How to Lower Customer Churn Rate in SaaS (Software-as-a-service) Businesses
The silent killer of SaaS businesses, stifling the success of great products and marketing strategies.
“Avoidable customer churn is costing U.S. businesses $136 billion per year” — Callminer.
Customer Churn Rate is the percentage of your customers or subscribers who cancel or don’t renew their subscriptions during a specified time frame.
Let’s say you’re a company with a steady $100,000 MRR (Monthly Recurring Revenue). If you’re experiencing a 0.5% monthly customer churn rate, it means you’re losing $500/mo and about $6000+ annually.
Lincoln Murphy, in his article “What is a good SaaS churn rate” said:
An “acceptable” SaaS churn rate is in the 5–7% range annually, depending upon whether you measure customers or revenue.
Imagine experiencing a 5 to 7% monthly customer churn rate. Yikes!
Now, how do you reduce customer churn rate in your SaaS Business, you ask?
This article will show you everything you need to know about Customer churn rates. You’ll see effective strategies to reduce customer churn rates and increase retention.
Let’s get right into it.
Why do Customers Churn?
After months of development, testing, marketing campaigns, and sales efforts, you’ve finally secured a decent number of paying subscribers. Yay!
Something bad starts to happen. Customers don’t resubscribe to your solution; they cancel and leave. What is going on? All your team’s effort and time — down the drain.
You’re losing money and panicking. You make your team focus more effort on bringing new subscribers to replace the old ones.
Fortunately, it works. You get new subscribers, but after a month, a chunk of them don’t resubscribe; they cancel and leave.
Now you’re perplexed.
Why are they leaving, you ask?
I’ll tell you why!
Your customers are leaving because they are humans. Humans get bored and want to try new things. You need to give your customers a reason to stay — always.
David Rowley, President, and CEO of Rowley & Associates, an IT service, wrote in his LinkedIn Pulse article:
You will never retain every customer. I don’t care how hard you try; it is inevitable.
It’s okay to have some customer churn. But when does it become a problem?
Find out below…
If your monthly Churn rate is >1%, You have a churn problem.
It’s generally accepted that anywhere between 0–1% monthly churn rate and 5–7% annual churn rate is “healthy.”
Your business is losing some customers within that range, but you can balance things out by acquiring new customers or expanding your current customers through add-ons, upsells, etc.
So, when should you start worrying about your customer churn?
Is your business in trouble if your monthly churn rate is above 1%?
Before I dive into why your business is in trouble if your monthly churn rate is above 1%, let’s learn how to calculate customer churn rate for SaaS companies.
How to calculate customer churn rate
Customer Churn Rate = (Total customer churned in a period) / (Active customers at the beginning of the period) * 100
If you had 80 customers at the start of the month (March), and by the end of March, 10 customers canceled their subscriptions, we can determine the customer churn as follows.
10/80 * 100 = 12.5%
Why is >1% a problem?
If your monthly customer churn is above 1%, it means your annual churn rate is above 11.36%.
SaaS churn rate benchmark varies by industry, but anything above 12% is high.
Say your monthly customer churn is 2%. Ceteris paribus, this means your annual customer churn is 21.5%.
If you started the year with 100 customers, with a 2% monthly customer churn, you’d be left with 78 customers at the end of December.
If you started the year with $1000 in MRR, you’d end up with $780 in MRR by the end of December.
The figures are not that bad, right?
Let’s look at the figures again. If you started the year with 100 customers with 2% monthly customer churn, you’d need to bring in 22 new customers to break even with the beginning of the year.
To grow by 1 customer, you’d have to get 22 customers.
Doesn’t look so nice anymore, does it?
I learned the above calculation from Lincoln Murphy’s post on SaaS Churn Rates.
How do you lower customer churn rates?
Earlier on, I established that you have to give your customers a reason to continue your service; this is the key to lowering customer churn.
But how do you do it?
Let’s start from the beginning; your onboarding experience.
Your onboarding experience: Aha! or WTF?
According to the Customer Onboarding Statistics by Wzylow:
86% of people say they’d be more likely to stay loyal to a business that invests in onboarding content that welcomes and educates them after they’ve bought.
The statistics went on further to reveal:
8 in 10 users say they’ve deleted an app because they didn’t know how to use it.
In other words, if your new customers don’t understand how to use your app or are unaware of all your platform features, they will churn.
Quality support at the onboarding stage is critical to retaining your customers and reducing your churn rate.
Your onboarding process should get your customers to the ‘Aha!’ moment, not WTF? They should see and experience the real benefits of your service — as quickly as possible.
Be sure to offer helpful training that shows your clients how best to use your product and optimize it for their success.
Saas Integration reduces customer churn.
The SaaS market is more competitive than ever.
In 2021, there were over 15,000 SaaS companies in the United States.
In other words, your customers have other options. So how do you make your customer sticky? By integrating with other products.
Jon Gitlin, a content strategist at Workato, defined SaaS integration as:
SaaS integration involves connecting a SaaS application with another cloud-based app or an on-premise software via application programming interfaces (APIs). Once connected, the app can request and share data freely with the other app or on-premise system.
When users find value in your product, they are less likely to churn. A good integration increases the value of your product by adding more pathways to and from the product. Therein increasing engagement and reducing churn.
A case study from Zapier showed that Typeform users who integrated with Zapier to push Typeform data to their other services showed about 40% less churn than users who used Typeform without Zapier.
The integration also accounted for 32% increase in daily signups driven by Zapier.
Therefore, as a SaaS company, integration should be one of your primary strategies to lower customer churn.
Implement Customer Retention Activities
A survey conducted by Invesp revealed that acquiring a customer is five times more expensive than retaining an existing customer.
Your customers are your biggest asset.
Sadly, most businesses are obsessed with lead generation but careless with customer retention, leading to a spike in customer churn rates.
So what are the things to do to increase customer retention?
- Provide great customer support
- Personalize your communications and offers
- Offer convenience
- Implement referral programs.
One of the most successful cases of an effective customer retention strategy is Dropbox.
Dropbox went from 100k registered users in 2018 to 4M registered users in 2010.
That’s a 3900% growth over 15 months!
How did this company pull that off, you ask?
The Dropbox referral program was quite simple: reward people with free space for referring their friends.
It didn’t stop there.
The referrer and the referee would get 500 MB of free space. Every new referral would get them 500 MB of additional free space, up to a limit of 16 GB.
Create Obstacles for Customer Churn
To avoid customer churn, you need to become a proactive problem solver.
What is proactive problem-solving?
Let’s look at how Christoph Goldenstern, Vp of Innovation & Service Excellence at Kepner-Tregoe, defined the concept.
Christoph wrote in his article:
Proactive problem solving is all about identifying problems and resolving them before the impacts are felt by the business. What is the impact of an event that never occurs? There isn’t one. While not all problems can be avoided entirely, there are often early warning signs that indicate that a problem is developing.
This definition says one thing — solve your problems before they occur.
Relating it to the topic; proactive problem solving can help reduce customer churn by putting up some barriers to prevent it.
In other words, you’re making it more difficult for your customers to leave.
How do you do that?
First things first — charge upfront.
Take a look at this pricing page from Grammarly.
Which feels like better value for your money?
The annual, quarterly, or monthly?
If you are anything like me and 80% of users, you chose the Annual plan.
Because you’re paying $12, it’s cheaper than the rest.
You’re saving 60%. Let’s be honest: who doesn’t love a good deal?
With an Annual Account, you’re saving more, but you’re also investing more to get started.
When you’re paying as much as $144 upfront, you’ll take the product seriously because you want to make an ROI as quickly as possible.
From a business standpoint, the annual plan is effective because it attracts customers and reduces churn.
When customers are locked in at an annual fee, they are more likely to use the product, incorporate it into their daily lives, and renew subscriptions if they are getting value.
Another way to make it difficult for your customers to leave is to introduce loyalty programs.
A report by Bond revealed that 79% of consumers say loyalty programs make them more likely to continue doing business with brands.
Loyalty programs give the customers an added reason to repurchase from your brand.
When executed successfully, loyalty programs lowers customer churn and improves customer engagement.
The key to lowering customer churn is simple — prioritize customer experience.
The SaaS niche is a highly competitive market with customer expectations higher than ever before.
As I stated earlier, your customers have so many options now more than ever. You need to give your customers a reason to stay.
Jeff Bezos, the executive chairman of Amazon, said:
We see our customers as invited guests to a party, and we are the hosts. It’s our job every day to make every important aspect of the customer experience a little bit better.
Think of your customers as guests, and you’d successfully lower customer churn.