This obsession with getting new customers is natural: the more customers you convert, the more revenue you will make. However, the subscription business model can’t survive if you keep on acquiring new customers but the old ones keep on walking away.
This article will answer the main questions that SaaS founders and marketers have about losing SaaS customers, in other words, user churn:
- What is SaaS churn definition and why lowering it matters?
- How to calculate this metric and what’s the average SaaS churn rate?
- How can SaaS companies reduce its churn rate?
What is the SaaS churn rate and why does it
In general churn rate shows how many people or items moved from a specific group over a specific period. In the SaaS industry, churn rate shows what percent of your customers stopped using your product after a certain time. “Certain time” may refer to a month, quarter or year.
Tracking your customer retention and churn metrics help you understand your growth opportunities. Just look at these stats:
- Increasing customer retention rate only by 5% can increase your profits by 25-95%.
- The probability of converting an existing customer is 60-70%, yet 5-20% for a new prospect.
Acquiring new customers is always harder and on average 7 times more expensive. If you don’t manage to retain your existing users, you will be spending thousands of dollars on new ones and your profits will suffer.
How to calculate churn rate for SaaS and how high is too high?
Watch my 1-hour interview with 10+ SaaS founders on Youtube
To calculate your churn rate, divide the number of customers lost during the period by the number of customers at the beginning of the period and multiple it by 100%. The period refers to a month or year depending on which payment option you offer or which of them is more popular.
While the acceptable churn rate for a SaaS company is 5-7% annual, ensuring such low numbers isn’t always easy. Software companies that serve large organizations experience a 6-10% churn rate. But the ones serving SMBs struggle with a 58% annual churn rate – a huge difference (source).
The biggest problem with SaaS churn is that the reasons may greatly vary from company to company. Moreover, the same company might have to bring multiple changes at once to actually increase retention. And the process usually requires lots of time, research, and high concentration on data.
After working with many SaaS companies and evaluating their experience, here is a list of 10 ways that are the most likely to help you with reducing churn. I also interviewed dozens of SaaS founders and marketers to understand the main factors behind high SaaS churn rate.
How to reduce SaaS churn rate?
#1 Focus on creating a brand, not just a company
Though not connected directly, brand perception influences people’s decision on whether to stay with this company or walk away.
Deven Patel, Founder and CEO at Alter says:
“Most new entrepreneurs don’t think twice about their brand but it can literally make or break their business. This is more true today than ever before now that there are countless alternatives to every product or service imaginable. This is how competitive the SaaS industry has become.
Sure, every business may have their own world-changing differentiator. But from the outside they all look the same. And the main differentiator ends up becoming their brand.”
Brand isn’t only about logos and trademarks, though memorable symbols can make a difference (e.g. Mailchimp, Datadog, SurveyMonkey). Branding is becoming more and more about being consistent, delivering your promises, and prioritizing customer experience.
#2 Build a community of customers
Your social network accounts, website, ads are visible to everyone who is browsing the internet. To make a deeper connection with your customers, you can leverage private communities. ZenMaid, a maid service software runs a private Facebook group that is available only to their users. In the inner cycle, they are
- Sharing exclusive content,
- Featuring special guests,
- Providing discounts and freebies.
RepairDesk, a repair management solution for cell phone repair shops, again runs a Facebook group to bring its customers together. It aims at promoting user engagement, sharing tips, finding answers, and discussing best practices.
In 2018, Fletcher Richman wrote an article claiming that 0% of their customers included in the company’s Slack channel have churned. Richman’s former company was Halp, a help desk for operations teams. The channels allowed them to initiate discussions between customers and employees, gather feedback, and create an atmosphere of engagement and transparency. You can send Slack invitations only to your premium customers that bring you the biggest revenue and heavily contribute to your company growth.
#3 Educate, educate, educate
In case of some SaaS companies, the features listed on the pricing page are all customers can learn about the product. The sign up process isn’t followed up by an onboarding process and no supporting materials are provided. Yet today even informative FAQs or blog posts aren’t enough for describing your software in the best light.
Successful SaaS companies go beyond describing their products and turn their websites into academies and universities.
For example, Sprout Social is a social media management tool but their website content isn’t limited to sharing social media tips. They have a learning portal that contains on-demand courses and webinars. Their Resource center offers data reports, guides, templates.
The number of resources is so huge that you can even filter them by topic, industry, content type, and experience level.
Other SaaS companies that invest significantly in creating educational content include Marketo, Ahrefs, SEMrush, etc.
The problem isn’t only about sharing more information about your SaaS but giving that information at the right time.
Jeff Solomon, Co-founder of Markup Hero says:
“Churn was something we had to pay a lot attention to early on as our churn was 4% a month range. We had about $ 25 ,000 to $ 100,000 in recurring revenue at that time a month.
One of the things that we noticed is that our tool is extremely customizable. It turned out that the more customization we gave to the customer, the more they kind of hung themselves.
What we did, and this was the biggest thing that we did is we created these best practice templates. When a new customer came on board with our product, they were all excited about how flexible the software was.
But we would say, “hey, first use our template to get proficient with the features, it’s already pre-built and set up for you. After a few months, if you are doing well, we’ll unlock the features and let you get crazy with it.” And everybody loved it. They were more successful out the gate, our onboarding process took less effort, and the retention was better.”
#4 Review and optimize the support process
Today people have more alternatives to choose from and less time to fixing issues. HubSpot is a great example of a SaaS company that is helpful, responsive, and provides excellent customer service. Whenever you want to get support, you just have to click the Help button in the bottom right-hand corner. They suggest you to choose from top searches, ask the community or contact support.
Most people don’t have time to read long explanations and they simply click Contact support. A support agent joins in a few minutes, if not seconds and makes sure your problem is solved before you close the chat window.
When a customer faces an urgent issue, automated emails, bots, “We will get back to you asap” and similar messages won’t be helpful. Live conversations with real and professional specialists will make the difference.
I recommend SaaS companies start hosting weekly onboarding or Q&A sessions where both clients, leads and prospects can join to ask questions. The companies that offer such sessions put themselves on a completely different level compared to their competition.
#5 Listen to your paying customers
As end users, customers see your software differently than your marketing or development teams. And not only your software but also how you support them, what content you deliver, etc. If you want your customers to stay, you should listen to their suggestions and take steps towards turning them into reality.
The best way to get closer to your customer’s thoughts is to send surveys every quarter or every 6 months. Include both open-ended and closed-ended questions, ask them to suggest new features, etc.
RepairDesk, ZenMaid, Transormify and many other SaaS companies encourage their users to suggest new features and vote on them. And the voting process is followed by working on the features and delivering them to end users.
Besides, asking a question “How would you feel if you could no longer use this product?” is a great way to learn about your super users versus everyone else.
#6 Create a relationship-building program and keep in touch
There’s life after closing. Your relations with your customer don’t end when they subscribe to your software. The relations only start with the subscription and can be followed by loyalty, upsells, referrals or other forms of cooperation. Here are a few ways you can build relations with your users:
- Give your customers a chance to leave a testimonial and provide information about their business.
- Interview them for your blog, vlog or podcast and link back to their website.
- Ask to refer to your software when you notice the customer is happy with your service.
- Invite to participate in industry research organized by your SaaS. Having numbers and statistics that came as a result of your research and having your own stats will be huge differentiation from your competition.
Appreciated users are more likely to seek help for problems and more likely to be patient when the problem persists. They are also more likely to engage with your social media posts and tell their friends about your product. Last but not least, they are more likely to stay with your company and spend more money in the future.
#7 Track the user behavior
How often do your users log in to your software? How long do they stay on it? What features do they use? You can track every login and every click by your users, so why not offer help when your software is underutilized?
You can reach out to your passive users via email or via a push notification and ask how you can help. Maybe they aren’t aware of some features and a short video call will help them be more productive. Maybe they think X isn’t possible with your software but in reality it is. Instead of sending generic emails to all your users, segment them by activity level and don’t hesitate to offer help. Thus you will identify at-risk users and take steps to win their heart.
Philipp Wolf, Founder of Custify says:
“If you’ve four main features, and your customers use only two, it’s an indicator they aren’t getting the full value of your product. Obviously, they are likely to churn because they are paying for something that they don’t get.
Instead of waiting for them to ask, you can reach out to them proactively and say: “Hey, I just looked into your account and I noticed that you haven’t made use of the X feature yet”.
You can do that either in a tech touch way, like with emails, or you can do that in a high touch way, like phone or video calls. The method you choose doesn’t really matter. The most important thing is to ensure that you build a relationship with your customer.
If you have a Netflix subscription, and you never watch Netflix, at some point you will feel like you don’t need their service. That’s why Netflix suggests things you should watch that match your interest. Because they want you to stay on their platform.
This should be the standard for SaaS companies. Reach out, build the relationship, make sure that your product delivers value with the method of your choice.”
Gaurav Bhattacharya, CEO of Involve AI takes a more scientific and modern approach to the user inactivity problem:
“We had a SaaS product for many years and churn was a huge issue for us. Almost 30% gross churn and net retention was about 90%: this is terrible for SaaS companies. We worked on a spreadsheet where we’d take all customer data and run some Python scripts that would predict churn. It worked so well we decided to productize it, so it became what our company does.
We are on a mission to organize company’s customer data. We take data from user interactions, consider how the product is utilized and combine these key indicators in a dashboard. Then we apply machine learning models that can see how behaviors and trends are changing and give alerts so our users can take action.
One of our customers just improved the net retention from about 110% to 140%. One of the things we figured out is every time a user goes from five projects to three, and their active usage changes from daily to weekly, there’s a 94% chance that the customer will churn.”
#8 Listen to your churning customers
Sometimes when you want to unsubscribe from an email list, you are asked to note why you are leaving. The answers include 1. I am receiving emails too frequently, 2. I am not interested anymore, etc. Sometimes they leave the space blank and ask you to write why you made that decision.
It’s the same when users decide to unsubscribe from your software. Even if retaining them is not possible at all (there are definitely options, more on that in another post), you can at least gather feedback. Not all customers leave because of missing features, low ROI or poor service. Sometimes it’s a matter of budget, company needs, and priorities.
Don’t let any customer churn without sharing their feedback. Ask for it via email or right when they cancel their subscription. Maybe the features they want are available in your higher plan? Maybe you can provide a discount that fits into their budget? Just try and see how many customers will change their decision after having an honest conversation with you.
Preetam Nath, Co-founder of DelightChat shares his unique findings with a real-life example:
“The experiences I will be sharing are from SuperLemon, a WhatsApp plugin for Shopify stores. We had 1700 paying customers but the churn rate was very high. When we started measuring it, it almost made us wonder how we are surviving. I think we were about 21% churn when we measured it in January 2020.
Initially, we had a very non-targeted email saying “oh, you uninstalled”, “sorry” or something like that. We later made it slightly personalized, like, “Hey, we must have disappointed you. Why don’t you reply to this email and in one line? Tell us what went wrong.” And people started replying which became the journey for us to start fixing churn.
It was not just people asking us to fix this feature, or telling we don’t have this functionality. It also introduced to us more the way our customers would think.
We found that a large percentage of customers wanted our subscription fees to be lower. They were already paying a per message fee. So we made a huge change in our pricing plan, which doubled our signup, to trial, to pay conversion rate.
Some people said they couldn’t understand our app. They only speak Spanish which they said in Spanish and I had to translate it using Google Translate. That told us that we should add localization and we started seeing our activation numbers increase and churn numbers reduce.
By the time we were done with all these changes, we were at 12% churn. And it went down further below 10% over the next few months.”
#9 Focus on closing annual deals
Annual billing doesn’t always mean that you charge your customers once a year. Most SaaS companies bill monthly but customers agree to use their service for at least 1 year. This agreement is strong enough to ensure that your customers won’t churn. Moreover, during that period they’ll learn all the ins and outs of your software and continue using later as well.
Though we don’t have stats, you will probably agree that large companies tend to commit to annual billing more often than SMBs. And the reason is understandable. SMBs face lots of uncertainties and might not need your software after a month or so. However, you will be able to convert more users with annual billing if you talk about the benefits of commitment.
First, annual billing means your customers won’t get invoices every month and their finance department won’t deal with extra tasks.
Second, annual subscription means your customers will get a discount that isn’t available for monthly users.
Petro Iacob from Audiencer went even further and switched to one-time payments instead of charging monthly or annually. Here’s what he says:
“I was getting over 40% churn as more than 40% of users leave after one month.
When I discovered that my retention was like two, three or four months, I quit selling a monthly subscription and I moved to one time payment. I moved from $19 a month to $ 199.
Although the price is like 10 times higher, it is working better than the monthly subscription. It is converting pretty much the same, but I am getting more money, people stay with me and they are happy .
It is also important to have tools like Hotjar as it helped me a lot by allowing me to watch how people use the software. So when I saw that people were struggling with certain features I went in and improved them.”
#10 Fight involuntary churn
Voluntary churn happens when the customer makes a conscious decision to stop using your product. Involuntary churn happens when the customer doesn’t want to but certain administrative or technical issues don’t allow them to make a payment.
20-40% of churn is due to secondary reasons such as expired credit cards, insufficient funds on the account, bugs in the application source code, server shutdown. 20-40%! It means that if 100 customers are walking away, 20-40 of them actually needed and wanted your product.
To prevent similar issues, you can send a reminder email to your users before the payment day. Thus they will make sure everything is correct and no errors will occur because of the credit card.
Churn rate isn’t the only metric to watch for SaaS growth. But it’s definitely one of the top metrics that shows how healthy your company is. How long customers stay indicates how well you understand the market and whether your company will stand the competition.