Churn is the enemy of any subscription company.
In a general definition, churn is the number or percentage of subscribers to a service that discontinue their subscription to that service in a given time period. In order for a company to expand its clients base, its growth rate (number of new customers) must exceed its churn rate (number of lost customers).
Why customers churn?
Churn is inevitable. It’s impossible to guarantee that all your customers will remain being your customers forever, because churn happens for a variety of reasons. A few examples of why your customers may discontinue their subscription to your service:
- Your customer is simply out of budget and can’t afford the subscription fee;
- Your customer can’t see/get the value proposition of your product anymore;
- Your product or service doesn’t meet the expectation or lacks quality/features;
- Your product is good but customer service is not;
- Your customer has chosen to change your product to a competitor’s product;
- Your B2B customer is bankrupted and the company doesn’t exist anymore;
- Your B2B customer has been acquired and the buyer uses a different service.
As you can see there are some events and variables that are out of your control and there’s almost nothing you can do. But the good news is that – in most cases – customer churn reason is under your control, like product quality, price and customer service.
How to reduce churn?
Your challenge is to deeply understand your customers engagement and satisfaction (like measuring NPS) and then try to fix the problems that are under your control to prevent and reduce churn. Churn analysis may lead to a new product roadmap to include/exclude product features, to invest in a higher quality product support or even changing your pricing model.
The best way of doing it is by making your product indispensable. It should make part of user’s daily workflow. Provide frequent value that they can’t live without. A good strategy is to engage with your customers using email, SMS and any kind of notifications to remind them you’re there for them.
Tips for Reducing Churn
Although it might not be possible to completely eliminate churn, there are a few things businesses can go do minimize it. If customers are cutting ties with you at a high rate, it’s time to rethink your customer retention strategy.
Being one of the most essential metrics to consider in the SaaS world, businesses simply cannot ignore the story churn rate tells. Although the acceptable churn rate depends on a lot of factors such as business type and size, a fast-growing business should aim to keep the churn rate under 5% and strive to keep its customers for as long as possible. Some ways of doing this include:
Understand Your Weaknesses and Keep an Eye on the Competition
Each business has its own and often unique set of weaknesses. The important thing is to recognize and improve on them instead of turning a blind eye. Feedback from customers is a great starting point whether it’s about issues with the user interface, functionality or poor customer services. Approaching customers directly and asking them why they are leaving through different channels such as emails, surveys and social media can provide valuable insights into your weaknesses.
Keep in Touch with Customers and Improve Customer Services
Poor or inadequate customer services is considered as one of the biggest reasons why customers leave, resulting in a high churn rate. Customer services reps are the face of a company and having a bad experience with them can cause customers to move to another provider. Reaching out to customers and engaging with them can help a lot in reducing the churn rate and earning their loyalty.
Calling customers only when a renewal is due can leave a negative impact in the minds of customers. Businesses need to make their customers feel valued by providing great customer services at all stages of the product lifecycle through emails, regular check-ins and phone calls. This also helps identify potential issues and fix them in future updates.
Sending personalized emails should be a part of the customer services strategy. Automated emails are convenient and it does not make sense to disregard automated emails and follow-ups altogether. However, the emails should have a certain degree of personalization. No-reply email addresses should be avoided and instead, businesses should send emails from an address that has a real name, preferably of someone from the management.
Segmentation and Identification of At-risk Customers
All customers are not equal. Segmenting customers according to different criteria allows businesses to target them at a more personal level. For example, segmenting customers who spent more than usual / very less time in the first session and following up through an email can improve response rates and engagement. They might be having trouble getting started or facing issues in completing tasks.
There are many signs such as less frequent site visits and usage that can help businesses identify at-risk customers who are likely to cancel their subscription. However, re-engagement emails should not be something like ‘we miss you’. Instead, you need to focus on helping them with the solution by sending carefully drafted emails that address the reasons behind drop in usage.
Offer Something Extra and Incentives
Offering or doing something extra for the customers can go a long way in minimizing churn rate. Any additional value is more likely to keep customers engaged and interested in your products. For example, offering free training or tutorials, free tools and plugins (other than the core software). Usage-based incentives such as free upgrades, free one-month, bundled offers and discounts encourage users to continue with their contracts and stay with you.
Modern CRMs and communication systems allow you to automatically send emails when an event is triggered. After signing up for a subscription, a customer usually goes through many phases. By sending emails triggered between these phases can help keep churn rate under check. For example, you can setup the system to automatically send an email to customers who signed up but never returned or long-term customers who have been inactive for a long time.
Trigger-based emails can also be effective when you introduce a new feature. This not only allows you to talk about new enhancements, but also provides an opportunity to highlight and summarize important features again.
Focus on Onboarding
Customer onboarding is an important part of retaining customers and improving engagement. Around half of customers who subscribe to free trials don’t use it after first use. That’s often because they are unable to clearly see how the solution is benefiting them. Improving the onboarding processes through clear communications not only minimizes complications for the customer, but also helps businesses create more user friendly and intuitive solutions by analyzing the feedback.
Use Existing Content to Educate and Market to Current Customers
If you already have a blog and useful content such as infographics and tutorials, why not turn it into eBooks and provide the customers with something of value to them. In addition to education, the existing content can also be used to market your products to existing customers. Spending all the marketing budget on new customers and not focusing on existing customers can be costly in the long run because the cost of acquiring new customers is often higher.
Don’t Forget to Say Thanks
Appreciating your customers or simply sending a thank you note is perhaps the easiest way of letting them know you value them. Other things you can do to show appreciation include featuring your best customers on your business’s social media pages or publishing their feedback on your blog. Publicizing your gratefulness sends a positive message and makes customers feel important, which ultimately helps minimize churn and increase revenues.
Customer Churn vs. Revenue Churn
It’s important to notice that Customer Churn is different from Revenue Churn. Customer Churn refers to the number of customers that have discontinued their subscription over a given period. Revenue Churn is how much those lost customers represents in revenue.
Let’s say your product has a $10/mo and a $100 pricing plan. Losing 5 customers paying $10/mo compared to losing one single customer paying $100/mo. That’s why Revenue Churn (usually referred as MRR Churn) is important as Customer or User Churn.
How to calculate Churn?
For example, if 1 out of every 20 subscribers to your service discontinued his or her subscription every month, the churn rate for your service would be 5%. That churn rate must be calculated for a given period, usually a year or a month.
To calculate churn, all you should do is to sum the number of customers that have discontinued their subscription on a given period. In case you sum all the churned customers in a month you’ll have monthly churn, or if you sum all the customers churned in a year, you’ll have yearly churn – and so on.
Churn = Total # of Churned Customers
Or you can calculate churn rate, representing the percentage of churned customers compared to total number of customers.
Churn Rate = Total # of Churned Customers / Last Month Total # of Customers
Let’s say that 3 customers have discontinued their subscriptions to your service on a given month. Now let’s consider that the first customer was paying $10/mo, the second was paying $50/mo and the third was paying $100/mo.
Your revenue churn would be the sum of subscription fees that will no longer come into your bank account from next month, which in this case will be $160.
MRR Churn = SUM (MRR of Churned Customers)
MRR Churn can also be represented in a percentage, referring to how much it represents of your total MRR.
MRR Churn % = Churned MRR / Last Month’s Ending MRR
Negative Churn is the dream of every SaaS/subscription entrepreneur. It happens when the expansions/up-sells/cross-sells to your current customer base exceed the revenue that you are losing because of Churn.
Getting to negative churn requires that you can do one or more of the following three things:
- Expansions: by having a pricing model that increases the pricing according to usage growth;
- Up-sell: customers moving to a more highly featured version of your product;
- Cross-sell: customers to purchase additional products or services.
Keep in mind that it’s not easy to make negative churn happen. As David Skok said in his blog post “Why churn is critial in SaaS”, in the first 12-24 months of your business it is usually too early to figure this out. At this stage it is more important to get broad customer adoption, and that often means simple pricing that leaves something on the table for your customers.
What’s an acceptable Churn Rate?
Of course the best answer for this question is “as low as possible”, but we know things are not that simple.
An acceptable churn rate depends on two main factors: your target customers and your company’s size/moment. Keep in mind that – if you’re doing a good job – your churn rate tends to drop over time, so should be considered for companies around 2 years old.
Very Small Business
If you’re selling to VSBs (very small businesses) even the most valuable services will churn at a significant rate no matter what. Unlike large companies, a VSB will have very little upsell opportunities unless the company itself grows, and many will go under or change business direction.
Small and Medium Business
If your selling to SMBs (small and medium business) an acceptable churn rate reference would be around 3-5% monthly, but you really should target zero or negative churn. Another good reference would be < 10% annually for healthier business.
If your targeting big corps with tickets higher than 5-digit/mo your churn rate should be under 1% and going down proportionally to your revenue growth. Enterprise SaaS is only a success if you are adding more net revenue from large-ish customers each year than you had the year before.
In addition to offering quality products, communicating actively and keeping in touch with the customers also plays an important role in minimizing churn rate. Only when you have a deep understanding of their values and needs can you provide them with a compelling product and great customer services.