Churn rate for SaaS is one of the most critical metrics measuring your customer lifecycle. It should be a top priority for founders of SaaS companies. Failing to monitor and manage your churn rate can severely damage your company’s health — it’s that important.
Unfortunately, sometimes founders and their teams need to pay more attention to this metric. They focus mainly on bringing more customers in, which is also essential, but only half of what can help you build a great business.
Here’s what founders need to know about the churn rate for SaaS.
What Is Churn Rate?
Churn rate is the percentage of users who stop using your product over a certain period. As a founder, understanding how this number affects your business can help you gauge customer satisfaction and make changes if problems arise.
To calculate the churn rate, divide the number of customers who left during a given period by the total number of paying users at the beginning. For example, if there were 1,000 customers on March 1st who paid $100 each per month, and on April 1st, there were 950 paying users left, then your churn rate would be 10%.
Growth requires replacing these customers and more. Knowing your churn rate is the first step to defining whether you have an issue.
A high churn rate might indicate that some of your offerings need to be revised. For instance, maybe customers don’t see your value relative to its cost, or your service isn’t helpful long term.
Types of Churn for SaaS
SaaS churn can take several different forms. It’s critical to categorize and determine the root causes when you’re experiencing excessive churn.
Voluntary Churn
Voluntary churn happens when customers proactively cancel their subscriptions and stop using your product. It’s a common type of churn and the easiest one to predict.
In many cases, ensuring your product is user-friendly, well-designed, and essential for customers can help reduce or avoid this type of churn.
Involuntary Churn
When a subscription ends without the customer’s deliberate choice, it’s involuntary churn. It can happen in SaaS businesses for several reasons.
For example, the customer might have left their company or changed their payment method and didn’t update their account. Perhaps they changed something in their technology stack and didn’t realize that their subscription wouldn’t work with their new setup.
This churn is sometimes good news. Often simply reaching out can bring the customer back.
Seasonal Churn
Certain offerings fit better at a specific time of the year. For example, you might see more people churning in November because they’re busy with holiday activities and not paying attention to your product. Alternatively, you notice more activity in March when people try to file their taxes by April 15th.
The best way to deal with churned customers is to identify which months are prone to increase churn and make an extra effort with customers in those months. Maybe sending them a free trial or a discount during the high-churn months would get them to stick around.
Causes of Customer Churn
Beyond different types of churn, there are multiple causes for churn in SaaS.
A Business Fails
Business failure is a common cause of customer churn. Unfortunately, it’s not uncommon for companies to go out of business. When these are your customers, the customer is gone.
If you’ve done an excellent job of creating a satisfied customer, they may sign up for their next endeavor.
A Card Bounces or Pricing Doesn’t Work Anymore
Bounced cards indicate a failed transaction. Sometimes this is intentional, sometimes accidental. When this happens, you may be able to contact the customer and have them update their information.
Pricing issues can also cause a customer to churn. Maybe you’ve increased your price, and the customer has decided your value proposition no longer makes sense.
Customer Support Issues
Customer support issues are a leading cause of churn. Unsatisfied customers with unresolved issues will likely leave you for another company that can solve the problem.
One of the best ways to prevent churn is to ensure that your customer support team is proactive and focused on providing solutions. Hire experts who can resolve problems and train your employees to handle difficult situations.
5 Tips To Reduce Churn Rate for SaaS
Improve Customer Service
Customer service is essential to your business. You will only have customers for a short time if you don’t have excellent customer service.
To improve your churn rate, start by improving how you handle customer complaints and questions. Ensure all your employees know how to provide quality service and train them on best practices for handling different situations.
Improve Your Product and Eliminate Inefficiencies
One of the best ways to reduce churn rate is to ensure your product is as good as it can be. Your product should be up-to-date, easy to use, and secure. If you cannot efficiently meet customer expectations with your current product, you must find out why and fix it.
Offer Loyalty Incentives
Beyond having a great product, rewarding loyal customers through incentives greatly reduces churn. One of the easiest ways to do this is through loyalty programs. You can provide coupons, discounts, or free products in exchange for their ongoing subscription.
Educate Your Users
Educating your customers is another effective way to reduce churn. Education can be anything from an email that explains how to use a new feature to a live webinar hosted by one of your experts.
When you educate your users, they feel more confident in your product and their ability to use your solution and are likelier to stick around.
Market to Current Customers
Email marketing is an excellent way to ensure your customers think of you. Email newsletters, for example, can keep your customers informed about the latest developments in your product or service. They also allow you to remind them of their purchase and why they made it in the first place.
Reaching out through social media can also help keep your brand top-of-mind and ensure your customers know how much you appreciate them. You want to make them feel like a part of a community, not another faceless number!
Keep Your Churn Rate Low With the Help of an Experienced Accountant
Keeping your churn rate for SaaS low is one of the most important tasks you can undertake as a founder. Unfortunately, high churn rates are not uncommon in some stages of a SaaS business.
Your business’s long-term growth relies on keeping your churn rate low, which is possible.
Retaining customers takes hard work and effort to keep your churn rate low.
Getting an outside opinion from an expert can help significantly. Our experienced team at Founders CPA can help you keep your SaaS churn in check. Contact us today to see how we can help you identify weak points and manage your churn.
