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SaaS Churn: Myths, benchmarks and strategies to Retain More Revenue -

Apr 26, 2022

The week before, I cancelled my annual SaaS subscription (I was left with three weeks to renew).

It's interesting that, despite having paid for a year-long subscription, the company didn't permit me to use the last 3 weeks' worth of exclusive features.

When I began to cancel, a pop-up alerted me I'd instantly lose access to all paid features.

"This action will immediately downgrade your subscription. Are you sure you want to continue?"

I decided to cancel, even though I didn't need the tool going forward. In the language of SaaS I was churning. This experience led me to thinking:

  • Was the immediate elimination of features that cost money is the best way to prevent me from going through the motions?
  • What date did I count to be "churned"? Did they count me as"churned" on the day that I cancelled my subscription? On the day my subscription could have been renewed? Would I have been able to cancel or upgraded my use?
  • What could they've done differently to keep me from cancelling?

In this post this article, we give the best possible approach to answering this and other queries regarding the process of churn.

In the first part we will discuss benchmarks as well as the most common churn formulas.

In part two in this second installment, we'll discuss five churn-prevention methods that have proven successful in other SaaS companies.

And in part three in part three, we'll wrap up with a set of definitions you could use to talk about churn with others -- and some additional tools.

If you prefer, you can use this table of contents to navigate through the sections in this article.

Table of Contents

Part I: SaaS Churn Benchmarks

In the event that people from SaaS talk about churn, we're not always doing an adequate job of making sure that we're on the exact same page.

If someone claims they have a 5% churn percentage, do they mean about monthly, quarterly, or annual Churn?

Are they excluding customers who never made the cut in the trial?

Can you compare the rate of churn for a SaaS company targeting enterprise customers with one that sells to consumers?

When we set churn benchmarks for SaaS firms, there's many things to think about. This is why we take it apart in order to let you run an extensive churn analysis for your company to get a clearer picture of how you're doing.

What is the ideal Churn Rate for SaaS?

I frequently hear that a 5 to 7percent churn rate would be perfect for SaaS companies. But is this purely anecdotal? Is it common for SaaS firms to achieve the requirements?

In other words 5 to 7% is the best, but what's the average?

To find out, Ryan Law, former CMO and cofounder at Cobloom, performed an examination of six recent churn reports or studies and found that there's no consensus regarding the average rates of churn for SaaS companies. The majority of the reports the researcher studied had an annual average churn rate of 10 percent. The three other reports revealed more and a wider spectrum of 32% to 61 percentage annual the rate of churn.

What's so different about this? Ryan theorizes that there's not enough information available to get a more accurate picture of SaaS churn because it's not something that companies would like to be very transparent about.

However, he also sees other factors that affect churn, including a company's size, and the sector it is in.

The Churn of a product can vary based on the industry.

Industries may have very distinct churn benchmarks.

"Look at your personal tech stack, and you'll probably find products you view as essential, and others deemed "nice to have,"" Ryan writes. "It's probable that finance or sales tools will be less susceptible to being discarded as compared to a marketing tool simply because it's perceived to be more accountable in terms of revenues."

He also says that niche products that are less competitive will have less churn.

Corporate Size Influences Common Churn Rates

Ryan states that many of the biggest SaaS companies target enterprise customers who have contracts with longer lengths, so their churn rate will be lower. This means that SaaS firms that focus on individuals or small businesses with an increased customer base and shorter contract lengths will naturally experience higher churn rates.

Although Ryan compares the common ratio of churn of big as well as small SaaS companies What he's actually saying is that the churn percentage will differ based upon the size of your customers and the average value of your contract. The smaller the ACV, the easier it will be to turn.

What is acceptable Churn?

Hotjar founder David Darmanin understands that a the churn percentage doesn't really mean anything in and of itself. "Ultimately it's churn, and the volume of it affects the magnitude of your market as well as the speed with which you're getting more customers." Darmanin explained in an interview on the ChurnFM show.

If your target market isn't large and churn is a major issue, it will matter greater. However, if the market you are targeting is large and you employ an approach to sales that is low friction, then you can withstand an increase in churn without majorly affecting your company.

This realization led David to break down the churn process into two groups: acceptable and worrying. Some churn is acceptable or even required- especially when you're using a B2C-style sales approach.

"Worrying Churn" is when you've found a perfect customerand they're now coming to the party, but after which they cease using your product] or stop paying for it," David said.

That's why the amount of churn you receive will be an issue in the event that you're losing a substantial portion of your best customers.

It can even be beneficial to lose users that don't fit your ideal customer profile (ICP). They're not the users that you'd like to be helping or getting feedback from.

But there's another distinction that matters to David The question is how do the users think about the service after they exit?

"Ultimately I believe that what has a much bigger impact in this type of flywheel you're making (in our instance, Hotjar) is if individuals are leaving or stopping with a bitter feeling it actually has more impact than simply the fact that they stopped making payments to the company. Because word-of-mouth for us is a much more powerful fuel than the revenue that is generating or dropping."

This is where gathering feedback from customers who have churned comes in (a issue we'll discuss more in the future).

What is the best Churn Rate Formula?

To determine churn to determine churn, the simplest churn percentage calculation is to calculate the number of churns in a particular period , divided by the number of clients at the beginning of a period.

Churns per time
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Customers at the start of a time

If, for example, you're looking at monthly churn and you start with 1,000 clients and then lose 27 of them, your churn ratio for the month is 2.7 percentage.

But this formula misses the mark on many important specifics.

It doesn't take into account the number of new users you gained over the course of time, as well as the percentage of these churned, versus the number of your existing customers that were churned.

It's also not weighted for the growth of your business. If you're losing the exact number of customers each month, and you continue to attract more customers than you lose, your churn rate will decrease however there has been no change in customer behavior.

If you apply this easy equation to measure monthly churn, you might not even realize the rate of churn can differ based on the number of days are in a month!

For these reasons, the basic churn rate formula isn't an accurate account of how you're growing or who you're losing. It's simply too simplistic.

In deciding on how to determine churn Outlier AI offers two suggestions:

  1. The churn formula you choose should be in line with your business's top priorities. Decide what details are essential for you to monitor and refine the formula accordingly.
  2. Don't make the formula excessively complicated. "The more complicated the formula becomes and more complicated, the higher the chance that you'll make a mistake making a calculation at some point or else you'll get an inaccurate metric."

Business analysts have released their own churn formulas. Steven Noble's blog post on the way Shopify evaluates churn is worth reading. It also contains an Baremetrics blog post examines churn for various types of customers like users who upgrade or annual plan users leaving.

One more thing: When people talk about churn, it's typically about the number of customers lost. There are many other kinds of churn to measure, such as revenue and the transactional (transactional) churn. Check out Outlier AI's blog post to learn more about these.

Monthly in comparison to. Yearly Churn: Which Should You Keep Track of?

There's a significant distinction between annual and monthly turnover. If you have 7% less customers to turn over over a year this is a different number than losing 7percent of your customers each month.

It's not necessarily an ideal idea to measure both of them, your monthly churn rate is likely to be significantly lower than the annual churn rate.

What Is Negative Churn?

In order to understand the whole picture on the churn rate, don't only take into account how many customers are you losing. The full picture includes the behavior of your regular customers as well.

This is where the negative churn enters the picture.

People have asked me if negative churn is a myth. The truth is that it's not, however, it could be different than the way you imagine it to be.

Negative churn occurs when the revenue gained from upsells and cross-sells outweighs lost revenue from customers that have been churned for a long duration of.

When you've reached this stage, you may lose customers without new customer acquisition and still grow your revenues (at minimum for a short time).

According to VC Tomasz Tunguz the pursuit of negative churn must be an objective.

"Combined together with prepay annual contracts negative churn has the potential to be a very powerful growth mechanism," Tomasz writes. "When you are pondering your pricing model and your customers' success strategies It's worthwhile to integrate negative churn in your startup."

The Next Level Churn Rate Analyze: Who and What are the reasons

At a high-level, a churn analysis is simply looking at the speed that you're losing customers.

But don't stop there. Your churn percentage only gives you an idea of what's happening is happening, but not the reasons and the who. To really understand and do something about churn, you'll need to know whypeople are turning away and what users are you losing.

SaaS growth expert Fred Linfjard suggests a combination of quantitative and qualitative analysis to determine who's producing the most data, and why, as well as what actions to take.

Quantitative Data Collecting Information from Product and Website Data

Sample questions to try and answer:

  • Which groups of users are most likely to churn?
  • Do they have patterns in the use of their products?
  • What supporting documentation did they view before churning?

Qualitative Data Gathering by Exit and Surveys

Questions to try and answer:

  • The reason they left?
  • What is the reason they should reconsider?

Hopefully this gives you a better understanding of how churn is impacting your business. Next, let's look at the steps to create a churn reduction action plan.

Part 2: Five Proven Strategies to Reduce SaaS Churn

Ideally, your churn prevention strategy is led by your quantitative and qualitative research you've been conducting as soon as you understand who's churning and why, it becomes more straightforward to decide which tactics will make the greatest impact. It's also beneficial to learn what other companies have done that has worked well.

1. Make sure you update your Dunning Management System

It's common to find between 20 and 40% of customer churn to be uninvoluntary, the result of expired cards, technical issues authorizing transactions, etc. Fred Linfjard explains why making certain you've got an effective dunning system should be your primary goal when fighting against customer churn.

2. Prove Value as Soon as you can

The process of preventing churn begins at the beginning of the customer's journey the most crucial point is during the onboarding process.

It's obvious the importance of being able to facilitate SaaS users to start. If there's too much friction at the start it's unlikely that they'll continue using the service.

However, there's more and discussions about the importance of offering "quick results." In the words of Lincoln Murphy explains, " Customers who realize that they are getting value fast are those who stick around for the longest."

There are plenty of ways to orchestrate quick wins within the software within the product itself. It's also something that you can do more directly via emails.

In the past, when Christoph Engelhardt worked for Moz, he was able to reduce its monthly churn rates for new users by 40% through posting an email that highlighted the importance Moz was providing to its clients within thirty days. The process that which he employed in an in-depth post.

3. Look for Red Flag Metrics

Search the product behavior of churned customers to uncover patterns. Such behaviors could be indicators that your customer may be in danger of churning.

Groove, a shared inbox that is designed for business, reduced churn by 71 percent using this analysis of data. Groove's team has compared utilization between the new users who churned before thirty days and the ones who stayed. They discovered that users who had churned were less productive in their first sessions and less frequent log-ins than users who continued to use the service after the initial 30 days.

4. Customize Your Cancellation Offers

A common churn reduction strategy is to automate sending an offer to users who decide to end their subscription regardless of whether it's a discounted rate, the ability to pause the subscription, or something else.

Wavve, a social media tool for podcasters, could reengage the more than 30 percent of the users who hit the cancel button, by incorporating an offer at the end of a short cancel survey.

The strategy was successful since affixing the offer the survey on cancellations allowed Wavve's team to customize the deal based on the reason a user was canceling.

5. Automate What Works, Including Collecting Feedback

When you've decreased churn what can you do to keep it at a constant lower rate?

Feedback is collected using an automated method.

The cancellation survey allows you to continue collecting information to keep track of what is making customers churn. "You can streamline or automate the collection of qualitative feedback and for this instance determine the reasons why your customers decide to leave your company. In general the exit questionnaire would be sent to someone who has cancelled, whether via an email or maybe even after they click the cancel button. If you are able to automate this survey, it will constantly provide you with feedback and you won't need think about it," Fred explained in our interview.

When your customers and your product evolve, so do the reason they decide to churn. Continuing to evaluate feedback is a crucial aspect of making sure you have a low churn.

In addition, by automating the process of collecting feedback, it allows you to work on other projects.

Part III of the course: Churn Definitions and Additional Resources

What is Churn?

The term "customer churn," also referred to as attrition of customers, refers to the loss of users to a product or service. It's the opposite of customer retention.

What is the average SaaS Churn Ratio?

There is no consistent average turnover rate for SaaS. Based on multiple studies The churn rates is ranging from 10 percent to 60 percent based upon the scale of the company and its market.

Churn and Retention KPIs to Follow

Besides monthly or annual customer churn rate, other SaaS metrics that can help you get a better picture of customer churn and retention include:

  • Net retention rate calculated in dollars (NDR)
  • Customer lifetime value (CLV)
  • Monthly recurring income Churn (MRR churn) and annually regular revenue churn (ARR churn)

What Can help?