If you’re just getting started to acquire your very first customers, churn may not be a big deal, but as soon as you get over a hundred customers churn becomes crucial. And by crucial, I mean it can be the different between the success and failure of your business.
A high churn rate can have an impact on your business growth, your company valuation, and the overall perception of customer satisfaction and success. Just as exponential growth is great for your company, high churn rates are exponentially bad.
Keeping track of retention metrics
Specially if you’re a high speed growth company, churn can be extremely frustrating because it means you’ll have to spend your marketing & sales resources to replace lost customers, instead of increasing your customers base. That’s crucial because it changes the way you have to keep track of your sales & retention numbers. The basics are:
- New customers: number of new customers acquired;
- Churned customers: number of lost customers;
- Reactivated customers: lost customers reactivating their subscriptions;
- New MRR: revenue from new customer acquired;
- Expansion MRR: expansion revenue from existing customers due to cross-sells and up-sells;
- Reactivation MRR: lost customers reactivating their subscriptions;
- Contraction MRR: lost of revenue without lost of customers due to downgrades;
This chart above represents customer churn in a year period, considering net numbers. You may break this down and analyze customer churn deeper, considering cohorts or even churn reasons.
As we’ve said in the The right SaaS metrics for each stage of your company article, you may start measuring gross customer and revenue churn, but as you company grows it’s crucial you use more detailed and comprehensive metrics, such as net churn.
Five common reasons that make customers churn
Before trying to reduce SaaS churn, it’s important you understand what causes SaaS churn. You’re not alone in the SaaS space, there are a lot o players in the market providing multiple solutions, products and services, and we all suffer with churn. If you truly analyze these companies you’ll identify five main churn reasons.
1. Customer is not the right fit
This is simple, but yet hard to see. As a company we want to believe we’re working on a big market – usually big enough to create a $100M company – and when you reject a customer by not being the right fit we’re saying the opposite.
This kind of churn simply because a customer can’t get the core value from your product or service, usually because they don’t suffer from the problem you’re trying to solve. They may use your product for a while, but once they see they’re not getting any benefit out of it, they’ll cancel their subscriptions.
2. Customer moves to a competitor
A competitor is somehow better than you and a customer decides to move. Period. It may be because of pricing, lack of features or even a bad experience with customers support. If you’re working on a crowded market this can be usual, but there are a couple of things to be considered:
How hard is for a customers to move to a competitors product/service?
Will your customers have a hard time trying to move out of your product? How much effort will they have to put in order to move to a competitor product? Think of things like exporting data do csv files. It’s common that competitor implement features in their products that makes it easy for customers to import data from your product. That’s the kind of thing that facilitates churn, but don’t misunderstand this: if you take off your “export to csv” feature your customer may not even use your product in the first place.
A better product doesn’t mean a better business
Making an awesome product is only half the battle. You may have a better product, a better customer support, a better price – but if your customer market their product better you may end up losing customers. How many ugly/bad products you’ve seen thriving out there? Market something you don’t have is a bad strategy in the long term, but if a competitor do that they can give you a hard time for a couple of years. Don’t just build a great product, make sure people know it.
3. Customer believes you don’t care about him
This may seem unlikely, but it’s widely known as one of the main reasons of churn in all industries. If you don’t show your customers you care for them, they’ll simply leave your company. You may think that if you’re delivering value there’s no reason a customer may not be satisfied – but it’s all about perception.
Think of when you go to a fancy restaurant and the waiter stops by just to ask you “Is everything all right madam? Do you need anything else?” – well, he already served you food, drinks and etc, but guess what – he just remembering you that he cares about you and is there if you need anything.
If a customer have a feeling that she’s just another one in the middle of hundreds or thousands of customers, there’s a huge chance she’s leaving you. In practice this is likely due to poor customer service.
4. Customer gets bigger, gets acquired or go bankruptcy
Let’s say you’re building a product for SMBs. Now imagine a customer using your product for 2 years and growing exponentially. Two things can happen: you decide to serve larges companies and adapt your product/service to that, or your customers will simply move to another product. Think of companies migrating from Xero or Quickbooks to SAP or Oracle EBS – it gets to a point that it’s inevitable.
If you’re a B2B company, and specially if you’re selling to startups of VSB (very small business), bankruptcy or dead business this can be normal. Customers cancel their subscriptions because their business have failed, and there’s no reason to keep paying for your product – or any product.
Another less common reason, but still possible, is that your customer is being acquired. Consider a company using Microsoft Azure to host it’s product, and then gets acquired by a larger company using Amazon Web Services. They may decide to move everything to AWS to get better pricing on cloud services.
5. Unintentional cancellations
These four main churn reasons can be categorized as voluntary churn, meaning that your customer is actively cancelling their subscriptions. Unintentional cancellations happens when a customer has no will to leave you but still they do. This usually happens due to billing problems, such as credit cards going over their limits or expiring.
Unintentional churn is surprisingly common and one of the more preventable issues to address. Most of the time, your customers won’t even be aware their card has expired for instance.
Five effective tactics to reduce SaaS churn
You know why customers churn, now let’s see how to avoid that.
These five tactics are almost directly related to the five common churn reasons, and that’s not a coincidence. What we’re doing is creating a potential solution for each problem. As you may think there’s no guarantees a customer will never churn, but we’ll do our best not to let them do it.
1. Get the right customers
This is exactly the opposite of having a customer that is not the right fit. You may think that reject a customer is not a good thing to do, but believe me, it definitely is. And the reasons are simple: 1) You spend money to acquire a customer, and you don’t want to spend money on a customer that will churn quickly. Actually if that happens you’ll definitely loose money. To have a healthy SaaS business your LTV (Customer Lifetime Value) must be at least 3 times higher than your CAC (Customer Acquisition Cost).
Customer Acquisition Cost
Let’s say you spend $100 to acquire a customer. Now let’s say your Average Customer Lifetime is 12 months, and your Average Revenue per Account is $50/mo with 50% Gross Margin – meaning each month you get $25 on net profit for each customer. Given that, you’ll need 4 months to fully recover your $100 spent on customer acquisition, but if the customer churns before that – well, you just lost money.
There are a few other tactics you can do to prevent that, such as encouraging yearly contracts (by giving discounts) and etc – but you definitely don’t want to have the wrong customers using your product. We’re not even considering the fact that these customers are distraction, since they’re eventually opening support tickets, requesting features and etc.
Optimizing your sales funnel
One thing to do here is to optimize your sales funnel. Firstly, you want to qualify your leads better on the top of the funnel. Your landing pages forms can ask questions that will help you qualify the lead, such as the size of the company, their industries, current solutions they’re using to solve the problem you’re tackling and etc.
You want to engage with high-quality, legitimate prospects – and prioritize quality over quantity. Create a detailed definition of a qualified lead and make sure everyone on marketing and sales teams are on the same page.
Another great opportunity to better identify your ideal customers is the trial period. It’s common to use free trials as a way to market your product, but it’s definitely a great opportunity to qualify leads. Although the period is usually short as 14 days, you should help customers on trials to have quick wins with your product, and truly validate the benefits out of your product/service.
2. Customer onboarding done right
Onboarding is the process of introducing new customers to your product or service in an organized and effective manner. It generally begins at the time of signup/purchase and may continue for up to three months, depending on the complexity of your offering.
Once you’ve managed to acquire a customer, what do you do with them? Customer onboarding is about cementing loyalty early and leveraging that critical honeymoon period in the relationship to build trust First impression matters, and the first in-app experience your customer has with your product sets the tone for your relationship. As Lincon Murphy usually says, the seeds of churn are planted early, and those seeds are planted deep if your onboarding experience for new customers or your prospects during a free trial is terrible.
What defines an onboarded customer?
The trick here is to get a clear understanding of what defines an onboarded customer. We want to deliver early value, quick-wins, and be able to measure and confirm it. We’re not just talking about technical tasks or account setup, but actual value delivered. So let’s say you have an CRM/sales tool – you could consider customers onboarded once they closed a first deal assisted by your product.
It’s not easy as that for all types of business, but I can’t you much here – it’s up to you to understand the most important value your product/service delivers and make sure your customers experiment that early.
I can’t recommend anything better than Intercom’s recent book Intercom on Customer Engagement. It brings amazing insights on how to engage the right people, with the right message, at the right way and time. It’s priceless, and it’s free. Go ahead and get your free copy now.
One key thing to do here is to send scheduled messages during the onboarding period. I love how Intercom do it (read more at their book). Make sure to put some space between sign-up and sending these type of messages. As a best practice, you shouldn’t send any messages that aren’t specifically related to onboarding in the first 30 days after sign-up. This means we can focus on getting customers engaged with your product in all the right ways, without them feeling like they’re being spammed with content irrelevant to their needs.
A great tactic is to offer onboarding as a paid service. HubSpot for instance don’t sell their software without you buying professional services to get started. The reason they do that is because they believe software is just a small piece of the inbound marketing/sales transformation. And that makes sense.
3. Know what your customers are doing
Actions speak louder than page views. That’s Mixpanel headline, one of the best analytics platforms for web and mobile applications out there. Knowing what customers are doing in your product is crucial. You have to know it. Period. If you have no idea how your customer are behaving and using your product, there’s no chance you can do anything to retain them.
We recently published an video and article about what is customer engagement score and how to calculate it. A single number/metrics that represents how much a customer is engaged with your product or service. A useful metrics to help you on keeping track of this.
Regarding customer behavior, there are some questions you need to know how to answer:
- How are your funnels going?
E.g. Do people go to check-out page but never completed a purchase?
- Did customers make important actions on your product/service?
E.g. How many tickets a customer responded using your customer support product?
- Who is coming back and using your product day after day?
E.g. How many people opened your app within a week after downloading it?
Triggers for the win
Once you know what your customers are doing it’s time to do something. Exactly as you do during the onboarding process, triggered messages are king. Remember that sending a message the right way is important and that includes choosing the right channel, including: email messages, SMS messages, on mobile push notifications.
There’s a famous case of Groove, a support tool for small businesses, called “Red Flags” metrics. Red flags are indications that customers are about to churn. The difficulty is that once a customer cancels you’re going to have a hard time convincing them to return. If you can spot churn as it’s happening i.e. spot the “leading indicator” of a cancellation, you’re still in a strong position to coax the customer back.
Customers rarely simply vanish. They usually stop using/engaging with your product overtime, and you can clearly see that. It’s a gradual slope, and it’s up to you to act before they quit. Mixpanel‘s retention table show you exactly that: how many customers came back after a period and did a specific action.
Trigger-based emails are sent based on user actions. For instance, if someone signs up for an account but never input data to your platform, send them an email prompting them to do it and providing links to a support article and/or video to help them achieve the task.
4. Build stickyness into your product
David Skok, VC at Matrix Partners and one of the greatest SaaS thinkers in the world, states that there are two main ways to increase product stickyness: become an integral part of their workflow or become the central repository for key data.
Think about how people use your product. How can you become so deeply ingrained in their business that the cost savings and/or extra features offered by competitors just isn’t worth making the switch? Ask yourself if you know what are the key features that make your product sticky, and then use measurements of customer engagement to see which customers are not using those features. Those are the customers most at risk of churning.
Alternatively, consider the data your application is holding for your customers. Is it critical data? Can it be easily transferred to other solutions? Perhaps there is an opportunity wrap up more of their data and make it more of an effort to move it out.
5. Offer yearly instead of monthly contracts
There are many benefits on billing your customers yearly, but guess what? It’s also a great tactic to reduce SaaS churn. Offering long-term contracts and up-front commitment has the effect of lowering churn, as customer become more committed to the product, and more will get through the phase of fully implementing the product and seeing benefits.
Some companies believe so much on this that they only bill customers annually. HubSpot is again a good example of a company doing that. HubSpot contracts are billed annually by default. They stat they’ve found that customers who can commit to a full year of using HubSpot will be more successful inbound marketers in the long run.
The negative effect is that it will slow down sales. So the best way to proceed is to test to find the optimal level. It is also possible to encourage sales to sell these longer contracts without forcing it.
But be careful: Steli Efti from Close.io says that if your SaaS startup is below $1MM ARR then you probably should not focus on this. Instead, keep your customers on monthly plans. Why? Because you want to understand churn first and see how long people stick around by choice and learn from that process. If you’re above $1MM ARR it’s probably a good time to offer annual plans, either pre-paid or monthly.