What is customer churn in SaaS?

Customer churn refers to the percentage of users who stopped using your company’s product or service during a given time period.

Churn is natural. As your business grows and the number of subscribers increases, so does your churn. The challenge is to align your revenue growth to counter the churn and maintain an acceptable SaaS churn rate.

Customer churn is a key SaaS metric as businesses are heavily dependent on retention.

SaaS companies tend to spend a lot of time and money building their products. Thus, they must retain customers to recover all the investment with repeat purchases and upgrades.

How to calculate customer churn rate?

Customer churn rate is, by far, one of the most important product-led growth metrics.

To calculate churn, divide the number of customers lost during a given time period by the number of customers at the start of that period, and multiply the result by 100.

How often should you calculate the churn rate?

You should actively track churn to get a clear understanding of how many customers are happy with your product and how healthy your business is.

You can calculate this on a weekly, monthly, or annual basis. However, most companies prefer to calculate it either monthly or annually.

Both monthly and annual churn rates offer the same information, i.e., how many customers you’ve lost, but over separate time periods. You can multiply the monthly churn rate by 12 to get the annual churn rate.

What is considered a good churn rate for SaaS?

There’s no universal churn rate that fits all SaaS businesses.

A typical ‘good’ churn rate for small SaaS businesses is considered 5-7% annually. For enterprises, the rate is much lower because they focus more on large companies, long-term contracts, and high-volume profits.

A Totango survey categorized companies into 3 groups based on their yearly revenue growth rate:

• High growth companies (more than 75%)
• Medium growth companies (25% to 75%)
• Low growth companies (less than 25%).

The table below shows the percentage of these companies that had a churn rate of less than 5%, 5% to 10%, and greater than 10%.

You can see that most low-growth companies experience a churn rate of more than 10%, whereas most high-growth companies maintain a churn rate of less than 5%. However, an average churn rate of 5-10% seems to be the safest option for both low and medium-growth companies.

Why is tracking churn rate important?

Customer churn is inevitable in SaaS. However, the higher the churn rate, the less revenue you’ll make. If your churn rate becomes very high or shows an increasing trend over time, you’ll need to take some actions to reduce churn.

Tracking churn rates allows you to formulate customer-centric marketing strategies, improve retention, and drive growth.

Moreover, customer acquisition is 5-25 times more expensive than customer retention. High retention ensures high customer lifetime value. Your revenue is then more likely to exceed what you lose through drop-offs to achieve negative churn.

High churn suggests there may be flaws in your product, or that the product-market fit hasn’t been considered. SaaS churn rates also hint at potential growth in the future.

Not only do your new products need to have a good product-market fit but your existing customers also have to advocate for your brand.

To add to it, churn negatively impacts your brand. Unhappy customers who leave your product tend to give bad reviews and spread negative word-of-mouth, which poorly reflects your brand value.

Why do customers churn?

Customers have certain expectations about how your product will help them achieve their desired goals. Thus, they usually churn when they don’t get that perceived value from your product.

There are multiple reasons for a mismatch between the perceived and actual value of your product.

• Product-market fit failure
• Bad user experience
• Product price
• Bad customer support.

Product-market fit failure

Achieving product-market fit can be daunting. One of the reasons that customers churn is that they don’t get the expected value from your product. This implies that you failed to understand what your customers are looking for.

Product price

Price is a key factor while purchasing a new software. Make sure to educate your users properly so that they deem the purchase worth the money. Otherwise, they may end up looking for other cost-effective solutions and switch to your competitors.

Bad user experience

If your product is rarely updated or prone to bugs, your customers aren’t likely to stick around or use your product on a regular basis.

Users may face issues now and then, but it’s how well you address their problems is what determines whether or not they will stick around.

Bad customer support

Good customer support is the way to your customers’ hearts. No matter how great your product is if your customers don’t receive the support they need, or worse, receive it in an unwelcoming way, they are going to churn.

Your customer success teams, onboarding process, and self-service support should be customer-centric so that customers stay satisfied.

How to improve churn rate and increase customer retention?

Reducing churn is the key to growth. Here are 5 tactics to improve your churn rate and increase retention.

• Provide in-app self-service support to reduce churn rate
• Implement onboarding gamification and offer incentives
• Secondary onboarding tooltips for product adoption
• Act on negative NPS scores and follow-up surveys
• Use churn surveys to understand your users

Provide in-app self-service support to reduce churn rate

Giving users all resources and help they need inside the app reduces friction in getting help and shortens the learning curve with guides.

A survey by Coleman Parkes revealed that the availability of a self-service knowledge base could boost retention rates up to 85%. You can also link to the knowledge base within your help center.

Day 1 retention is a crucial issue for many SaaS companies. If a customer has to wait for 3 days to get an answer they can actually get in minutes, you most likely won’t have a customer anymore.

In-app self-service support, such as resource centers and tooltips, helps users find solutions significantly faster.

Self-service support takes the pressure off your support team by providing easy and quick solutions to repetitive issues. This also reduces your support costs without harming support quality.

Moreover, you should never stop educating your customers. Educational self-service resources will help keep customers engaged throughout their user journey. It’s more affordable and practical to let your software help customers educate themselves, especially if they’re growth-oriented.

Implement onboarding gamification and offer incentives

Learning a new product is hard and uses up time and money. You can eliminate a lot of friction in the learning process by creating a positive onboarding experience.

Onboarding gamification is the process of incentivizing your customers with gaming elements to engage with your product.

Many companies do this by offering rewards to their users as they go forward in their journey. The most widely used reward elements are:

• Badges (likes, emoji reactions, shares, etc.)
• Points
• Discount coupons
• Leaderboards

These gaming elements provide incentives to customers to complete their onboarding and use all of your product’s key features. They help simplify onboarding and improve app usability.

Furthermore, gamification adds an element of competition among your customers.

First, it provides social proof to users that other people use and love your product. This makes them more likely to imitate their behavior and gain success themselves. Social proof also emphasizes the authenticity of your product.

Second, gaming elements like leaderboards make the onboarding experience more fun and encourage competitive customers to participate.

Gamification thus helps customers reach their goals throughout their user journey so that they stay with you in the long run.

Drive product adoption with secondary onboarding tooltips

A surefire way to reduce your SaaS churn rate is to offer users upsells and features they find valuable.

Stopping at the initial onboarding is like leaving your child on their own after they learn to take the first step. That’s why onboarding must be a continuous process across the customer journey.

A tooltip is great for showcasing these things to your customers. You can include this in your secondary onboarding process.

Tooltips advise customers on how to improve processes they are currently working on. This allows targeted support in real-time by helping users adopt new features as they move forward in their journey.

Moreover, tooltips allow you to reach out to customers with upsell offers so they can upgrade to features that will benefit them. This helps expand your monthly recurring revenue (MRR).

Tooltips depend on triggers throughout your product. For example, when users click on a specific button or scroll to a particular page section, a trigger is fired to display your onboarding message.

The following is a tooltip from Postfity.

Tooltips can identify a user’s problem and suggest features that can address it. Furthermore, it concisely showcases how the feature will help users achieve their goals.

Act on negative NPS scores and follow-up surveys

NPS measures customer satisfaction and tracks how likely users are to recommend your product to others on a scale of 0 to 10 (10 being “Extremely Likely”).

To calculate the NPS metric, subtract the percentage of detractors from the percentage of promoters.

Detractors are essentially users who give a score of 6 or less. They are unhappy customers who are at a high risk of churning. On the other hand, promoters are those who give a score of 9-10. They are very satisfied with your product and are likely to become your brand advocates.

There’s another group of customers -the passives – who give a score of 7-8.

You need to understand why users gave you a certain score to capitalize on your strengths and address customers’ pain points. Therefore, you need to introduce a follow-up question in NPS surveys.

Follow-up questions help you get valuable qualitative feedback. Learning why detractors are disengaged with your product can help you improve your product or service and turn them into promoters. Resolving detractor issues can be the fastest way to reduce churn.

When you know why promoters love your product, you can build on those strengths to keep them loyal and encourage them to spread positive word-of-mouth.

Moreover, you can help passives reach Aha! Moments to reach activation point and even at later stages of the user journey so they get more value from your product and turn to promoters.

Use churn surveys to understand your users

There’s another way to know why your customers are leaving. Churn surveys are micro surveys that are automatically sent to churning users after they downgrade or cancel their subscription plan.

You can use churn surveys to collect user feedback and understand why users churn. Then you can take actions to improve your user experience and product.

Unlike emails, in-app churn surveys give customers time to change their minds by automating personalized responses depending on the reasons they give. For instance, you can give customers the option – “pause my account” – as an alternative to leaving your product.

Wrapping it up

Whether a churn rate is good for you depends on the size of your SaaS company.

But your growth will indeed slow down as your churn rate increases. Strategies like onboarding gamification, self-service support, and churn surveys can effectively reduce your churn rates and increase retention.

Want to learn more about how Userpilot can help you reduce churn? Book a demo today!