Lost revenue, disgruntled investors, and dampened growth... Churn is the dreaded reality for every SaaS business. SaaS businesses hinge on a steady stream of recurring revenue and customer churn can be a silent assassin.
Only knowing churn metrics is not enough. It’s vital to analyze and predict churn. Your customer success team plays a crucial role in reducing churn and maintaining financial stability.
We’ve put together this detailed guide with actionable strategies to prevent churn. Let’s begin!
Understanding SaaS Customer Churn
Simply put, customer churn is the rate at which customers discontinue their subscription or stop using a particular SaaS product.
In a SaaS business, the recurring revenue flow creates a flywheel effect. That’s why the revenue implications of churn in SaaS are much more significant. SaaS customers need to be won, not just once, but through every recurring billing cycle.
Business profitability can suffer from high churn rates. Moreover, churn can also harm reputation and customer acquisition.
Acquiring new customers is six times more expensive than retaining existing ones, so calculating and managing your churn rate is crucial for growth.
How to Calculate Churn
There are two ways to calculate churn — customer churn and revenue churn.
Customer churn signifies the rate at which you’re losing customers. Revenue churn indicates the loss of revenue from churned customers or loss of revenue within existing subscriptions (also known as “contractions”).
Monitoring both metrics is crucial. For instance, you may have a 10% customer churn rate during a specific period, but the revenue churn could be as high as 30%, which is a cause for concern.
Let's delve into each calculation:
Customer Churn Rate
Customer churn (also known as logo churn) is calculated by dividing the number of customers lost during a given period by the number of customers at the beginning of that period. This ratio is typically expressed as a percentage.
Customer Churn = [(Customers at the beginning of a period) - (Customers at the end of that period)] / (Customers at the beginning of that given period)
For example, if you started with 100 customers at the beginning of 2023 and 5 customers canceled their subscriptions throughout the year, the customer churn rate would be 5%.
Revenue Churn Rate
There are two types of revenue churn: gross revenue churn and net revenue churn.
Gross Revenue Churn
Gross revenue churn measures the revenue lost without considering expansion or upgrades within the existing customer base. It focuses solely on revenue leakage.
Gross Revenue Churn Rate = [(Downgrade MRR + Cancellation MRR) / (Total MRR at the beginning of the period)] * 100
For example, if a company had $100,000 MRR at the start of the month and experienced $10,000 in downgrades and cancellations, the gross monthly revenue churn rate would be 10%.
Net Revenue Churn
Net revenue churn accounts for both losses (cancellations and downgrades) and gains (expansion, reactivation, and upgrades) within the customer base.
Net Revenue Churn Rate = [(MRR at the beginning of the period - MRR at the end of the period) - (Expansion MRR)] / (MRR at the beginning of that period) * 100
Net revenue churn can be negative, indicating that a business is generating more revenue from a cohort of customers than it is losing within a given period. Therefore, net revenue churn serves as a better indicator of business performance.
For example, if a company had $500,000 MRR at the start of the month, $450,000 MRR at the end of the month, and $70,000 MRR from upgrades, the net monthly revenue churn rate would be -4%.
What Causes Customer Churn?
As much as we’d like it, it’s nearly impossible to achieve zero churn. Customers churn for various reasons, both internal and external. However, the silver lining is that a significant portion of customers who churn out do so due to reasons that you have control over. This means that you can take measures to reduce churn rates and retain customers.
These are some common reasons for customer churn:
Insufficient User Onboarding
If a SaaS product is difficult to navigate, customers are more likely to abandon it and search for alternatives. Hence, SaaS companies need to prioritize user-friendly interfaces and a well-planned onboarding process. Offering product guidance can assist customers in swiftly adopting key features of the product, leading to a faster time to value for them.
Lack of Sufficient Product Value
Customers expect value from the products or services they subscribe to. If a SaaS product fails to deliver the promised value, customers may feel dissatisfied and choose to churn. SaaS customer success teams should continuously assess product usage and demonstrate value to meet customer expectations.
Inadequate Customer Support
Effective customer support is crucial for customer satisfaction and retention. If customers encounter issues or have questions that are not promptly addressed, they may become frustrated and decide to churn.
It’s a competitive world out there! Customers have numerous options to choose from and they may be tempted to switch to a competitor's offering. Customer Success teams need to stay ahead of the competition and provide unique value propositions to retain their customers.
Importance of Churn Analysis
When you notice an increase in your churn rate, what does it imply? It's not enough to just be aware of churn metrics. Without understanding their significance, you could be leaving money on the table.
That’s where customer churn analysis comes in.
Churn analysis is a valuable tool that can help businesses in several ways:
- It identifies the strengths and weaknesses of a product and helps businesses improve customer experience.
- It uncovers opportunities for better communication with customers, leading to better customer retention.
- It helps predict and reduce future churn by analyzing historical customer data.
- It can act as a secret weapon during downturns or recessions by prioritizing revenue retention over new customer acquisition.
How to Analyze and Predict Churn?
Cohort analysis is a useful tool for businesses to compare the behavior and characteristics of different groups of customers over time. Track the performance of specific customer groups, such as those who signed up during a particular period to identify any significant differences in their churn rates or lifetime value.
Churn analysis can be done in different ways using customer segmentation. Two common types are:
1. Churn Analysis by Revenue: This segmentation divides customers into groups based on their revenue, such as start-up, scale-up, and enterprise segments. Analyzing churn by revenue segment can help identify any specific revenue range that is churning more or less and devise strategies to reduce churn. For instance, early-stage startups might churn due to budgetary issues, which can be reduced by offering discounts and flexible payment terms.
2. Churn Analysis by Industry: Different industries have separate sets of problems, and hence this type of customer segmentation can uncover churn trends based on specific industries. Analyzing churn by industry can help prevent churn by implementing specific measures for each sector.
Churn analysis should be an ongoing process, as customer behavior and market dynamics can change over time. Regularly review and update churn analysis strategies to stay ahead of the curve and continue to deliver value to your customers.
Additionally, there are several leading indicators of customer churn:
- Reduction in the time spent on the product
- Decline in the number of support tickets
- Increase in missed payments
- Increase in plan downgrades
- A change in the decision-makers of an account may result in a shift in priorities and eventually churn.
Key Metrics for Churn Analysis
Customer Success teams should closely watch the following key churn metrics:
1. Churn rate: Percentage of customers who left during a specific period. We already discussed how to calculate this earlier in this article.
2. Customer Lifetime Value (CLV or CLTV): Total value a customer brings over their entire lifecycle. The formula for calculating CLV can be as follows:
CLV = (ARPU x Average Customer Lifespan)
ARPU (Average Revenue Per User) is the average monthly revenue generated per customer.
Average Customer Lifespan is the average number of months a customer remains subscribed to your SaaS product.
3. Net Promoter Score (NPS): Measures customer loyalty and advocacy. The formula to calculate NPS is as follows:
NPS = % Promoters (9-10 ratings) - % Detractors (0-6 ratings)
NPS can range from -100 to 100, with higher scores indicating better customer loyalty and advocacy.
4. Customer Satisfaction Score (CSAT): Indicates customer satisfaction and overall experience with the product or service. The formula is simple:
CSAT = (Sum of All Satisfaction Ratings) / (Total Number of Responses)
Strategies to Reduce SaaS Customer Churn
Reducing customer churn is not an easy or quick process. It requires a thorough understanding of your customer base and their changing needs. If you have a well-established churn analysis process, then you are already halfway there. The next step is to implement effective strategies that can help minimize customer churn.
1. Improve Customer Engagement
To retain customers, you need to engage them. Your goal is to create a product that customers find valuable enough to use regularly. By embedding your product in their core tech stack, you make it difficult for them to leave. Engaged customers are less likely to churn.
2. Ensure a Positive Onboarding Experience
Onboarding is essential for user retention. Your customers cannot use your product to its full potential if they don't know how to use it. You need to provide training materials and tutorials to help your customers see the value of your product. This will reduce churn in the long run.
3. Survey Customers When They Cancel
Collecting customer feedback is crucial for SaaS businesses. Net Promoter Scores (NPS) and in-product surveys are common ways to do this. However, you need to survey customers at the point of cancellation to understand why they are leaving. This is a critical moment in the customer lifecycle, and you need to know why customers are leaving to reduce churn effectively.
4. Identify High-Risk Customers
Tracking leading indicators of churn, such as payment failures and slower product adoption, can help you identify high-risk customers. Offer special discounts, coupons, or flexible payment terms to this segment of customers to prevent them from churning.
5. Provide Personalized Offers and Discounts
Provide personalized offers to influenceable customers on the right channel, at the right time, and for the right reason. Set up alerts to notify the relevant teams when a customer who meets specific criteria decides to cancel. Engagement with the customer should trigger based on the reason for cancellation. Offers can include eligibility-based discounts, free add-ons, training videos, etc.
6. Provide Excellent Customer Support
Promptly address customer issues and concerns, and monitor social media platforms and online forums to identify customer sentiment and concerns. Be helpful and quick in your responses.
7. Invest in a Robust Customer Success Platform
Let’s admit it — customer success teams have a LOT on their plates. They need a centralized system with actionable data that acts as a single source of truth. Customer Success Platforms like Velaris track and analyze user interactions to identify churn risks, providing deep insights into customer satisfaction and retention. Velaris.io offers powerful capabilities to enhance your Customer Success function.
- Customer 360 — a centralized customer hub
- Robust Customer Success reports and analytics
- Automation playbooks
- Customer segmentation
- Pipeline management
- Customer lifecycle management
For small and large companies alike, it is crucial to keep track of customer churn rates. With a customer-focused product and a powerful customer success tech stack in your arsenal, you can efficiently strategize and reduce churn.
Velaris can be your trusted partner in this journey. Explore our Customer Success Platform today.