel their subscription.
On the other hand, if it’s easy and intuitive, they’ll be more likely to use your product on a regular basis
Here are some things you can do to streamline your onboarding process:
Make it self-service: Allow users to sign up and start using your product without having to talk to anyone from your team.
Keep it short and sweet: The onboarding process should only take a few minutes at most. Otherwise, you risk losing the user’s attention.
Make it interactive: Use quizzes, games and other engaging content to provide an interesting customer experience during onboarding.
3) Provide Excellent Customer Service
If your customers encounter a problem, they should be able to easily reach out to your customer service team and get help.
Ideally, you should offer multiple channels for support, such as email, phone, and live chat. This way, customers can choose the method that’s most convenient for them.
Remember, the goal is to make the entire experience as smooth and stress-free as possible. Otherwise, they’re going to get disappointed and cancel their subscription.
4) Minimize Involuntary Churn
Remember a while ago when we said not all instances of churn are intentional?
Well, involuntary churn is the type of churn that results from a technical error in renewing a customer’s subscription to your SaaS product.
For example, let’s say a customer’s credit card expires and they don’t update their payment information in time. As a result, their subscription is canceled.
This type of churn is difficult to avoid, but there are some things you can do to minimize it:
Automate billing and payments: This way, customers will always be up-to-date on their subscription status.
Send reminders: Send customers reminders when their credit card is about to expire or their subscription is due for renewal.
Offer multiple payment options: Allow customers to pay by credit card, PayPal, bank transfer, etc. This way, they can choose the option that’s most convenient for them.
5) Regularly Ask For Customer Feedback
Make it a habit to regularly reach out to your customers and ask for their feedback.
This will help you identify any areas where your SaaS product needs improvement.
It’s also a good way to show your customers that you care about their experience and are always looking for ways to make your product better.
There are many different ways to collect customer feedback. You could launch a Net Promoter Score (NPS) or Customer Satisfaction (CSAT) survey.
These methods can help you quantify your customers’ satisfaction and their likelihood of churning. Plus, with the right follow-up questions, you can identify areas of improvement that you need to address.
6) Provide Valuable Customer Success Services
Customer success services are designed to help your users get the most out of your SaaS product.
This could include things like training sessions, webinars, and helpful content. Basically, anything that helps customers achieve their goals with your product
By providing these services, you can reduce churn by ensuring that customers are enjoying your SaaS product to its full capacity.
Plus, it’s a great way to build long-term relationships with your customers
7) Track Customer Engagement Metrics
Customer engagement metrics can give you a good idea of how well your customers are using your product.
This information can help you identify potential churn risks and take steps to prevent them.
There are many different customer engagement metrics you could track, but some of the most important ones include:
Active users: How many people are actively using your product?
Usage frequency: How often do people use your product?
Feature usage: Which features are being used most often?
8) Implement A Reactivation Process For Inactive Customers
If you have customers who have stopped using your product, it’s important to reach out to them and try to reactivate their subscription
There are many different ways to do this, such as the following:
Send triggered reactivation emails: You could set up an email campaign that’s triggered when a customer becomes inactive. This email could include helpful tips on how to get the most out of your product or special offers for reactivating their subscription.
Run retargeting ads: You could also run ads on social media or Google that are specifically targeted at people who have stopped using your product.
Offer an exclusive discount for staying: Another option is to offer a special discount for reactivating their subscription.
By implementing a reactivation process, you can reach out to inactive customers and try to get them interested in your product again. This can help reduce your overall churn rate.
9) Celebrate Your Customers’ Milestones
One way to reduce churn is to celebrate your customers’ milestones
This could include things like their first purchase, their 1-year anniversary, or reaching a certain level in your product.
By celebrating these milestones, you can show your customers that you value them and appreciate their business. This can help foster long-term relationships and prevent customers from churning.
10) Build A Community Around Your Product
Another way to reduce churn is to build an online community around your SaaS product.
This could include things like creating a private Facebook group or a Discord server.
By building a community, you can create a sense of belonging and loyalty among your customers. This can help prevent them from churning and encourage them to continue using your product.
It can also provide the following benefits:
Peer-to-peer support: Some of your customers may not be very comfortable reaching out to your customer support team. But if they are a part of a community, they can get help from other users who may have encountered the same problems before.
Increased engagement: A community can also help increase customer engagement by giving people a place to talk about your product and share ideas.
Referral marketing: A community can also be a great way to encourage word-of-mouth marketing for your product. If your current customers know other people who are interested in your SaaS solution, they can simply add them to the community.
Final Thoughts About The Acceptable SaaS Churn Rate
Churn is a normal part of any SaaS business. But the question is, what is an acceptable churn rate for your company?
Unfortunately, there is no one-size-fits-all answer to this question. It will depend on factors like your industry, target market, and the maturity of your SaaS company.
Of course, the lower your churn rate, the better. But knowing the right benchmark will help you set realistic goals for reducing churn in your business.
There are many different ways to reduce churn in your SaaS business. But some of the most effective methods include the ones we’ve discussed above.
By using these techniques, you can lower your churn rate and keep more customers subscribed to your SaaS product.
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