Let’s talk all about SaaS churn! SaaS churn rate refers to the percentage of customers who cancel their recurring subscription service. Knowing your churn rate is extremely important for understanding the probability of customers that may cancel their subscriptions, as well as revenue forecasting. It sort of makes sense, though.
As a business, you’re focused on obtaining new customers and increasing revenue. But if you’re ignoring your customers once you get them, then they’ll just leave, and you’ll have to find even more new customers. Sounds exhausting and never-ending, right? That’s because it is, and it’s a bad way to do business. So, it is time to face the churn head-on. Keep in mind that it’s quite simple the key thing to take away is the more customers you keep the lower your churn rate will be.
Measuring churn rate is important because it tells you if your business is profitable or not, and it also gives your insight into how much your customers like you. The goal is to grow your SaaS AND have a steady revenue stream coming in from subscribing customers, while still having new customers subscribing to your service.
Let’s take a look at the stats below if you still don’t think paying attention to it is important: Increasing the customer retention rate by 5% can increase your profits by 25%-95% and the probability of an existing customer converting is 60%-70%, but the probability of a new customer converting is only 5%-20%. High churn means more money spent acquiring new customers, and more work for your marketing and sales teams as they try to convince new customers to sign up.
For the time frame in this calculation, you can choose any length of time you want. Most companies focus on month-to-month, but that’s a mistake. Only focusing on month-to-month in your calculation means you’re not seeing the whole picture. Make sure to calculate the Year over Year (YoY) churn rate as well, to see the effects of things like Churn Seasonability.
But what’s churn seasonality? Consider video content streaming apps like Netflix, Amazon Prime Video, Crave, etc. They probably experience seasonal churn, and it could be tied to factors like fewer people staying inside and watching movies or TV shows during the summer. During the winter months, subscriptions increase again. With most SaaS businesses, customers are paying different rates depending on what subscription tier they chose.
Looking at the customer churn rate on its own doesn’t tell you if a customer who pays $5,000 per month left versus a customer who only pays $50, and although both are valuable, you’ll probably be hurting more at the loss of the higher paying customer. CAC helps you figure out if your business is spending way too much or way too little on marketing and sales efforts. While sales and marketing costs are near the top of the budget for many companies, you want to make sure you’re getting the most out of those dollars spent.
37% of low-growth companies had a medium churn rate of 5–10%. 39% of medium growth companies had a high churn rate of 10%+. 40% of high-growth companies had a minimal churn rate of 5% or lower. It seems like newer companies will experience moderate churn as they are figuring out their place in the market. Oppositely, maturing companies have the highest churn because they are in the midst of growth and experimenting. Once a company has solidified its product and customer base, churn tends to reach a minimum. Where are you along with the product and business lifecycle?
Before you tackle a problem, it’s important to identify the cause, sounds obvious, but it’s a useful tactic. Whenever you see unexpected churn in our businesses, there are three simple ways we use to find out why. You can send a customer exit survey, call the customer or you could send a personalized email.
Be it on the phone or in person, engaging with a strong welcome makes your customer feel comfortable and appreciated. This can be considered one of the best ways to add a personal touch to customer service. Quality customer service is helpful because it helps you save effort in convincing customers that you can take care of their needs.
After signing up for a free SaaS application trial 40-60% of users will use it once, but then they will not use it again. One of the reasons is that users are unable to perceive how your offering could add value to them or their business. Improving your onboarding process and communicating clearly with your users throughout each stage of the sales funnel is important in mitigating agents this.
Sometimes customers leave your website if they cannot navigate pages properly or find information regarding products, leading to an increase in churn rate. To address this, your customer support team could take a proactive approach, engaging customers at certain points.
Think of a way of integrating something into your offer that is indispensable to your customers. You’ll make it extremely difficult for them to switch to your competitors or cancel their accounts.
People like to feel like part of the community. The desire to belong is integrated into our nature. To reduce customer churn rate, make your customers feel like they belong to your brand.
Customers may forget to appreciate the true worth of your services unless you make it explicitly clear to them. Collect metrics and data that pay testament to the impact your services are having on their business in other words how it is helping drive revenue or saving resources. Keep them regularly updated by sharing the process being made.
In this competitive world, your customers are constantly being rushed by options and information from all over. Your company is not the only one that can fulfill their needs after all. If they feel that they are not getting the most value out of their relationship with you, they can and they will change to your competitors.
How do you follow up with new customers? Do you send them a welcome email and nothing else? Well, you could do so much more! When customers feel they have a personal relationship with someone in the company, someone they can always ask questions, that connection increases the likelihood of them staying.
Put a smile on your customer’s face, it can be as simple as giving the best customers recognition awards, a digital certificate. Or you could always do something out of the ordinary to show how much you value them.
Logo churn- this metric measures the number of customers you lose over some time. The formula behind this calculation is customers-lost/ending customers.
-tracking the reasons customers are leaving can be even more important than tracking this number itself. Particularly when selling to early-stage startups, you may experience involuntary churn ( a customer goes out of business or gets acquired) which may not be able to choose to cancel or pick a competitor, which is important to mitigate.
Gross dollar churn- this metric looks at your total lost revenue both from customers churning and from down selling. The formula here is (revenue lost-churn+ revenuelost-downselling)/(ending-revenue).
In regression, analysis leverage is a measure of how far away the independent values of observation are from those of the other observations. High-leverage points, if any, are outliners concerning the independent variables. That is, high-leverage points have no neighboring points in {\displaystyle \mathbb {R} ^{p}}space, where {\displaystyle {p}} is the number of independent variables in a regression model. This makes the fitted model likely to pass close to a high leverage observation.
Hence high-leverage points have the potential to cause large changes in the parameter estimates when they are deleted i.e., to be influential points. Although an influential point will typically have high leverage, a high leverage point is not necessarily an influential point. The leverage is typically defined as the diagonal elements of the hat matrix.
Your billing and invoicing process is, essentially, the heartbeat of your operation. Cash is the blood that keeps you moving forward every day. Hence, you must ensure an effective and streamlined billing process. This is inherent and obvious to all business owners and managers. Still, few of these operators take action to improve, streamline, or ensure the efficacy of their accounts receivable department. And there is almost always room for improvement.
Basic, simplistic invoicing, billing, and collection procedures can be both effective and inexpensive. Yet the key is to maintain careful attention to and consider the details of your billing process flow. Rather than hiring excess employees or buying sophisticated software, a smoothly operating customer invoicing process is built with a little elbow grease and some know-how. Fortunately, getting your invoicing and billing process to a place of stability is not difficult, whether you’re a freelancer or you’re managing a larger outfit. Rather, it’s a matter of developing systems that work well without micromanagement.
Churn rate is an especially important metric for SaaS and other subscription-based companies. Acquiring new subscribers is anywhere from 5 – 25x more expensive than maintaining existing ones, so businesses must avoid churn however possible. Furthermore, sellers have a 60 – 70% chance of cross-selling and upselling to existing customers. Compare that to their only 5 – 10% chance of closing a sale with a new customer, and it’s clear why a low churn rate and an eye toward customer retention is critical to the success of any organization.
Marketing, sales, and customer success need to have an all-hands-on-deck approach to attracting and retaining highly qualified buyers that are likely to derive long-term value from your product. It’s worth repeating that churn can be sneaky. Even a few percentage points dramatically affect how detrimental churn will be on a company’s bottom line. Take a look at the example below, highlighting the various costs associated with each a 5% and a 10% customer churn rate.
There are many ways to reward employees, and one of those ways is by building a corporate culture that not only recognizes good work and behavior with nice perks and words of encouragement, but also that provides a setting where people can be heard, lets them take ownership of their work, makes them feel they have a purpose and allows them to grow in their career and at a personal level.
Gifts, rewards, and incentives only hold meaning in the eyes of employees when they come from management that makes them feel part of a team. Like the preschoolers in the study, motivation has to come from within. And the right environment will ensure that motivation grows over time.
A moat is a durable competitive advantage that a company has that protects it from being attacked by competitors. A business moat is what makes a company predictable and allows us to put a value on the business. Charlie Munger said that “Coca-Cola is the perfect business because it has this gigantic durable competitive advantage, or moat, which gives it predictable cash flow.”
This allows us to figure out what the future cash flow will be and value the company today, so we know whether we can buy it on sale or not. A value moat is centered around price. Walmart of course is the king of price moats, as the company can create or sell products much, much lower than anybody else.
If you run a SaaS company, measuring customer churn rate is a must to ensure the profitability of your business. Using a variety of churn metrics instead of just one will help you see a full view of your company’s performance, and help you determine where you need to focus your attention for improvements. Check out other blogs by RocketHub to gain insight on SaaS!
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