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

Apr 26, 2022

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

Incredibly, even though I purchased a subscription for the whole year but the company refused to let me keep the last 3 weeks' worth of top services.

Once I had started to cancel, a pop-up alerted me I'd instantly lose access to the paid features.

"This move will instantly reduce your account. Are you certain you wish to continue?"

I decided to cancel, even though I didn't need the tool in the future. As a result, in the terms of SaaS I was churning. The experience made me thinking:

  • Was the immediate removal of paid features the best chance to keep me from turning?
  • Was it the day I was officially counted to be "churned"? Was I counted as"churned" on the day that I cancelled my subscription? What if my subscription would have renewed? Was it the case if I had downgraded, upgraded, or changed my subscription?
  • What could they have done better to try to prevent me from canceling?

In this article, we take the best possible approach to answering these and many other questions regarding the process of churn.

In part one 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 across other SaaS business.

And in part three the final part, we'll provide the definitions you can use when talking about churning with other people as well as some other tools.

If you'd prefer to use this list of contents as a way to move through the sections in this article.

Table of Contents

Part I: SaaS Churn Benchmarks

In the event that people from SaaS discuss churn we're often not doing well in making sure that we're on the same on the same page.

If someone says they have a 5% churn rate, are they talking about quarterly, monthly, or annual churn?

Do they include clients who did not make it out of the trial?

Do you know the rate of churn for an SaaS business that is targeting customers of enterprise with one that sells to the general public?

If we are setting benchmarks for churn for SaaS firms, there's much to consider. And in this section, we take it apart in order to let you run an extensive churn analysis on your own company and be able to better understand what you're up to.

Is There an Ideal Churn Ratio for SaaS?

I often hear that a 5 to the churn percentage of 7% is ideal for SaaS firms. However, is it just anecdote? What is the average number of SaaS companies to meet this standard?

Also In other words, 5 to 7% could be the best however, what's the typical?

To investigate, Ryan Law, former CMO and co-founder Cobloom, former CMO and cofounder Cobloom, performed an analysis of the most recent six churn reports, or studies . The results showed that there is no consensus on the average number of customers churned for SaaS firms. The majority of the reports he studied showed an annual average churn rate of 10%. Three other reports showed an even larger range between 32% and 61% annual the rate of churn.

Why such a wide range? Ryan suggests that there's not enough data out there for a clearer image of SaaS churn because it's not something that companies would like to be very transparent about.

However, he also sees other elements that influence churn such as a company's size, and the sector it is in.

Churn Can Vary by Industry

Industries may have very distinct churn benchmarks.

"Look through your own tech stack, and you'll likely see some tools you think are vital, while others you consider  desirable," Ryan writes. "It's probable that tool for sales or finance are more resistant to being discarded more than marketing tools, due to the fact that it is believed to be more directly responsible in terms of revenues."

He also says that niche products with fewer competitors will also experience less the rate of churn.

The size of the company can affect common churn Rates

Ryan states that many of the biggest SaaS firms target enterprises which have longer contract durations and therefore their churn rates is lower. So the flip side is that SaaS businesses that target smaller or individual businesses that have an increased customer base and contract lengths that are shorter tend to be more churn-prone.

When Ryan examines the ratio of churn of big and small SaaS businesses What he's actually saying is that your churn rates will vary based upon the amount of money you pay your client and the average value of your contract. The smaller the ACV, the easier it will be to turn.

What is acceptable Churn?

Hotjar the founder David Darmanin understands that a churn rate doesn't mean much on its own. "Ultimately the churn rate and volume of it affects the amount of customers you have and the speed at which you're attracted more customers." he explained on an episode of ChurnFM. ChurnFM show.

If your target market isn't large, then churn matters significantly more. But if your target market is substantial and you employ a low-friction sales approach, then you can withstand an increase in churn without it dramatically impacting your company.

This realization led David to break down churn into two categories: acceptable and worrying. A certain amount of churn is normal and perhaps necessary- especially if you're using a more than a B2C style sales strategy.

"Worrying the churn happens when you've identified an ideal customerand they're now coming onto the bandwagon, and after which they cease using your product] or stop paying for it," David said.

Also, churn really starts to matter if you're losing a large portion of your best customers.

In fact, it could be beneficial to eliminate users who do not match your ideal profile of customers (ICP). They're not the users whom you'd prefer to spend your time asking for feedback or support from.

But there's another distinction which is important to David The question is how do the users perceive the product after they exit?

"Ultimately, I think what has a much bigger impact on the kind of flywheel that you're developing (in our case, at Hotjar) is if individuals are leaving or stopping with a bitter feeling this can have a much bigger impact than the fact that they have stopped paying the company. Because word-of-mouth for us is actually much bigger source of revenue than any money is being collected, churning out or dropping or whatever."

That's where the collecting of feedback from customers that have already churned is crucial (a subject we'll explore more in the future).

What is the best Churn Rate Method to use?

To determine churn The simplest churn rate calculation is to calculate the number of churns in a particular period divided by the number of clients who have churned at the start of a period.

Churns per period
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Number of customers at the start of a time

For instance, if you calculate monthly churn beginning with 1000 customers and only lose 27 of them your churn rate for that month is 2.7 percent.

But this formula misses out on a lot of crucial details.

In particular, it does not take into account the number of brand new customers you acquired over the course of time, as well as the percentage of them churned, versus the amount of customers that churned.

The weighting is not based on expansion. If you lose the same number of customers each month, and you continue to attract more clients than you lose, your churn percentage will drop yet there is no change in customer behavior.

If you employ this straightforward calculation to determine the monthly churn, then you could be surprised to find the rate of churn can depend on the number of days you have in the course of a month!

Because of this, the most basic formula for calculating churn rates does not give you the most accurate picture of whether theyou're expanding or losing. It's simply too simplistic.

When deciding how you're going to measure churn Outlier AI recommends two things:

  1. The formula for churn you select must be compatible with your top business priorities. Choose the elements that are crucial for you to monitor and tweak the formula in line with that.
  2. Make sure that the formula isn't excessively complicated. "The more complicated the formula becomes it is, the greater chance you'll make a mistake when calculating it which will result in a misleading measurement."

Business analysts have created their own churn-based formulas. Steven Noble's article on how Shopify measures churn is an essential read. And a Baremetrics article examines churn for various types of customers for example, users upgrading or annual plan users leaving.

One more thing: When you hear people speak about churn it's usually referring to the number of customers lost. But there are other types of churn that you can track, such as revenue and transactions-related (transactional) churn. Look over Outlier AI's blog post to find out more information about these.

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

There's a huge difference between monthly and annual churn. If you are losing 7% of your customers who turn over in a calendar year it's a distinct number from losing 7% of your customers each month.

Although it's not a bad idea to track both, your monthly churn rate should be much, much smaller than the annual churn rate.

What exactly is negative churn?

In order to understand the full picture of Churn, it's not enough to take into account how many customers are you losing. It's all about the behaviours of your existing customers, and.

That's when negative churn comes into play.

I've heard people ask whether negative churn is an untruth. The truth is that it's not, however, there's a chance that it's not what you think.

Negative churn happens when revenue gained from upsells and cross-sells outweighs lost revenue from customers that have been churned for a long period of time.

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

According to the VC Tomasz Tunguz that achieving negative churn must be an objective.

"Combined together with prepay annual agreements Negative churn can be a very powerful growth mechanism," Tomasz writes. "When you are pondering the pricing strategy and customer success strategy, it's worth trying to engineer negative churn into the startup you're working on."

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

At a high-level the concept of churn analysis just a way of analyzing the frequency of loss customers.

However, don't stop there. The churn rate you see only gives you an idea of what's happening is happening, but not the reason and the who. In order to truly understand and take action things about it, you'll need to know whypeople are churning and which users you're losing.

SaaS growth specialist Fred Linfjard recommends using a mix of qualitative and quantitative data analysis to understand who is churning and why, as well as how to take action.

Quantitative Data Collecting Information from Product and Website Data

Sample questions to try and then answer

  • Which user groups are more likely to churn?
  • Do they have patterns in their use of products?
  • What supporting documentation did they review prior to churning?

The Qualitative Data Gathering Method by Exit and Surveys

To try to answer questions:

  • Why did they leave?
  • What could make them reconsider?

Hope this provides you with an knowledge of how churn negatively impacting your business. Let's now look at ways to come up with a churn-reduction actions plan.

Part II: Five Tested Strategies for Reducing SaaS Churn

Ideally, your churn prevention strategy is led by the qualitative and quantitative research you've done since once you know who is churning and why, it becomes easy to determine which tactics will make the greatest impact. But it's always beneficial to learn what other companies have done which has been successful.

1. Upgrade Your Dunning Management System

It is commonplace to find 20 % to 40% of the churn experienced by customers to be uninvoluntary, caused by expired credit 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 first priority when battling customer churn.

2. Show Value as Quickly as Possible

Preventing churn starts in the initial stages of the customer's journey and a crucial time is when the customer's onboarding process begins.

It's obvious how important it is to facilitate SaaS users to start. If the user experience isn't smooth at the start, they're not going to keep using it.

However, there's more and discussions about the importance of providing "quick wins." In the words of 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 create quick wins in the product itself. But it's also something which you can achieve more direct through email.

In the past, when Christoph Engelhardt worked for Moz the company, he managed reduce the monthly churn rate of new users by 40% through mailing an email that demonstrated the value Moz offered its customers within the first thirty days. The process that the company employed in an extensive blog post.

3. Look for Red Flag Metrics

Look into the behaviour of customers who were churned out to discover patterns. This behavior could be red flags alerting you that a customer is in danger of churning.

Groove, an inbox shared specifically for companies, reduced churn by 71 percent using this analysis of data. Groove's team compared the product utilization between the new users who churned before thirty days and those who stayed. The team found that those who were churning had shorter first sessions and less frequent log-ins than users who remained on after the first thirty days.

4. Customize Your Cancellation Offers

A common churn reduction strategy is to send an automatic offer to users who decide to cancel their subscription, regardless of whether it's a discounted rate, the ability to pause the subscription, or something other.

Wavve, a popular social media platform for podcasters has been able to recoup over 30% of users who pressed the cancel button, by incorporating an option at the end of a quick cancel survey.

The strategy was successful because attaching the offer to the cancellation survey allowed Wavve's team to customize the offers based on reasons the user decided to cancel.

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

After you've cut down on churn, how can you maintain it at a constant lower rate?

The feedback you collect is always using an automated method.

The cancellation survey lets the company to collect valuable information to keep track of the reasons customers keep coming back. "You can streamline or automate your qualitative feedback collection and for this instance determine the reasons why your customers decide to leave your company. In general, an exit survey would be sent to someone who decides to cancel, via an email or maybe even after they click the cancel button. If you can automate that survey, it will continually provide feedback to you which means you do not have to think about doing it," Fred explained in our conversation.

If your products and clients change, so will the reasons they churn. Continuously evaluating feedback is essential to maintaining a low churn rate.

In addition, by automating the feedback collection process, it allows you to focus on other tasks.

Part III: Churn Definitions and Additional Resources

What Is Churn?

Customer churn, also known as attrition of customers, refers to the loss of users towards a particular product or service. It's the opposite of customer retention.

What Is the Average SaaS Churn Ratio?

There's no standardized turnover rate for SaaS. Based on multiple studies The churn rates can vary from 10 percent to 60 percent based upon the scale of the company and the market it is in.

In addition, the Churn and Retention KPIs can be used to Follow

In addition to the monthly and annual churn rates, additional SaaS measures that will provide a more complete view of customer churn as well as retention are:

  • Net retention rate based on dollar (NDR)
  • Customer lifetime value (CLV)
  • Monthly recurring revenue churn (MRR churn) as well as annual regular revenue churn (ARR churn)

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