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SaaS Churn: The Myths and Comparisons, and Strategies to Increase Revenue

Apr 26, 2022

Last week, I canceled an annual SaaS subscription (I was left with three weeks before renewal).

Interestingly, even though I purchased a subscription for the whole year, the company didn't allow me to keep the final three weeks ' access to exclusive services.

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

"This move will instantly reduce your account. Do you really want to stay?"

I decided to cancel, even though I didn't need the tool for the foreseeable future. In the language of SaaS I turned on the engine. And the experience got me thinking:

  • Did immediate elimination of features that cost money is the best way to prevent me from going through the motions?
  • Was it the day I was officially counted in the official count as "churned"? Was I counted as"churned" on the day that I cancelled my subscription? On the day my subscription would have renewed? Would I have been able to cancel, upgraded, or changed my subscription?
  • What would they have done better to try to keep me from cancelling?

In this piece, we take the best possible approach to answering the above and many more questions surrounding churn.

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

In part two we'll go over five churn prevention strategies that have worked in other SaaS businesses.

Then, in the final part of this series, we'll conclude with a set of definitions you can use when talking about churn with your colleagues along with some additional tools.

If you prefer, you can use this table of contents to jump between sections of this article.

Table of Contents

Part I: SaaS Churn Benchmarks

In the event that people from SaaS speak about churn we don't always do an adequate job of making sure we're on the same on the same page.

If someone says they have a 5% churn rate, is it talking about quarterly, monthly, or annual churn?

Are they including customers who never made it through trials?

Are you able to compare the churn rate of the SaaS firm that targets enterprise customers with one that sells to the general public?

In setting churn benchmarks for SaaS companies, there's so much to consider. And in this section, we dissect it into smaller pieces so that you can perform a comprehensive churn analysis on your own company and have a better idea of what you're up to.

Does There Exist a Perfect Churn Ratio for SaaS?

I often hear that a 5 to 7% churn rate is perfect for SaaS firms. However, is it just anecdote? What is the average number of SaaS firms to achieve this standard?

That is In other words, 5 to 7% could be the ideal, but what's the average?

To investigate, Ryan Law, former CMO and co-founder at Cobloom, performed an study of the most recent six churn reports, or studies . The results showed that there's no agreement on the typical churn rate for SaaS businesses. The majority of the reports that he examined showed an annual average churn rate of 10 percent. The three other reports revealed a larger and wider range of 32% to 61 percentage annual rate of churn.

What's the reason for such a broad range? Ryan theorizes that there's not enough data available to get a more accurate image of SaaS turnover because it's not an area that most businesses want to make transparent.

He also observes some other elements that influence churn such as a company's size, and its industry.

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

Industries can have very different values for churn.

"Look at your personal technology stack and you'll probably find tools you think are vital, while others you consider 'nice-to-have,'" Ryan writes. "It's probable that tool for sales or finance are less prone to churn than a marketing tool, simply because it's perceived to be more accountable for revenue."

He adds that niche tools that have fewer competitors can have lower the rate of churn.

Corporate Size Influences Common Churn Rates

Ryan states that many of the biggest SaaS businesses target customers of enterprise which have longer contract durations which means their churn rate will be less. The flipside is that SaaS businesses that target customers who are small or individuals with more customers and shorter contract lengths tend to be more churn-prone.

When Ryan analyzes the typical rate of churn for large as well as small SaaS companies What he's actually saying is that the churn percentage is dependent upon how big your client as well as your average contract price. The less your ACV, the easier it will be to turn.

What's the Acceptable Level of Churn?

Hotjar creator David Darmanin understands that a churn rate doesn't mean much by itself. "Ultimately it's churn, and the quantity of churn affects the amount of customers you have and the speed at which you're bringing on more customers." Darmanin explained in an interview on ChurnFM. ChurnFM show.

If your target market isn't large, then churn matters significantly more. However, if the market you are targeting is large using an approach that does not require any friction to sell that is, you will be able to handle an increase in churn without it dramatically impacting your business.

This realization led David to separate churn into two categories that are acceptable and alarming. A certain amount of churn is normal, perhaps even necessary -in particular if you're using a more B2C-style sales approach.

"Worrying churn is where you've found a perfect customer, and they're coming onto the bandwagon, and after which they cease using your product] or cease to pay for it," David said.

Also, the amount of churn you receive will be an issue in the event that you're losing a substantial percentage of your ideal customers.

It can even be a good thing to eliminate users who do not match your ideal profile of customers (ICP). They're not the users you want to spend time asking for feedback or support from.

There's a second distinction that matters to David What do customers think about the service after they exit?

"Ultimately, I think what can have a greater impact in this type of flywheel you're developing (in the case of Hotjar) is if people are exiting or pausing in a state of anger this can have a much bigger impact than the fact that they have stopped payment to you. Since word-of-mouth is much greater fuel than the revenue that we're collecting or churning or dropping or whatever."

That's where the collecting of feedback from customers who have churned comes in (a issue we'll discuss farther below).

What is the best Churn Rate Formula?

For determining churn rate, the easiest churn rate calculation is to calculate the number of churns that occur during a specific period divided by the number of clients at the beginning of a period.

The number of churns produced during a time
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The number of customers in the time of the first day of the period

If, for example, you calculate monthly churn beginning with 1000 customers and only lose 27 of them the churn percentage for that month would be 2.7 percentage.

This formula leaves the mark on many crucial details.

In particular, it does not include the number of users who joined your account in that time as well as the percentage of they churned, versus the amount of customers that churned.

The weighting is not based on expansion. If you lose the same number of customers each month, but you continue to acquire more customers than you lose, your churn percentage will drop however there has been any change in the behavior of customers.

If you use this simple equation to measure your churn rate in the month, you may even notice that the rate at which you churn differ based on the number of days in the month!

For these reasons, the standard churn rate formula isn't the most accurate picture of whether you'reyou're growing or who you're losing. It's too easy.

When deciding how you're going to measure churn Outlier AI offers two suggestions:

  1. The churn formula you choose is one that aligns with your top business priorities. Determine what aspects are the crucial for you to keep track of and then refine the formula to suit.
  2. Make sure that the formula isn't too complex. "The more complicated the formula becomes and more complicated, the higher the chance that someone will make a mistake calculating it at some point or else you'll get an incorrect metric."

Business analysts have published their own churn-based formulas. Steven Noble's blog post on the way Shopify measures churn is a must-read. Also, a Baremetrics blog post analyzes the churn rate of different types of customers, like users who upgrade or monthly plan customers quitting.

A final note: when people talk about churn, they're typically referring to the number of customers lost. There are many other kinds of churn that you can track like revenue or the transactional the churn. Look over Outlier AI's article to learn more about these.

Monthly vs. Yearly Churn: Which to Keep Track of?

There's a huge difference between monthly and annual churn. If you lose 7% of your customers who churn over a year this is a differently than losing 7% of your clients every month.

While it's not a bad idea to measure both of them your monthly churn percentage ought to be much, much smaller than your annual churn.

What is Negative Churn?

If you're trying to figure out the whole picture on churn, you shouldn't just look at the amount of customers are you losing. It's all about the behavior of your regular customers, as well.

And that's where negative churn comes into play.

People have asked me if negative churn is an untruth. The truth is that it's not, however, it could be different than what you think.

Negative churn is when the revenue gained from upsells and cross-sells exceeds the revenue lost from the customers who have been churned over a certain period of time.

Once you're at the point where you can continue losing customers with no any new customers and grow your revenues (at at least for a time).

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

"Combined together with prepay annual agreements negative churn has the potential to be an effective growth strategy," Tomasz writes. "When you are pondering the pricing strategy and customers' success strategies It's worthwhile to engineer negative churn into your business."

Future Level Churn Rate Analysis: Who and Why

In a broader sense, a churn analysis is just a way of analyzing the frequency at which you are losing customers.

But don't stop there. The churn rate you see only tells you the what you know, and not the why and what or who. If you want to really comprehend and do something to stop churn the first step is to find out what's drivingpeople are leaving and the users are you losing.

SaaS growth expert Fred Linfjard advises the use of a mixture of quantitative and qualitative data analysis to discover who's producing the most data, and why and also how to take action.

Quantitative Data Gathering: Website and Product Data

Sample questions to try and the answer

  • Which user groups are more likely to be churning?
  • Do they have patterns in the use of their products?
  • What documentation for support did they read prior to churning?

The Qualitative Data Gathering Method by Exit and Surveys

To try to answer questions:

  • Why did they leave?
  • What is the reason they should reconsider?

Hope this provides you with a better knowledge of how churn effecting your company. Next, let's look at ways to come up with a churn-reduction action plan.

Part II: Five Proven Strategies to Reduce SaaS Churn

Ideally, your churn prevention strategy is led by your quantitative and qualitative research that you've conducted -- because once you have a clear picture of who's turning and the reasons, it's more straightforward to decide which tactics will make the greatest effect. However, it's beneficial to learn what other companies have tried that has worked well.

1. Upgrade Your Dunning Management System

It's common to find 20 % to 40% of the churn experienced by customers to be uninvoluntary, caused by expired credit cards, issues with the authorization of transactions, etc. Fred Linfjard explains why making certain you've got an effective dunning system is the top priority in fighting customer churn.

2. Demonstrate Value as soon as is possibile

To prevent churn, it starts in the initial stages of the customer journey, the most crucial point is during the onboarding process.

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

There's been more talk about the importance of providing "quick successes." As Lincoln Murphy explains, " Customers who realize value quickly are the ones who stay with the company for the longest time."

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

Back when Christoph Engelhardt worked for Moz He was able to reduce its monthly churn rate of new customers by 40 percent by posting an email that highlighted the importance Moz could provide to its customers in the initial thirty days. He explains the process he used in an detailed article.

3. Look for Red Flag Metrics

Look into the behaviour of churned customers to uncover patterns. This behavior could be indicators that a customer is in danger of churning.

Groove, an inbox shared that is designed for business, reduced churn by 71 percent by analyzing the data. The Groove team compared utilization between the new users who churned before thirty days and the ones who stayed. The team found that those who churned had much shorter initial sessions, and had fewer frequent log-ins than users who were on for the first 30 days.

4. Customize Your Cancellation Offers

A common churn reduction strategy is to automatically send an invitation to those who opt to terminate their subscription whether it's a discount or the option to stop the subscription, or something else.

Wavve, a popular social media tool for podcasters, has been able to recoup more than 30% of users who pressed the cancel button, by incorporating an incentive at the conclusion of a brief survey on cancellation.

This method worked due to the fact that attaching the offer the cancellation questionnaire allowed the Wavve team to tailor the offers based on reasons users were cancelling.

5. Automate What's Working, including the ability to collect feedback

After you've cut down on churn, how can you maintain the churn rate at a consistent low rate?

The feedback you collect is always in an automated way.

The cancellation survey lets you to continue collecting information to keep track of why customers are churning. "You can automate or systemize your collection of qualitative feedback. You can also for this instance, find out why they decide to leave your company. In general the exit questionnaire would be sent to someone who has cancelled, whether through an email, or even after they click the cancel button. If you are able to automate this collection, that's going to continuously get you feedback and you won't need think about it," Fred explained in our conversation.

If your products and clients evolve, so do the motives for churning. Continuing to evaluate feedback is an important part of keeping a low rate of churn.

In addition, by automating the feedback collection process, it frees up your time to focus on other tasks.

Part III: Churn Definitions and Other Resources

What exactly is Churn?

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

What Is the Average SaaS Churn Ratio?

There's no standardized percentage of churn for SaaS. According to multiple research studies it is estimated that the churn rate can vary from 10% to 60% depending on the size of a business and the market it is in.

In addition, the Churn and Retention KPIs can be used to Follow

In addition to the monthly and annual turnover rate, some other SaaS metrics that can give you a fuller picture of customer churn and retention include:

  • Net retention rate calculated in dollars (NDR)
  • Customer lifetime value (CLV)
  • Monthly recurring income churn (MRR churn) as well as annual recurring revenue churn (ARR churn)

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