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

Apr 26, 2022

Last week, I canceled the annual SaaS subscription (I had three weeks left before renewal).

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

When I began canceling, a popup warned me I'd right away be denied access to all features paid for.

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

I did cancel the program, even though I knew I didn't need the tool for the foreseeable future. As a result, in the terms of SaaS the tool, I churned. This experience led me to thinking:

  • Did immediate the removal of all 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"? Do they consider me to be"churned" on the day that I cancelled my subscription? The day that my subscription was due to renew? What if I had downgraded, upgraded, or changed my usage?
  • What could they have done better to try to stop me from cancelling?

In this piece, we take our best shot at answering the above and many more questions regarding the churn process.

In part one, we cover benchmarks and typical churn formulations.

In part two in this second installment, we'll discuss five churn-prevention strategies that have been successful in other SaaS businesses.

Then, in the final part of this series, we'll conclude with the definitions to use in discussions about churn with others as well as some other sources.

If you'd prefer to 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 discuss churn we don't always do well in making sure we're on the exact same level.

If somebody claims to are churning at 5% percentage, do they mean about monthly, quarterly, or annual churn?

Are they excluding those who have never made it through trials?

Are you able to compare the rate of churn for the SaaS business that is targeting customers of enterprise against one that is selling to the general public?

If we are setting benchmarks for churn for SaaS companies, there's so much to take into consideration. This is why we take it apart so that you can run an extensive churn analysis for your company to have a better idea of the way you're performing.

Does There Exist a Perfect Churn rate for SaaS?

I often hear the 5%- 7% churn rate is optimal for SaaS companies. However, is it just anecdote? How common is it for SaaS companies to meet this standard?

In other words 5 to 7% is an ideal range, but what's the average?

To find out, Ryan Law, former CMO and cofounder at Cobloom, performed an study of six recent churn report or research studies. He found out that there is no consensus regarding the average rates of churn for SaaS businesses. Half of the reports the researcher studied had the average annual churn of 10%. The other three showed an even larger range of 32% to 61 percentage annual rate of churn.

Why such a wide range? Ryan believes that there isn't enough data out there to provide a better image of SaaS turnover because it's not something that companies would like to be very transparent about.

But he sees other common elements that influence churn such as 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 churn benchmarks.

"Look through your tech stack, and you'll probably find tools you think are essential, and others deemed  desirable," Ryan writes. "It's likely that a financial or sales tool are more resistant to losing customers than a marketing tool, since it's believed to be more accountable for the revenue."

He adds that niche tools that are less competitive will experience lesser churn.

The size of the company can affect common churn Rates

Ryan points out that many of the most reputable SaaS businesses target customers of enterprise who have contracts with longer lengths, so their churn rate will be lower. This means that SaaS firms that focus on smaller or individual businesses that have an increased customer base and contract lengths that are shorter are likely to experience higher churn rates.

While Ryan compares the common ratio of churn of big and small SaaS businesses the truth is that the churn percentage will differ based on how big your customers and your average contract value. The less your ACV, the easier to make churn.

What is acceptable Churn?

Hotjar founder David Darmanin understands that a churn rate doesn't mean much on its own. "Ultimately, churn and the quantity of churn matters as much as the amount of customers you have and the speed at which you're getting more 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 greater. But if your target market is large and you employ an approach that does not require any friction to sell, then you can withstand the higher rate of churn, and not have it significantly impact your business.

The realization caused David to break down churn into two categories that are acceptable and alarming. Certain types of churn are acceptable or even required- especially when you're using a B2C-style sales approach.

"Worrying churn is where you've found a perfect customer, and they're coming to the party, but after which they cease using your product] or cease to pay for it," David said.

In other words, churn really starts to matter when you're losing a significant portion of your best customers.

It could be a good thing to eliminate users who do not meet your ideal customer profile (ICP). These aren't the customers whom you'd prefer to spend your time helping or getting feedback from.

However, there's another aspect that matters to David The question is how do the users perceive the product after they quit?

"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 in a state of anger this can have a much bigger impact than the fact that they stopped paying your. Since word-of-mouth is much greater fuel than the revenue that is generating or dropping."

This is where collecting feedback from customers who have churned is crucial (a topic we'll dive into farther below).

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

For determining churn rate The simplest churn rate calculation is the amount of churns that occur during a specific period , divided by the total number of customers who have churned at the start of a period.

The number of churns produced during a period
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Number of customers at the start of a time

In this case, for instance, if you're calculating monthly churn, starting with 1,000 customers, but lose 27 of them, your churn rate for that month is 2.7%.

But this formula misses the mark on many vital details.

It doesn't include the number of brand new customers you acquired over the course of time, and how many of they were churned out, as compared to the number of existing customers that were churned.

The weighting is not based on growth. If you lose the same number of customers each month, and you continue to acquire more customers than you lose, your churn rate will decrease yet there is any change in the behavior of customers.

If you use this simple equation to measure monthly churn, then you could not even realize that the rate at which you churn depend on the number of days in the month!

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

In deciding on how to determine churn Outlier AI recommends two things:

  1. The formula for churn you select is one that aligns with your top business priorities. Decide what details are essential for you to keep track of and tweak the formula in line with that.
  2. Do not make the formula complicated. "The more complicated it gets, the more likely someone will make a mistake when calculating it, and you'll have an incorrect metric."

Business analysts have released their own churn-based formulas. Steven Noble's post about how Shopify determines churn levels is an essential read. It also contains the Baremetrics blog post analyzes the churn rate of diverse types of customers like users who upgrade or monthly plan customers quitting.

A final note: when people talk about churn, they're typically referring to the loss of customers. There are many other kinds of churn to measure like revenue or transactions-related the churn. Look over Outlier AI's blog post to find out more information about these.

Monthly and Annual. annual Churn: What One Should You Track?

There's a big difference between monthly and annual churn. If you lose 7% of your customers who the churn over a year, that's a way different number than losing 7percent of your customers each month.

While it's not an ideal idea to measure both of them, your monthly churn rate should be much, much less than the 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 you're losing. This includes the behavior of your regular customers, as well.

And that's where negative churn is a factor.

There have been many people who ask if negative churn really is a myth. It's not actually, but it could be different than what you think.

Negative churn occurs when the profit from upsells or cross-sells is greater than the loss of revenue due to the customers who have been churned over a certain length of time.

If you're at this point, you could keep losing customers, but without any new customers and increase your revenue (at minimum for a short time).

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

"Combined together with prepay annual contract negative churn has the potential to be a very powerful growth mechanism," Tomasz writes. "When considering the pricing strategy and customers' success strategies is worth trying to engineer negative churn into your business."

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

In a broader sense the concept of churn analysis simply looking at the speed at which you are losing customers.

Don't end there. Your churn percentage only provides the information, not the why as well as what or whom. To really understand and do things about it you'll have to understand the reasonspeople are churning and which customers you're losing.

SaaS growth expert Fred Linfjard suggests a combination of quantitative and qualitative analysis to discover who's turning and for what reason, as well as how to take action.

Quantitative Data Gathering: Website and Product Data

Sample questions to try and answer:

  • Which user groups are more likely to churn?
  • Are there patterns in the use of their products?
  • What documentation for support did they review prior to churning?

Qualitative Data Gathering by Exit and Surveys

There are many questions to be tried and answered:

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

Hope this provides you with the understanding of how churn is impacting your business. The next step is to consider ways to come up with a churn-reduction action plan.

Part II: Five Proven Strategies for Reducing SaaS Churn

Ideally, your churn reduction plan is based on the qualitative and quantitative research that you've conducted since once you have a clear picture of who's turning and why, it becomes easy to determine which tactics will make the greatest influence. It's also beneficial to learn the strategies of other businesses which has been successful.

1. Make sure you update your Dunning Management System

It's typical for between 20 and 40% of the churn experienced by customers to be involuntary: caused by expired credit cards, technological issues approving transactions, and so on. Fred Linfjard explains why making sure you have an advanced dunning system is the top priority in fighting the churn.

2. Show Value as Quickly as you can

The process of preventing churn begins at the beginning of the customer journey, and a crucial time is during the onboarding process.

You're undoubtedly aware of how crucial it is to facilitate SaaS customers to get started. If they experience too much hassle from the get-go it's unlikely that they'll continue using the service.

There's been increasing discussion about the significance of providing "quick wins." As 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 plenty of ways to orchestrate quick wins within the program within the product itself. But it's also something you can accomplish more easily through email.

In the past, when Christoph Engelhardt worked for Moz, he was able reduce the monthly churn rate for new users by 40% by mailing an email that demonstrated the worth Moz was providing to its clients within thirt y days. He explains the process 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. Such behaviors could be indicators that your customer may be in danger of churning.

Groove, an inbox shared that is designed for business, reduced churn by 71% by analyzing the data. Groove's team has compared utilization between the new users who had churned prior to 30 days, and the ones who stayed. The team found that those who churned had much shorter first sessions and less frequent logins than those who were on for 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 terminate their subscription whether it's a discount or the possibility of a pause in the subscription, or some different.

Wavve, a social media tool specifically designed for podcasters was able to recapture the more than 30 percent of users who hit the cancel button. This was done by adding an option at the end of a short cancellation survey.

The strategy was successful since affixing the offer the cancellation survey allowed Wavve's team to customize the offer based on why a user was canceling.

5. Automate What's Working, including Collecting Feedback

When you've decreased churn how do you keep it at a constant at a low level?

Feedback is collected in an automated way.

This survey lets you to keep collecting valuable information to keep track of what is making customers churn. "You can automate or systemize your qualitative feedback collection and, in this case, find out why they decide to leave your company. In most cases the exit questionnaire would be sent to someone who cancels, either by email or even after they click the cancel button. If you are able to automate this collecting, you'll continually provide feedback to you and you won't need to consider doing it," Fred explained in our interview.

If your products and clients alter, so will the reason they decide to churn. Monitoring feedback on a regular basis is an important part of making sure you have a low churn.

And by automating the feedback collection process, it frees up your time to focus on other tasks.

Part III Part III: Churn Definitions and Additional Resources

What Is Churn?

Customer churn, sometimes referred to as customer attrition is the loss of users towards a particular product or service. This is the reverse of retention.

What's the Average SaaS Churn Ratio?

There's no standardized churn rate for SaaS. According to multiple research studies The churn rates could vary between 10 up to 60% based upon the scale of a company and the market it is in.

Churn and Retention KPIs to Track

Apart from the annual or monthly churn rates, additional SaaS measures that will help you get a better view of customer churn as well as retention are:

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

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