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Churn is the common enemy of all SaaS and B2B businesses. Essentially, it refers to the rate at which you are losing customers and, while it’s not exactly our favorite number to look at, it’s crucial to keep a close eye on your churn rate and how things like product updates, feature releases, marketing activities, and customer support impact your churn rate.
In fact, avoidable churn could be costing US businesses in excess of $136 billion a year and reducing churn by just 5% can boost profitability by 75%.
Churn matters. In this blog, we’ll explore what churn is and how to calculate it, the different types of churn, and proven tactics for reducing churn in your SaaS.
Let’s get into it.
Customer churn refers to the percentage of customers that stopped using your product after a set period of time. The lower your churn rate, the higher your customer retention.
Churn is a part of life, and it is extremely unrealistic to expect your churn rate to be 0% — customers are always going to leave for one reason or another. But lost customers are lost revenue, and since the cost of getting new customers to replace those who have churned is higher than ever before, it’s important to keep a close eye on this number.
Churn rate impacts all of your other key business metrics like customer lifetime value, retention rate, and total revenue.
When you have a leaky bucket, you are constantly refilling it in order to keep the bucket level. For many SaaS companies, this forces marketing and customer-facing teams to focus on acquisition, rather than retention — and the cycle continues.
When churn is reduced, your new acquisitions are just that — new acquisitions — and they help your business grow. A reduction in churn will also allow you to focus on the bigger picture, growing by expanding your existing customers, increasing lifetime value, and converting and retaining new business.
Not convinced? Take a look at these stats:
Acquiring a new customer is 5-25x more expensive than retaining one
Improving retention has a 2-4x greater impact on growth than acquisition
44% of companies have a greater focus on customer acquisition vs. only 18% that focus on retention
The probability of selling to an existing customer is 60-70%, but only 5-20% for a prospect
Existing customers are 50% more likely to try new products and spend 31% more
There are two main types of churn: voluntary and involuntary.
Involuntary churn occurs when payments are declined or something else goes wrong in the process of renewing.
Voluntary churn occurs when the user decides to end their agreement because they’ve found a better or more cost-efficient solution or your product is no longer serving their needs. This is the type of churn we’ll be focused on here.
Within the broad category of voluntary churn, there are three distinct phases for a SaaS business:
Onboarding churn (0-30 days)
Mid-stage or results phase churn (30 - 180 days)
Long-term or loyalty phase churn (180+ days)
Early-stage or onboarding churn is by far the most common, but it’s also the most avoidable. People who churn in this phase are typically struggling to get set up, have not realized the value of the product, or are yet to discover the features or use cases most relevant to them. Personalized onboarding journeys that educate and support these customers will go a long way to assisting them.
In the Results phase, your customers will be hoping to see real value in your product and will look at the results they are generating. Often, making tweaks to the onboarding process can help you avoid this phase of churn — the better customers are set up from the start, the better off they’ll be when they’re trying to prove ROI or make a case for the value of your product.
In the Loyalty phase, customers who churn may feel as though they are not getting enough out of your product and they could require a little extra support to help them experience the benefits firsthand.
We’ll get into some churn-busting strategies for each phase soon. But first, we’ll look at some of the ways you can calculate and monitor churn, to find out which phase is impacting your business the most.
The basic formula to calculate your business’s overall churn rate is simple — number of customers canceling their subscription per time interval, divided by the number of customers at the beginning of that interval, and multiplied by 100 to get a percentage.
For example, let’s say you’re looking at churn for Q1. At the start of January, you had 5,000 customers and throughout the month you lost 250. This would mean your churn rate for Q1 is 5%.
Some businesses decide to calculate customer churn rate as a percentage of MRR instead of customers lost. In this case, you would look at your MRR for the month and divide it by the MRR you lost that month, minus any upgrades from existing customers. In this equation, you would not be including new sales for the month either, as you ultimately want to identify what was lost.
Many SaaS companies may also benefit from tracking subscription level or downgrade churn — that is, the number of customers who downgrade their plan. Depending on the pricing model you’ve put in place, this kind of churn could be indicative of a feature that’s not quite working as intended, a usage level that is far and above what your customer really needs, or something else entirely.
In a customer data platform like Ortto, it may be worth setting up an entire dashboard dedicated to churn to answer tough questions like:
What type of customer is likely to churn?
Are there any product actions that customers do or do not take before churning?
How do engagement scores look for customers that churn?
Which pricing tier is the customer most likely to be in when they churn?
Are there seasonal churn trends that could be eliminated with special offers or discounts?
Does churn happen at a specific time in the customer’s lifecycle? E.g. at the end of an annual contract?
Is the churn voluntary or involuntary (e.g. declined payment cards, incorrect payment information, or lack of customer assistance)?
Answering these questions with an in-depth churn analysis can help you set up a plan to reduce churn, and set your business up for long-term success.
Now that you’re analyzing churn, it’s time to take action and bring those churn numbers down. ProfitWell studies have shown that the average churn rate in SaaS is around 5%, and a “good” churn rate is considered 3% or less, but only one-third of SaaS companies are actually hitting this benchmark.
No matter what your churn rate is, the most important thing is to make continuous improvements to lower it. These strategies are designed to do just that.
We all know that starting a new habit is easier said than done. But it CAN be done. Products like Headspace, Asana and Slack work well because they encourage us to log in every single day. And when a product becomes part of your daily routine, it’s really only those inevitable things like budget constraints or changing circumstances that drive you to cancel.
Consider how your product can become a part of your user’s routine. It could be as simple as emailing your customers with a weekly update on their progress or using integrations to habit stack with their daily usage of popular products like Slack.
We’ve said it before and we’ll say it again — a stellar onboarding process is absolutely crucial to success. In fact, 80% of all app users are likely to churn within the first three months of signing up.
You’ve likely heard that it takes 21 days to build a habit but, in fact, a 2009 study published by the European Journal of Social Psychology showed it takes an average of 66 days for a new behavior to become automatic, and anywhere between 18 to 254 days for a person to form a new habit. This is largely dependent on the type of habit — and the type of person. In any case, it’s clear the first 90 days are crucial to both avoiding churn and making sure your product becomes a habit in your customer's life.
Assess the role of timing in your churn analysis to find out where people are dropping off. This will help you prioritize campaigns and journeys for key moments, helping customers overcome onboarding issues or re-motivating them when the initial excitement wears off.
It's equally important to look at the journey your most loyal customers took in the early days. Using Ortto, you can identify the actions and behavior your best customers took and create custom activities that represent these actions.
With custom activities set up, you can create onboarding journeys that guide your audiences to take these actions. For example, perhaps you’re a productivity tool and you’ve noticed customers who make it past the 90-day mark are more likely to have set up a task and invited a team member within the first two weeks. You can then set up a journey encouraging them to take these two crucial actions and incentivizing them if the action is not taken by day 13. This simple journey can go a long way to nudge them towards value realization and reduce churn.
As a user, you’ve probably noticed a lot of companies offering up huge (up to 25%) discounts for signing up for an annual subscription. There’s a reason for this — once a product has been a part of a user’s life for 12 months, it’s highly likely that they’re going to struggle to give it up.
After all, 365 days is far beyond the maximum of 254 days it can take for a new behavior to become automatic — and once your product enters ‘automatic’ territory, churn is far less of a risk.
Sometimes early-stage churn starts before the customer has even become a customer. If your marketing, advertising, and website messaging do not match up to the product experience, your customer may churn because their expectations have not been met.
This is rarely intentional, but it is more common than you may think, especially for products that are complicated and could be misunderstood in the market. Aim for simple, straightforward messaging explaining what you solve and how you solve it. Videos, product imagery, and customer stories can help here.
Another way to avoid alignment issues is to find out what customers are expecting in the first place. Set up an onboarding survey or pop-up form that prompts your customers to share the features they are anticipating using heavily, and what they are hoping to achieve with the product. With this information, you can segment the audience and start sending them the most relevant educational content to fast-track their success.
Perhaps you’ve gone all-in on video tutorials. Or maybe you’ve been reliant on written content and a few pre-recorded demo videos. The fact is, different people learn in different ways and while you can make some predictions about your audience’s preferred way to learn, the more content types you have, the closer you’ll get to ensuring every customer you have will find a way to reach their goals.
It’s also worth looking at pop-ups, tooltips, product tours, and even gifs to help users learn as they do. This is often the most effective way to teach your users about new features or hard-to-master features.
Tracking engagement in a CDP like Ortto will help you catch churn before it happens. When a customer stops using specific features, drops from using the product once a day, to once a week, to once a month, or usage at the organization level drops down to one specific individual, it’s time to funnel the customer into a re-engagement campaign.
Early intervention can go a long way here. Set up a journey that is triggered when engagement first starts to drop off, sending emails, SMS, or in-app messages that educate these customers on new or lesser-known features to ensure they’re seeing the full value of the product. It’s also a great idea to share some customer stories and specific use cases that may inspire them to reengage with your product.
If engagement continues to drop, ask for feedback in a survey, pop-up, or via your customer service team to find out why their product usage has dropped off, and offer some help. With this information, you can ensure they get the right kind of support, whether it’s content on how to use a specific feature or sales intervention to help negotiate payment terms.
Spotify’s Wrapped is known for being one of the more viral content efforts of the calendar year. Social shares aside, it also happens to be a great reminder of the role Spotify plays in our life. We listened to that much music?! Learned from that many podcasts?! It's a feel-good moment that has been replicated in the value realization emails from many popular products.
Grammarly’s weekly report is one of the best examples out there. It provides a great balance of celebratory moments to make the customer feel good, value realization moments, loyalty drivers, and a reason to upgrade. Check out the template below.
Consider how your product could create something similar at key moments throughout the customer’s lifecycle. Maybe they’ve been with you for three months and you want to show them how much time they’ve saved or revenue they’ve generated. Or perhaps it’s week one and they’ve already integrated their tech stack and set up their first project.
Whatever set of stats you choose, the goal is to appeal to all of the things that make us want to keep up a good habit. You're already winning, but you've got room to improve (an upgrade will help reach that next milestone), and why stop now when you're in the middle of a streak?
Keeping engagement high doesn’t stop with in-product use, it’s important that your customers are engaging with your brand, too.
Blogs, newsletters, product updates, and social content provide extra value to your customers and inspire them to keep growing with you. Focus on adding real value through content that provides examples, explainers, and how-tos to keep customers coming back.
When your customer feels truly connected to your brand, they’ll be less likely to churn. Plus, with a regular feed of inspiration and how-tos, they’ll be motivated to log in and discover new or new-to-them features and use cases. It’s all about the long-term, doing little things to help keep the excitement alive long after their initial ‘aha’ moment.
Tracking your Net Promoter Score (NPS) helps you to identify the customers who may be at risk of churning and will provide a steady stream of feedback that can inform product improvements and updates.
When you encounter a less-than-positive review, ask follow-up questions to home in on the problems and solutions, and ensure that your support team is reaching out to respond to the issues and help resolve them.
In the example below, you’ll see how Evernote uses a progressive NPS to evaluate performance on a macro level and home in on specific features. The use of progressive disclosure — showing one screen with one question, before asking the customer for more information — helps ensure that customers are not put off by the granular level of feedback they are being asked to provide.
Image source: Reallygoodux.io
It may seem counterintuitive, but focusing on customers who are less likely to churn, but more like to bring in high ARR can help you focus efforts and grow your business. Consider this: A low-MRR, high-touch customer who churns is going to hurt your business a lot less than a high-MRR, low-touch customer.
As Harvard Business School Professor Sunil Gupta shares in his paper Managing Churn to Maximize Profits, focusing on higher-spending customers, even if they aren’t as likely to leave, can increase the total profit a company can reap. In an experiment conducted for the paper, Gupta applied a new algorithm to manage churn — one that identified: the high-spending customers who were likely to churn (even if that likelihood was lower), and filtered for the customers that were more likely to respond to a retention offer. With this information, they were able to theoretically increase profits by 180 percent.
If your reports are currently filtering only for ‘high likelihood to churn,’ you may be missing out on early intervention with your highest-paying customers.
Watching what your closest competitors are doing can help you identify churn before it happens. For example, if a close competitor with a lower barrier to entry (price or product difficulty) launches a new feature that is a copycat of your top-performing feature, it’s likely they’ll be coming for your customers via targeted advertising or sales outreach.
Now is not the time to panic, but it is worth being aware of any market changes that could impact your customer’s decisions. Show your customers, especially those who you have identified were already at-risk to churn, a little love and remind them why they chose your product in the first place.
Some of the top-performing SaaS brands today, like Figma, Notion, and Asana, have the strongest communities. This is not a coincidence. Customers are more loyal to brands when they feel that being part of the product makes them part of something bigger.
We have a whole article on taking a community-led approach to growth with plenty of examples to learn from. One of the most important things to learn from these success stories is that it’s not so much about forcing your customers to become a community, it’s about identifying the community that is already out there and giving them the resources they need to thrive.
Churn is inevitable, and there is a certain level of churn that your business will come to accept. The goal is to avoid exceeding that level of acceptable churn, so your business can continue to grow.
To do this, create churn prevention journeys, track customer engagement and NPS scores closely, measure success on improvements to journeys and re-engagement campaigns, and make churn prevention a part of your everyday.
Not only will these insights help ensure the health of your business, but they’ll also give you a better understanding of what your customer needs so you can continuously improve your product and messaging.
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