How SaaS Businesses Can Reduce Churn

For most SaaS businesses, there’s often an intense focus on attracting new customers. Startups view rapid customer acquisition as the fast track to skyrocketing revenue. However, beyond customer acquisition, it is important to have users stick around for a long time because recurring revenue from existing customers is easier and more sustainable than acquiring new customers. One major reason is that acquiring new customers costs more marketing and sales efforts than retaining existing ones.

This article will look at:

• What is Churn?
• Types of Churn
• Churn Rate Benchmarks for SaaS
• Importance of measuring churn rate
• How to Reduce Churn Rate

Let’s dive in.

What is Churn?

Churn in SaaS refers to the rate at which customers or revenue is lost over a specific period. This is usually measured in percentage over a timeframe, typically monthly or annually.

Churn is a critical metric for SaaS businesses that impacts recurring revenue and business growth. Having a high churn rate may signify issues with customer satisfaction, product quality, or the availability of better competition. In contrast, a low churn rate indicates a loyal customer base and strong product-market fit.

Types of Churn

Typically, there are four types of SaaS churn. These are:

• Customer churn
• Revenue churn
• Gross churn rate
• Net churn rate.

Let’s discuss each one in depth.

Customer Churn

This refers to the rate at which customers stop using your SaaS product over time. It focuses on the number of customers lost over a chosen period, regardless of their value to the business. 

Customer churn helps understand overall customer satisfaction and retention.

Calculation: Customer Churn Rate = (Number of customers lost during period) / (Number of customers at start of period) x 100

Example: If you start the month with 500 customers and lose 20, your customer churn rate would be (20 / 500) x 100 = 4%

Revenue Churn

This measures the revenue lost due to cancellations, downgrades, or reduced usage of your saas product over a specific time frame.

Revenue churn is usually expressed as a percentage of total revenue. It provides insights into how much recurring revenue is lost due to customer cancellations, downgrades, or non-renewals.

Calculation: Revenue Churn Rate = (Revenue lost during the period - Revenue gained from existing customers) / (Total revenue at start of period) x 100

Example: If you start the month with $100,000 in monthly recurring revenue (MRR), lose $5,000 due to cancellations, but gain $2,000 from upgrades, your revenue churn rate would be: ((5,000 - 2,000) / 100,000) x 100 = 3%

Gross Churn Rate

This measures the percentage of revenue or customers lost over a specific period without accounting for revenue or customer growth (e.g., upsells or expansions from existing customers).

It focuses purely on the losses, clearly showing how much business you lose due to customer churn.

Calculation (for customers): Gross Customer Churn Rate = (Number of customers lost) / (Total number of customers at start) x 100

Calculation (for revenue): Gross Revenue Churn Rate = (Total revenue lost) / (Total revenue at the start) x 100

Example: If your SaaS company started the month with $100,000 in monthly recurring revenue (MRR) and lost $5,000 due to customers canceling their subscriptions, your Gross Revenue Churn Rate would be: (5000/100,000) x 100 = 5%

Net Churn Rate

This takes into account both lost and gained revenue from existing customers. It factors in expansions, upgrades, and cross-sells along with losses. 

Calculation: Net Churn Rate = ((Revenue lost - Additional revenue from existing customers) / Total revenue at start) x 100

Example: If you start with $200,000 MRR, lose $10,000 from cancellations, but gain $15,000 from expansions and upgrades, your net churn rate would be:  ((10,000 - 15,000) / 200,000) x 100 = -2.5% 

A negative net churn rate for Saas businesses indicates that revenue gains from existing customers exceed losses. This is called SaaS Nirvana. It means existing customers are becoming more valuable.

Churn Rate Benchmarks for SaaS

ChartMogul SaaS Benchmarks Report breaks down different churn rates by ARR (Average Recurring Revenue) and ARPA (Average Revenue Per Account).

Lenny's Newsletter has a breakdown that is based on the business model.

• For B2C and B2B (SMB), a good churn rate should be 5% or less.
• For Enterprise B2B, a good churn rate should be 2% or less.

Importance of measuring churn rate

Measuring churn rate is critical for SaaS businesses. It represents the percentage of customers or revenue a company loses. Keeping track of this metric allows Saas businesses to quickly identify trends, understand customer behavior, and take necessary actions to improve retention. 

Below are the key reasons why measuring churn rate is so important:

1. Business Financial Health Indicator: Customer churn directly impacts business revenue and profitability. A high churn rate can erode your customer base and revenue over time, while a low churn rate suggests stable, predictable income.
2. Measure Customer Satisfaction: Churn rates often reflect how well your product meets customer needs. High churn might indicate customers’ displeasure or unresolved issues with your product or service.
3. Product-Market Fit Assessment: Low churn indicates your product aligns well with the market’s needs. In contrast, high churn could mean reassessing your product’s value proposition or target market.
4. Growth Trajectory Insights: To grow, you must acquire customers faster than you lose them. The churn rate helps you understand whether your growth is sustainable or losing ground.

How to Reduce Churn Rate 

Improve Your Customer Onboarding Experience

First impressions do matter. A smooth and stress-free user onboarding process can set the stage for long-term customer success. You can improve your user onboarding experience by 

• Creating personalized and automated drip campaigns
• Creating interactive tutorials and walkthroughs
• Offer personalized onboarding experience based on user roles or goals
• Provide easy access to support during the initial setup

Read on how you can improve your onboarding campaign

Have A Proactive Customer Success Strategy 

Please don’t wait for customers to reach out with their problems. Implement a proactive customer success strategy by:

• Regularly checking in with your customers via different channels.
• Monitoring usage patterns to identify blockers and unusual product usage. 

Continuously Deliver Values To Customers 

Your customers use your product because they get some value. Ensure that you keep your product fresh and valuable by:

• Creating features and updates based on customer feedback.
• Constantly update your customers about new features and improvements.
• Personalized recommendations for underutilized features.

Implement a Robust Feedback Loop

Get and act on your customers’ input; it gives them some sense of belonging, and this will help them to want to stick with you; you can adopt several feedback mechanisms, like:

• Regular surveys and feedback sessions.
• Quick response to feature requests and bug reports.
• Transparent product roadmap shared with customers.

Offer Flexible Pricing and Plans

For subscription-based products, ensure that your pricing aligns with your product’s value. You can have:

• Tiered pricing options for different user needs.
• Usage-based pricing for more accurate value alignment.
• Opportunities to pause subscriptions instead of canceling.

Conclusion

Monitoring and measuring churn is crucial for SaaS businesses regardless of sector or customer type. However, reducing customer churn is an ongoing process that requires dedication and a deep understanding of your customers’ needs. 

SaaS businesses can significantly lower their churn rates and create a more loyal customer base by improving their user onboarding process, having an effective customer success strategy, and continuously delivering value.