As a SaaS business, your long-term growth and success will depend on your ongoing customer relationships. In that sense, focusing on your churn rate is essential.
When your business model is centered on software, then without encouraging users to renew their memberships or subscriptions it’s unlikely that your business will survive in the long term. That said, keeping your customer churn rate to a minimum should be a top priority for your SaaS enterprise.
Here we explore the meaning of SaaS churn rate and look at practical ways to minimize your churn rate for improved commercial growth.
Let the journey begin.
What Is Churn Rate and Why Is It Important?
So, what exactly is churn rate?
At its core, churn rates represent the percentage of users who stop using a SaaS app, platform, or service within a particular time frame (usually monthly, quarterly, or annually). For a SaaS provider to evolve consistently, the volume of new users or subscribers must be higher than the number of users who cancel their memberships or subscriptions (those that ‘churn’).
Here’s how the majority of digital businesses calculate customer churn rate:
Customer Churn Rate = (Customers at the beginning of the month – Customers at the end of the month) / Customers at the beginning of the month
For instance: (500-450)/500 = 50/500 = 10%
Maintaining a consistently low churn rate is pivotal to long-term SaaS business success, regardless of your niche, because the more customers you retain, the more stable and economically streamlined you will become.
If you’re losing customers at the same rate that you’re acquiring them, then you will never be able to grow your SaaS business. And, you will fall behind your competitors, which is not an option in the cutthroat digital age.
Avoidable customer churn costs businesses a collective $136 billion every year. If you take measures to minimize your churn rates, you will boost customer retention and, as a result, you will thrive in the SaaS sector.
What Is an Acceptable SaaS Business Churn Rate?
We’ve established that minimizing your SaaS business churn rate is important, but what is considered acceptable?
Naturally, no two SaaS businesses are exactly the same. But as a rule of thumb, your SaaS business churn rate should be consistently reduced, offering a continual level of growth.
A mix of SaaS business experts believe that an acceptable or healthy churn rate falls at around 3% to 5% annually. Ultimately, you should focus on retaining as many customers or subscribers as possible while aiming to drive down your churn rate incrementally.
How to Reduce Your SaaS Business Churn Rate
Here’s the big question: how do I minimize churn rate for my SaaS business? Here we’re going to explore practical measures that you can take to reduce the risk of losing your customers or subscribers regularly, starting at the root of the issue.
Understand the Problem
While this may seem like redundant advice (if you knew exactly what the problem was, you would be able to fix it, after all), it’s not.
If you analyze your business model and processes in detail, then it’s likely that you will be able to identify one or two primary customer churn drivers and develop plans to tackle the issue. When it comes to SaaS specifically, understanding your main problem areas will help you to direct your efforts effectively.
As a guide, here are the most common SaaS customer churn issues:
- A poor user experience (UX) and inconsistent levels of customer support.
- A lack of customer success—subscribers failing to achieve their personal or business goals with your service. Often this is a case of perception (what people believe your platform can do compared to what it can do).
- A feeling of disconnection between the customer and the brand. A lack of engagement from the SaaS provider in terms of personalized communication and content.
Once you get a firm grasp of why your customers might be churning, you will be empowered to fix the issue with confidence and maximize consumer retention in the process.
“The faster you can understand why your customers are leaving, the sooner you can get to fixing it. Stop trying to fix the sink when the well is broken.”
JR Farr, customer churn expert
Focus on User Experience (UX) and Quality
To drive down SaaS customer churn levels, you must provide a consistently superior level of UX. 83% of web users state that a seamless experience across touchpoints is essential to them, so yes, user experience does matter.
That said, to minimize churn rates for your SaaS business sustainably, prioritizing user experience is a must. By taking measures to ensure that your interface is accessible and user-friendly while offering an exceptional level of customer education and support, you are likely to reduce your churn rates over time. Here are some UX-boosting tips for your SaaS business:
- Invest in your onboarding strategy, making the best possible first impression while offering a tailored experience based on the specific needs of each user.
- Provide a choice of consistent customer support channels including online chat. Offer easy-to-follow tutorials and a comprehensive FAQ portal that will help your users learn more about your platform while troubleshooting any potential problems.
- Manage SaaS user perceptions by being honest about your service’s features and capabilities from the very start of the relationship.
- Conduct regular platform testing (both in-house and externally) to help you make improvements and iron out any service inefficiencies.
- Ask your customers for feedback. By requesting feedback from your existing subscribers, you will make them feel valued while gaining invaluable insights that will help you boost your UX efforts while minimizing customer churn.
Concerning the reduction of SaaS customer churn, charging for your service upfront is often an effective approach.
Not only does offering a discounted upfront annual fee deliver genuine value for money, but when consumers commit to your service for a whole 12 months, they are more likely to engage with the platform and, as such, will be less likely to churn. Also, when a user signs up annually, you will gain 365 days to nurture your relationship and incentivize your users to stick around.
Following on from our previous point: if you offer your SaaS customers incentives, you are more likely to retain them in the long term.
A host of successful SaaS businesses use incentives to drive down customer churn when it comes to converting free trial users into paying customers and retain existing subscribers.
By setting up regular user milestones (for instance, for reaching the service milestone of 20 hours usage, your users can unlock exclusive content), you will increase user engagement while incentivizing people to continue using your service. Moreover, discounts on service renewals, exclusive deals, and referrals bonuses also make powerful churn-reducing incentives.
Take Dropbox, for example. By improving its referral incentives, the cloud storage provider reduced customer churn while increasing its sign-up rate by 60%. It’s a clear-cut case for providing your users with regular incentives.
Identify At-Risk Subscribers
If you nip potential churn-promoting issues in the bud, you will prevent them from becoming widespread. One of the best ways to nip SaaS churn issues in the bud is to identify—and appease—your at-risk subscribers.
To identify your at-risk customers (or potential ‘churners’), you should consult your net promoter score (NPS). NPS is a metric that helps to define your overall level of user satisfaction based on a score of -100 to +100.
Typically, your NPS is split into three categories: detractors (those that score you 0 to six based on their experience), passives (those that score you seven or eight based on their experience), and promoters (those that score you nine or 10, very satisfied users).
By identifying your detractors (your most at-risk subscribers), you can take measures to understand why these users are dissatisfied with your service and tackle the issue before it’s too late.
Consider the most common reasons SaaS customers churn and reach out to your most at-risk subscribers for additional feedback, or by offering insights that you believe offer direct solutions to their problems.
If you invest time in converting your detractors into promoters, you will help to minimize your SaaS customer churn rates while boosting your brand credibility, which counts for a lot in the digital age.
Consult the Right Data
Some 85% of business leaders believe that big data has a positive impact on their processes, and managing customer churn is no exception.
If you analyze your most valuable SaaS business data, you will gain a wealth of insights that will empower you to make more informed decisions while developing strategies that will significantly reduce churn. Here are the customer churn metrics you should leverage to your advantage:
- Customer churn (of course)
- Revenue churn
- Repeat purchase ratio
- Existing customer growth rate
- Loyal customer rate
- Time between purchases
- Customer lifetime value
If you commit to offering a seamless user experience, deliver on your promises, take measures to nurture your subscriber relationships, and use your data to navigate your decisions, you will minimize customer churn for your SaaS business, accelerating your business growth in the process.