Nearly all SaaS businesses are subscription-based. Growth depends on adding new customers and retaining existing customers. In SaaS, customer churn is the loss of users. SaaS churn is unavoidable — for a variety of reasons, customers will move on. Customer attrition (churn) is the polar opposite of customer retention. For a healthy product, it’s important to minimize SaaS churn and maximize customer retention.
Why Churn Matters
In the early days of a software product, SaaS churn rates might not mean much to your business. As your product matures, high churn can seriously limit your ability to grow. And if you’re raising capital, it’s a showstopper. We’ll explore how churn is measured and what it means to growth.
A useful way of measuring churn is cohort analysis, which looks at the behavior of groups of users (called cohorts) that share common characteristics. In SaaS, a cohort is a group of customers who start their subscription in the same month and year. Cohort analysis allows you to evaluate churn and retention rates based on when customers subscribe. For example, your monthly SaaS analytics could look at the behaviors of cohorts from each month of the past year to see how many signed up and how long they remained active users.
We like to visualize user retention as the strata of earth. Each period, users add a new layer. The more users and revenue you retain from prior periods, your layers accumulate faster. Conversely, if you have a leaky boat, with layers shrinking, you’ll grow slower (or worse, shrink).
It’s a good idea to measure a variety of activation/retention/churn data points and determine which are best suited to monitor & predict your growth. We’ve worked on a number of SaaS solutions, and we know that models and patterns vary widely.
How many users signed up and then converted to paid users? Free trials are good to get interest, but if no one ever pays you anything, you’ll have problems. We discussed onboarding previously, which is central to both activation initially and retention long-term.
User (Logo) Churn
Some SaaS business models rely on individual and corporate accounts, so monitoring user gains & losses in cohorts is helpful. User counts are easy to track and relevant to growth.
The ultimate scorecard for most SaaS businesses is money in the door. Retaining (and growing) revenue from your customer base is essential to success. Obviously revenue drops as users leave. With upsells & cross-sells, your revenue can grow even if users drop off.
Gross churn rate is the percentage of monthly revenue lost from canceling customers.
Net churn rate is the percentage of monthly revenue lost from canceled contracts, but adding revenue from upgrades from remaining customers. Net churn provides a better representation of revenue changes for the period.
Negative churn — AKA “net negative revenue churn” or “negative revenue churn” — occurs when new revenue from existing customers is greater than the revenue lost from cancellations and downgrades. “Expansion” revenue (upselling and cross-selling current customers) offsets revenue lost from churn. If you have negative churn, you’re happy…
Customer Lifetime Value
Customer Lifetime Value (CLTV) reflects how much a customer is worth over the lifetime of their relationship. It is based on the average revenue per customer and the average customer lifespan. The longer customers continue to subscribe, the greater the expected lifetime value becomes.
Just as not one-metric-fits-all, nor does one retention strategy work for every SaaS application. That said, here are some ideas to help develop strategies to minimize churn.
1. Optimize SaaS Onboarding
As we explained in our onboarding article, a key to success for activation and retention is to build the fastest path to prove value of your solution. Onboarding done well ensures that customers engage with your product, learn how to use it faster, and (ideally) find a key reason to make using the product a habit. How many times have you downloaded an app to your phone that you never used? Perhaps you find too much friction in signing up, ads distract from the user experience, or the navigation is confusing. That initial customer experience is critical to adoption. Successful applications use a variety of tools to deliver a smooth onboarding workflow.
2. Survey Customers
Another way to engage customers is by using surveys. We all get “NPS’ed” regularly — “how would you rate your experience with this product?” and “how likely are you to recommend this service to a friend?”. Using a methodical approach, you can learn a great deal about what’s working and where you need improvement. A breadcrumb approach works best — start with one or two questions, then follow up. If feedback tells you that your support is horrible, fix it. If you learn that your product’s interface is confusing, improve it. Then tell the customers what you did — make sure they know you’re listening AND responding. If things turn sour, there are third-party companies who do survey work for you, asking why they left (e.g., exit surveys). If the relationship isn’t salvagable, at least you can learn why.
3. Monitor Red Flag Metrics
Warnings — red flag metrics — vary depending your product and the type of customers who subscribe. To figure out what affects churn, you have to work backwards from churned accounts. Perhaps they had an urgent ticket with a slow response or they didn’t sign in for two months or they gradually reduced the number of users over time. Patterns will dictate what you monitor and how you respond (e.g., responding to tickets faster, reminding users of the value if they don’t sign in, or calling customers whose number of users declines by over 20%).
4. Look for Upselling Opportunities
We learned a long time ago that the more services someone buys from us, the harder it is to leave (we’re a one-stop shop!). The same rule applies to SaaS – if you engage customers with add-on services to build a bigger footprint, the relationship strengthens. More value from you means a longer customer lifespan.
5. Do Dunning Wisely
Another lesson we learned long ago is that honey is better than vinegar when it comes to collecting money. A kind voice asking for updated payment information is far superior to a harsh dunning email. Credit cards expire, employees move on, and a variety of factors can lead to inadvertent cancellations. Reach out (personally) and see if you can save the relationship.
6. Experiment with Cancellation Offers
We’ve seen some outstanding ways to entice canceling customers to stick it out. A free month of service or an upgrade is easy to offer, for example, in hopes that you can remedy what ever broke the relationship initially. Look for incentives that suit your product and try them.
Minimizing SaaS Churn and Maximizing Customer Retention
SaaS churn is the enemy. When you attract a customer to your SaaS product, you don’t want to lose them. Customer retention is a critical key performance indicator to measure and improve. Retention is essential for sustained growth. When you retain customers at a high rate, you can spend less on marketing, sales, training, and onboarding costs. You build a strong base, adding cohort layers over time. So measuring churn and retention is important, as is remediating problems that cause churn. You’ll need to collect customer feedback to gauge customer satisfaction and improve the overall customer experience.