Reduce SaaS Customer Churn Rate
‘Churn’ the word is enough to scare SaaS business owners because it is an unavoidable part of any SaaS business. Churn affects 9 out of 12 SaaS businesses; customer churn rate is one of the worst enemies you can have while marketing your product.
The ideal and the most common customer churn rate in the SaaS industry is in between somewhere around 5% to 7% range annually. If you convert it to monthly, then it comes around 0.41-0.58% range.
In this article, we are going to show you five amazing hacks you can apply in your SaaS business that could help you reduce your customer churn rate. Unfortunately, you cannot completely stop churn, but you can cut it, and this article is just about that.
What is a Churn Rate?
Churn rate refers to a percentage of customers that your business loses over a specific period. It can be calculated on a quarterly or monthly or yearly basis. But, make no mistake churn rate and revenue rate are different. Although both of them are related to each other, I’ve seen many SaaS owners mistaking them for the same.
As a SaaS marketer, I’ve spoken to many SaaS founders that don’t have any idea about the different types of churn rates in the industry. They think all are the same and how great their churn numbers are, but when I ask them what type of churn they are? Customer churn, Revenue churn, gross or net churn? They seem to go numb after hearing my question.
Are you among the SaaS owners who aren’t aware of customer and revenue churn rate? Learn more about customer churn, revenue churn, gross MRR churn, and net MRR churn.
To simplify it even further here’s another breakdown of churn rate with an example:
Let’s take an example of us, Payvoice; we are a Stripe Subscription Management & Recurring Billing Software that helps’ businesses integrate with Stripe in minutes without any coding and start receiving payments.
Imagine our customer base is 100 monthly recurring customers. Suppose, we had one customer out of 100 that canceled the monthly recurring plan with us, that’s just 1 percent customer churn, right? It is not great, but it doesn’t sound horrible. But that customer was our biggest customer and accounted for 25 percent of our revenue, well then, we had an awful churn month when it comes to revenue perspective. Imagine we are charging customers percentage of revenue.
This is how every SaaS owner should calculate the SaaS churn rate.
How to Calculate Churn Rate?
To understand your churn rate, you take the number of customers lost over a period to the number of active customers at the start of that time. So, for example, let's look at Spotify.
At the beginning of 2020, let's say Spotify had 50 million U.S. subscribers, and then they had a change in a pricing structure that expired during the middle of that year, and they lost half a million subscribers. So you do some quick math on that, and the churn rate is 0.01, or 1%.
Now, a 1% churn rate, or any churn rate, doesn't necessarily mean Spotify is doing poorly, they could've added millions of subscribers during that time. Here's the formula on how to calculate customer churn rate:
Now that you’ve got an idea about what churn rate is and how to calculate it, let us move forward to the next and the most crucial part about the topic, “how to reduce SaaS customer churn rate?”.
How to Reduce SaaS Customer Churn Rate
Customer satisfaction is the key to success in the long term for any SaaS business. Customer acquisition is important, but retaining existing customers is vital (as well as cost-efficient, too!) than getting new ones. What is the point of spending all your resources, power, and time on the acquisition of new customers while ignoring the existing ones?.
We are going to show our top strategies to reduce customer churn rate. These are tested strategies that have worked exceptionally well in reducing customer churn rate for many SaaS companies, and hopefully, it will help you to reduce SaaS customer churn rate.
1. Onboarding Experience
Trust me; the onboarding experience is so critical. In my view, the worst churn a SaaS can experience is customers that haven't even gotten to experience the product due to an inefficient onboarding experience.
As a SaaS marketer, I've interviewed many SaaS founders, and the most common challenge their company faced during the initial phase was implementing the right onboarding experience for users.
So, the recommendation for new SaaS entrepreneurs or companies out there is to make the onboarding process super simple for users to get a result, and that will be a great first impression. Interacting with your new clients in those early few days after you brought them on board can have a massive impact on how long they stay with you as a client and how enthusiastic they are to refer you to other people.
2. Setup a Customer Cancellation Process
Now, this isn't always a popular recommendation. Still, in the early days, if you genuinely don't know why your customers are canceling and not using your product, then you need to avoid the scenario where customers can auto-cancel their subscription. I'm not saying make it hard for them, but I am suggesting maybe they contact you so you can at least have that conversation about why, what was missing, how could I make the product better, and over time you take those responses and make your product better. When a client chooses to cancel their subscription, you can present a checklist of tailored cancellation choices. To decrease churn, you can provide discounts or coupons to urge customers to continue to be subscribed.
3. Improve your SaaS Products
The thing that kills most of the SaaS startups at the beginning is the product strategy. Lack of insufficient analysis is often cited as the most common root cause of SaaS product failures. Differentiating your SaaS product is the key to selling; massive mistake, beginners often make, is finding an existing product that sells well and thinking that they can be just as successful by selling the same product except for a few minor tweaks. This is one of the most common mistakes any SaaS company makes when they are about to start. But, the real question is, how can you improve your SaaS products? Well, that depends on several things.
Research the market: This may sound mundane and obvious, but there are a lot of people who start things without an end goal in mind. -They think, "hey, I launched this product, -and it will be the next big thing in the SaaS industry." Good luck with that. To develop a strong understanding of your product, take a look at the entire market through the lens of your consumer to figure out the real potential. Keep yourself accountable for doing the right things to improve the product quality; otherwise, it's easy to get distracted and work on all of the wrong things.
Pricing: - During the Q2 2019 Netflix, a famous US-based online streaming company reported a loss of a whopping 126,000 US-based paid subscribers (the highest numbers since 2011). The shares plunged to 10.3%, and the reason was the increase in price. Whatever product you sell, the price you charge your customers or clients will undoubtedly have a direct impact on the success of your business. Be aware of the industry rates and always include your cost and profits, while pricing a product.
Find faults before your customer does: - Set a dedicated team to find bugs, errors, or mistakes in your product, fix them before any customer can complain. In this way, you are not only improving the quality of the product but also improving the customer experience.
4. Fix Payment Failures and Declined Rates
If you do not have a specific system for understanding then you need to look into it. Maybe your credit card provider or services allows you to manage that, but there is an opportunity for you to reduce about 30% of those credit card failure payments that will be considered as churn in your business. The five most common reasons for payment failures and credit card declines are: -
- Customers input wrong credit card details or CVV code
- Customers are changing their minds at the last moment
- Bank declining the payments
- Poor internet connections or flaky mobile networks
- Customers’ using VCC’s (Virtual Credit Card) to make payments
5. Customer Service
Consumers now rate customer service as the most critical factor when deciding to do business with the company; this means the traditional competitive advantages such as price location and product are rapidly disappearing in the technological era. Customer service is king. It's crucial to understand and avoid certain behaviors that make your customers angry.
In a recent survey, 57% of customers expressed frustration that the company was not available when needed; 56% of customers felt that customer service is still too slow; 42% of customers thought that they have to speak to multiple agents before their problem is resolved. 24% of consumers feeling they know more about the product than the agent they were speaking to. A rapidly growing percentage of customers are dissatisfied with poor website design and online availability.
The consequences of getting customer service wrong can be very damaging for a SaaS business. A massive 89% of customers have reported that they've stopped doing business with companies because of bad customer service.
The goal is to make sure that your customers are not going out of business. If we served them better, if we made sure they’re more successful, we could’ve helped in the overall success of that customer and may be kept them alive as a business. How many of our customers are churning because of reasons we’re not going to tackle.
And also, which of these churn reasons affect what kind of a strategy you run? Maybe your marketing’s attracting the wrong type of customer that’s going out of business very early. Perhaps you need to grow up-market to larger firms because these small customers are churning at too fast a rate to make your business healthy. Maybe you need to build a specific feature or functionality to keep up with your growing customer base and their needs.
Maybe you need to spend more time educating your customers about the product, so they get more out of it, because most people that churn, have never used your product and have been paying you for months. Whatever the reasons may be, you need to stay on top of it to know what’s happening, and then to be able to formulate a strategy to improve the numbers.