ShivaniChurn is also known as attrition, is a metric that measures how much business you’ve lost. This damage can be in:
- percentage of customers – this is known as customer churn and measures how many consumers you’ve lost in a given period.
- Or in revenue – this is known as revenue churn and measures the money you’ve lost in a given period. It’s crucial to note that revenue churn doesn’t only count the money lost due to customers leaving you but also the capital lost from customers’ lower subscriptions.
Based on these two types of losses, churn can be divided in several ways:
- revenue churn and customer churn
- voluntary and involuntary churn
- negative churn.
1. Revenue and Customer churn
Let’s look closely at both types of churns one by one.
Customer churn, also known as subscriber churn or logo churn that depicts the rate at which your users are canceling their subscriptions, and it’s usually calculated in percentages.
Revenue churn (also known as MRR churn), on the other hand, is usually represented as a whole number and can determine the lost revenue or, more commonly, a normalized value such as MRR (Monthly Recurring Revenue).
As revenue churn and customer churn are not always attached, it’s essential to measure both – measuring customer success provides you with the context.
For instance, let’s say you lose one customer. But what does that imply for your bottom line – $100 or $10,000? Losing one customer might not appear crucial, but you also have to acknowledge the type of customer you’ve lost.
But in case you have 0 lost customers and still experience revenue loss (because your current customers are lowering their subscriptions).
2. Voluntary And Involuntary Churn
While diving deeper, we can then identify each type of churn as voluntary or involuntary. Voluntary churn indicates those customers who have voluntarily chosen to spend their money elsewhere or cannot pay (if they go bankrupt, for example).
On the other hand, involuntary churn shows your customers that don’t even realize they’re churning. This kind of churn is usually associated with expired or maxed-out cards.
3. Negative Churn
This is an ideal situation that only pertains to revenue churn. A negative churn rate indicates that the revenue you produce through cross-sells, upsells, and new signups exceed the revenue you miss through cancellations.
For instance, let’s assume you had $50,000 MRR at the beginning of the month, but only $30,000 at the end, and you obtained an additional $30,000 in upgrades. This means that you actually raised your revenue that month.
Why Does Customer Churn Happen?
Remember that you can’t make all your customers happy – churn will always be a part of your SaaS business’ life. Here are some of the most common reasons why consumers discontinue their subscriptions:
- Budgeting/finance issues;
- Their requirements changed;
- They fail to understand the value proposition of your product long term;
- Your SaaS fails to match or exceed their expectations;
- Bad customer service or response rates;
- They switched to a contender.
Some of these causes are within your control, and some depend on external factors. That’s why a 0% churn rate is unattainable. However, you can try to lower your churn rate as much as possible.
Why is churn important for SaaS businesses?
We all know that churn is bad; it’s unavoidable. That’s why it is crucial to measure it and understand how your business performs over time – is it improving, stagnating, or sinking?
We all know that churn is bad; it’s unavoidable. That’s why it is crucial to measure it and understand how your business performs over time – is it improving, stagnating, or sinking?
Also, it’s a lot simpler (also cheaper and more probable) to market products to existing customers. In fact, an improvement in customer retention of just 5% can produce at least a 25% rise in profit.
That’s because returning consumers are likely to spend 67% more on your company’s products and services, which means you’ll spend less on acquiring new customers
What is a good churn rate for SaaS businesses?
Churn rates differ for industries and companies. However, for the majority of the SaaS businesses, they stay within the 5-7% range annually.
How to deal with churn
Suppose your customer churn rate doesn’t come within this range (or even if it does, there is always a scope of improvement). Therefore, you can use different strategies to increase customer retention.
Step 1 Analyzing your existing churn and figuring out exactly where and how much you need to improve.
How to analyze churn?
Start analyzing churn by calculating your current churn rate. In theory, this seems easy, but in practice, it is not. But the problem is how to determine the exact number of customers you had during a given period. You own customers who have been with you the past month also, as well as new signups.
That’s why there’s no one-size-fits-all strategy to calculate churn, but here are 4 methods through which you can calculate Churn Rate, along with a Churn Calculator you can utilize to see whether your business is expanding or not.
There are various ways you can calculate churn. You have subscriber churn, gross revenue churn, and net revenue churn. Also, because many factors lead churn to happen, there are several kinds of churn analysis you can do to discover why your customers leave you:
a) Customer behavior analyses
You can group and analyze your consumers based on how they associate with your product. The most common things SaaS businesses look at are:
- Features used
- In-app actions
- Health score
- Engagement score
- Patterns
b) Cohort analyses
In cohort analysis, customers are classified based on their shared traits. Each business is different, so there are several ways you can group your customers to obtain valuable insights. Here are a few examples:
- Month of purchase
- Acquisition source (organic, paid, affiliate, etc.)
- Customer age
Why should you analyze your churn?
Churn is the game-changer in SaaS businesses. Therefore, it’s a significant metric you should track regularly and accurately.
If you did not, then churn can lead to higher customer acquisition costs that eat away your revenue. We all know that what isn’t tracked and measured can’t be fixed. It’s one thing to understand your churn rate is 10%, and another to understand why your customers leave you and how you can stop them from doing that. This leads us to the next point.
Voluntary churn causes and how to fix them
As per the recurring billing platform Recurly, the average churn rate for SaaS businesses is around 5%. For worst-performing companies, churn can be up to 8.5%, while for best-performing companies, it can be as low as 2.9%.
As we have already mentioned, churn rates differ from business to business. Therefore, it isn’t easy to understand their impact on your growth unless you take a step back and look at the larger picture.
By now, you hopefully understand your current customer churn rate, as well as why your customers are leaving you. Now, it’s time to look at a few causes and strategies that will help you diminish your churn and expand your business, depending on the issues you’re facing:
a) Onboarding Problems
Therefore, most churn SaaS businesses experience before the “aha moment” (the moment when your customer ultimately realizes the worth of your product). To avoid this, try to track each step in your onboarding process and set goals (like filling in their details or using a particular feature) your customers should do to complete the onboarding successfully.
Whenever you notice a customer doesn’t accomplish the goal you set for them, reach out and help them attain it.
A great onboarding process doesn’t concentrate on your company’s goals. Instead, it will turn focus to sufficing your customers’ needs and exceeding their expectations. When you change focus from making sales to retaining customers long-term, you’ll be quick to generate more business.
b) Poor Product Quality
No product is absolute; crashes and downtime will occur. What matters is how you react to these issues. Act fast, recognize your fault, and communicate the steps you’ll require to resolve the issue and how long it will take.
c) Wrong Customer Fit
Not every consumer fits in your business. Sometimes there is a discrepancy between what you give and what they’re looking for.
There are some things that lead to wrong customer fit:
- your sales team oversold and set the wrong expectations;
- your product positioning is wrong;
- you’re costly as compared to your competitors.
In this case, there’s nothing much you can do to reduce churn from happening. But you can use exit interviews (either online exit surveys or 1-on-1 interviews) to identify why the customers are leaving so that you can work on your product positioning.
The better the outline of your buyer persona is, the more you will be able to identify whether user expectations are aligned with what you can give and if users utilize your service in an intended way. Once you get the root cause of churn, you can act with your sales team to get the right customers and work on your website to reach the right promises.
d) Poor Or No Customer Support
Customer support should be your top-most priority. Set up various communication channels (phone, email, live chat) and ensure that your customers can communicate with you in a way that’s easy for them.
Consider implementing a customer issue tracking software to your customer support tech stack, to help manage and resolve the customer’s concerns and issues more quickly and efficiently.
Also, analyze the support quality (through surveys sent after an interaction with support reps) and the number of tickets you’re getting.
Make sure your reps understand how to handle every situation, and there’s a method in place for when unforeseen happens.
No one assumes that your product is ideal; what really ticks your customers off is not the little mishaps but how you manage them. As we’ve previously stated, you have to act fast and develop a solution for your customers. Otherwise, the smallest issues could turn into deal-breakers.
How to reduce involuntary churn?
Most SaaS businesses concentrate on voluntary churn, which isn’t always the most reliable way of doing it. Of course, it’s crucial to know why your customers leave you and how you can enhance your product.
However, unlike voluntary churn, involuntary churn is entirely avoidable. This implies that you can eliminate a big chunk of your overall churn (up to 40%) with little or no effort.
The most obvious reasons that determine involuntary churn are:
- expired cards;
- hard declines after fraud attempts (if the card details have been stolen before);
- soft declines after credit limit max;
- out-of-date billing information;
- charges not flagged as recurring.
Involuntary churn doesn’t just damage your bottom line but also your connection with your customers. If they’re counting on your service for a significant project and don’t see that that service was automatically disconnected because of a failed payment, you can be assured they won’t be nice about it. They might even choose to leave you for good (meaning they churn voluntarily).
Luckily, involuntary churn is simple to fix. Here are 3 tactics:
1. Account Updaters
An account updater is a service that automatically monitors your customers’ card details with their issuing banks before every renewal. On average, SaaS businesses that utilize this service see 2-5x improvement in recovery rate.
A word of caution here: if you utilize an account updater and expired card notifications, you might end up spamming your consumers, and that won’t work in your favor. Even worse, you could charge users that actually needed to cancel their subscription.
Rather than try utilizing the account updater by itself for a while and see how that affects your involuntary churn. Then, try expired card notifications separately and compare results.
2. Dunning Emails
Over time, cards expire or get stolen, misplaced, maxed out, etc., which leads to consumers churning involuntarily. A dunning strategy can support you to prevent a significant percentage of this churn.
If you suspend customers’ accounts immediately after a failed payment, this leads to a poor customer experience. Instead, you can inform them before their card expires and ask them to update it (pre-dunning).
For a maxed-out card that’s been rejected, instead of freezing the account, let your customers have a few days to replace their card and try the payment again.
3. In-App Lockouts
Most of the time, problems can be solved if the card is tried again or updated. But if the situation isn’t fixed by the time the grace period ends, you can consider locking them out.
Although in-app lockouts are useful, you shouldn’t lock a user out of your app instantly after their payment fails. Instead, you should enable them a grace period to sort things out.
Also, make sure to collect their data for a set period in case they decide to return.
What can you learn from churn?
Sometimes, no matter how great your product is or how great a customer experience you give, customers still prefer to leave you. That’s out of your control, but what you can do is see why so you can limit other customers from doing the same.
There are various ways you can do this. Here are two:
Feedback Loops
Unlike exit surveys and exit interviews, feedback loops assist you in preventing churn. That’s because you’re constantly asking for feedback and implementing it and then developing a product your customers love.
Feedback loops are an excellent tool to use when your product isn’t mature yet. They can be classified into three stages:
- Stage 1: gathering info;
- Stage 2: analyzing data;
- Stage 3: implementing changes.
Once you’ve reached stage 3, it’s time to start again.
Exit Interviews
Not to be confused with exit surveys, exit interviews dig deeper into patterns. Most SaaS businesses use closed-ended exit surveys to gather quantifiable data. And although they’re ok, they don’t gather the actual reasoning behind the customer churn.
If possible, use exit interviews to gather as much information about the reason your customer is leaving. You can interview over the phone (this way, they can’t avoid answering) or via online questionnaires, and you use both open-ended questions or ask customers to choose from a list of predefined answers.
Final Thoughts
Diminishing customer churn is less about problem resolution and more about how you can implement and gauge customer feedback step by step.
In this guide, we’ll guide you on how to:
- Analyze churn (both voluntary and involuntary);
- Recognize the challenges your consumers are confronting with;
- address these problems and prevent churn from happening;
- learn from your churned customers and enhance your service and customer experience.
