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Customer churn is a silent killer in SaaS companies, crippling growth in spite of marketing efforts.
A staggering number of SaaS businesses treat new customer acquisition as their highest growth priority. While bringing in new users is crucial component to SaaS success, when all the efforts are focused on acquisition, you might miss out on the low-hanging fruit of expansion revenue from your current customer base.
It is much easier to retain an existing customer than it is to acquire a new one, and in most cases it's also easier to sell more to an existing customer than someone who is not yet a customer.
This doesn't mean you should neglect new customer acquisition. It simply means you need to find creative ways to grow your revenue from your clients who are already committed to you. As customer acquisition cost increases in many SaaS verticals, expansion revenue can be a key source of growth.
Churn rate measures how many customers or revenue was lost over a given period. While tracking churn rate doesn't seem as exciting as tracking new sales, the reality is that customer churn can negate your acquisition impact.
When you focus on eliminating churn, you're investing in customer lifetime value (CLTV). An anti-churn approach increases the likelihood that newly won customers will stick with you for the long run, and therefore, keep revenue in the business. Cutting your churn in half doubles your customer lifetime value.
Calculating churn isn't difficult but it does require a bit of nuance. There are several churn metrics that most SaaS companies pay attention to.
Revenue churn at its most basic measures the percentage of revenue lost over a certain period of time. To find your churn, you will divide your total revenue churned in a period by the total revenue from the beginning of your specified time period.
Revenue Churn Rate = (Total Revenue Churned In a Period)/(Total Revenue at the Beginning of a Period) x 100
However, to get a clearer picture of your SaaS churn rate, you will want to look at net revenue churn. Net revenue churn takes into account your expansion revenue (like upsells, add-ons, or tier upgrades), as well as the churned revenue, which includes things like downgrades, cancellations, payment failures, and other revenue losses.
Net Revenue Churn = (Total Churned Revenue in a Period - Expansion Revenue in a Period) / (Total Revenue at the Beginning of a Period) x 100
Customer churn rate (commonly referred to as logo Churn) measures how many customers churn. Logo churn gives insight into how many customers choose to cancel or opt out of renewal within a given time.
Logo Churn Rate = (Total Customers Churned in a Period) / (Total Customers at the Beginning of the Period) x100
This calculation gives you a great starting insight into your customer attrition. However, now we should consider how your new customers factor into the equation. Your net logo churn takes your new clients into account.
Net Logo Churn = (Total Customers Churned in a Period - New Customers Gained in a Period) / (Total Customers at the Beginning of the Period) x100
A final lesser known churn calculation is ATR (Available to Renew) Churn.
ATR churn is like net revenue churn, except you are not counting any contracts that could not have churned in a given calculation period (like customers that are on annual plans that didn't come up for renewal).
ATR Churn Rate % = (Churned Revenue in a Time Period From Renewal Cohort) / (Total Starting ATR Pool) x 100
A final key consideration in churn calculation is what time period to use. Almost all companies use either monthly churn or annual churn depending on how long your average contract is.
If most of your customers are monthly, you will probably want to calculate your MRR (Monthly Recurring Revenue) Churn. To find your monthly churn rate, subtract your expansion MRR from your MRR churn. Then divide that by the Total MRR at the start of the month.
MRR Churn = (Total Churned MRR - Expanded MRR) / (Total MRR at the Beginning of Month) x 100
If most of your customers are annual, you will probably want to calculate your ARR (Annual Recurring Revenue) Churn. To find your annual churn rate, subtract your expansion ARR from your ARR churn. Then divide that by the Total ARR at the start of the year.
ARR Churn = (Total Churned Revenue in the Year - Expanded Revenue in the year) / (Total ARR at the Beginning of the Year) x 100
Churn rates vary widely from company to company and across industries. Recurly compiled churn data over 12 months with a sample size of 1500 businesses using their billing platform. They found that the overall average churn rate for all SaaS businesses is around 4.79%.
It's worth noting that B2C SaaS companies experienced a slightly higher churn (5.06%) while B2B SaaS companies experienced a lower average churn rate of 4.67%. This difference makes sense; B2B customers typically make more extensive price commitments than the average B2C consumer. Additionally, B2B customers include multiple teams, approval chains, and decision-makers, so it's not usually up to a single individual to cancel.
Industry-wide, a good SaaS churn rate benchmark falls between 5% - 7% for annual churn, roughly 0.5% monthly churn.
Let's take a moment to talk about the inverse of churn –– retention.
Retention measures how many customers or how much revenue you retain over a period of time.
Net Revenue Retention Rate = (Revenue at Start of Time Period + Expansion Revenue - Churn Revenue) / (Revenue at the Start of the Period) x 100
The lower your revenue churn rate, the higher your monthly or yearly retention.
As you'll notice, annual revenue retention rates will vary across SaaS companies, depending on their size or the target market. Use the following benchmarks to compare your retention rates to other SaaS companies.
90% Net Revenue Retention (Good for SMBs) - A 90% retention rate is typical for SaaS companies that target SMBs. Because their customers are smaller and probably paying monthly, the likelihood of revenue churn is higher. Therefore, 90% is a reasonable retention rate for this type of company.
100% Net Revenue Retention (Industry Median) - This is considered the industry median across all SaaS companies. If your net revenue retention rate is higher than 100%, that indicates company growth.
125% Net Revenue Retention (Extremely Strong) - This level of retention is most commonly seen in enterprise-level SaaS companies. This type of business typically attracts larger clients with annual contracts and has not only convinced them to renew but also to upgrade or purchase new products or services. These SaaS companies deliver exceptional value to their clients, which encourages high revenue retention.
150% Net Revenue Retention (Top End) - At the very top end of the spectrum, the biggest SaaS companies like Slack, Twilio, and Snowflake reach astronomically high revenue retention and consistently measure negative churn.
If you are a smaller SaaS company targeting SMBs and your net revenue retention rate doesn't exceed 100%, that's ok –– 90% and above is a normal, healthy level. The reason that smaller SaaS companies tend to have a lower retention rate is due to a couple of factors:
• High volume of monthly contracts
• Higher likelihood of cancellation or payment issues.
Smaller companies also lack the people power and organizational might of a larger business, so that is something to bear in mind. It simply comes with the territory. To improve your net revenue retention rate over time, plan to move upmarket so you can capture high-value clients and reduce churn.
If a user's activity begins dwindling over time, it reveals a declining interest or a negative perceived value in the product. It could also demonstrate a lack of understanding or knowledge of how to use your product.
When you spot reduced usage, take action immediately. Reach out to the inactive client to remind them of your product's value and offer guidance to maximize utility. Perhaps they have questions or feedback for your team that could help you in improving the platform.
To reverse potential churn due to low platform engagement, organize a specific action plan with your customer success or accounts team. Decide what levels of disengagement and length of inactive time define the danger zone for churn. If you have workflow software, set up automated workflows that alert your team to take the necessary steps to recapture disengaged users.
Churn should be top-of-mind, even at the earliest phase of the customer lifecycle. Even before the sale closes, salespeople and marketers should operate in an anti-churn, retention-positive mindset.
If your new users don't understand how to use your app, have trouble connecting with your team, or are unaware of all your platform features, they are more likely to churn. Recent findings on this subject are particularly eye-opening:
63% of customers say that onboarding – the level of support they're likely to receive post-sale – is an important consideration in whether they make the decision in the first place.
86% of people say they'd be more likely to stay loyal to a business that invests in onboarding content that welcomes and educates them after they've bought.
Over 90% of customers feel that the companies they buy from 'could do better' when it comes to onboarding new users/customers.
Quality customer training and support at the onboarding stage is critical to retaining your customers and reducing your churn.
Craft an onboarding program for your clients that demonstrates the value of your product and establishes rapport right off the bat with new clients. Be sure to offer simple, helpful training that shows your clients how to use your product well and optimize it for their success.
No matter how well you run your company, occasionally, your users might need assistance solving a problem. When that happens, your customers will reach out to the support team. Therefore, your customer success teams must be firing on all cylinders to ensure the experience is positive. Otherwise, it could lead to churn.
Nothing erodes customer trust more than poor customer service.
66% of consumers have terminated their relationship with a company due to poor customer service.
Keeping customers happy is key, so ensure you have a personable and efficient support team to solve customer issues quickly.
Your technical support and customer success teams should keep retention at the forefront of their mind every time they interact with a client. But customer success transcends service tickets. If your success team really wants to make a difference with churn, they can get creative. Here are some ideas you might consider incorporating into your customer success strategy:
Customer Feedback Panels & Surveys - No matter how diligently you track customer data, hearing directly from your user base will reveal things you didn't know. Make sure you show your customers that you care about their experience by asking for their feedback. You can get this insight in multiple ways, through one-on-one calls with account managers, regular customer panels or town-hall-style meetings, and surveys asking questions about the customer experience.
Knowledge Base & Ongoing Training - Customers often prefer to solve their own problems, if possible, before they reach out to support.
According to the Harvard Business Review, 81% of customers attempt to take care of matters themselves before reaching out to a live representative. And a survey conducted by ZenDesk suggests that 67% of respondents prefer self-service over speaking to support.
Provide a knowledge base for your customers containing help articles, product information, and support videos. If a customer has a simple question, they will likely find their answer from the knowledge base and avoid submitting a ticket. This improves the customer experience in two ways:
Cater to Customer Preference - The self-serve element capability empowers customers to solve their own problems quickly and get back to being productive.
Improves Ticket Resolution Times - When your users have resources to solve simple issues, it frees up your support team's queue to focus on the most pressing tickets. Fewer tickets equal faster resolution times, which in turn creates happier customers.
You can also offer continuous customer training to support your customer as your product expands and your company grows. As long as your success team helps your clients find value, you'll reduce customer churn.
Professional Services - Some customers might be interested in professional services to help them implement or use the product, train staff onsite, or provide consulting. This is something that larger clients will especially appreciate, so as you move upmarket, be sure to include this as part of your customer success strategy.
Not only are satisfied customers less likely to cancel a subscription, but they're also open to paying you more. The key to unlocking this kind of expanded revenue from happy clients is through creating a "sticky" product.
What do we mean by calling a SaaS product sticky? It means that your offering is so useful that your customer can't live without it. For SaaS, high usage and expanded revenue go hand-in-hand with a sticky product.
At Unbounce, customers who downgraded to a free plan from a paid subscription responded to the question, "Why did you downgrade? The most popular answer, at 31.4%, said they were under-utilizing the product. That wasn't great news because it meant that perhaps their product wasn't sticky enough.
To combat this, Unbounce made product tweaks to improve stickiness. They made sure that the platform was simple to use, introduced new products that work together in tandem to deliver value over the long term, reduced the time to value, and continued to deliver exceptional customer service.
In SaaS, you must deliver value quickly, and continue delivering value over a long time period to prevent customers from churning.
To keep your customers happy, you must understand their unique qualities. Your users are not one-size-fits-all; each has a set of goals and problems to solve. With this in mind, approach your anti-churn strategies in segments.
Enterprise customers can quickly spot an ill-equipped or inexperienced SaaS company, so be ready to support all their needs and make them happy.
As we touched on earlier when we spoke about customer success, providing a knowledge base and helpful resources is essential. But it's even more of an imperative when you're dealing with your smaller, self-serve customers.
Even if they aren't paying for a personal account manager or professional services, your smaller subscription clients can still enjoy a great customer experience. To promote easy support and assistance:
Of course, if all else fails, make sure that all of your clients can get in touch with a service representative when necessary.
Your larger customers drive a sizable chunk of your SaaS revenue, and they will typically have a lower churn. However, if you don't put in the effort to please them, you could lose them.
To avoid this crushing heartbreak, offer a dedicated AE or accounts team to service each enterprise client. You need to be available for them at all times and respond as quickly as possible. If they feel prioritized and well taken care of, they will likely stick with you.
Enterprise customers can quickly spot an ill-equipped or inexperienced SaaS company, so be ready to support all their needs and make them happy. They will tend to be less price sensitive but pickier about support, so make sure to charge a high enough price point to be able to support these customers.
We've discussed the customer experience and how to proactively prevent cancellations and downgrades. However, what about involuntary churn? What is it, and how do you avoid it? Let's break it down.
This occurs when a client actively decides to cancel their subscription, downgrade their tier, or otherwise reduce their spending or terminate their relationship with you. This could be due to several factors like their customer experience, price point, underutilization, etc.
This type of churn usually happens when a customer undergoes payment failure, triggering account cancellation. The payment failure could occur because of insufficient funds, a maxed card limit, a bank halt on the business card, or a lost/stolen card.
If you are a B2B SaaS company that serves an SMB segment, you might encounter involuntary churn more often than a company with an enterprise target market.
It's essential to develop a plan to counteract payment failure. Without a solid strategy, you could lose customers who otherwise would have continued their relationship with you. By reducing involuntary churn, you'll boost your customer LTV (lifetime value), and therefore gain higher ROI from your CAC (customer acquisition cost).
While voluntary SaaS churn indicates more deep-rooted issues within your organization, involuntary churn is easily avoidable. You will drastically improve your retention when you are diligent about catching and correcting involuntary churn through simple strategies like dunning emails.
Dunning emails are emails you send to remind clients about subscription payments. There are several common Dunning email strategies used to combat involuntary churn.
You can begin counteracting payment failure before the bill is due. Create a workflow with your team that outlines the proper progression of actions to take before passive churn occurs.
For example, you can reach out with a pre-dunning email that reminds the client to update their card or payment information before it expires. Within your platform, you can also send alerts and notifications that will appear when your customer logs in.
The name of the game is speed, so leverage an email automation platform, preferably one that specializes in dunning and payment reminder emails. Trigger an automated email if payment failure occurs. It's also a good idea to notify a team member to reach out personally and assist the customer if necessary.
If a customer churns involuntarily, don't give up hope just yet.
Send a series of follow up emails making sure they actually want to churn before them off, many times they will be grateful for the reminder!
One way to measure the health of your customer churn is to actively track your NPS (Net Promoter Score). This metric is widely used and depended upon across all industries, especially SaaS.
NPS measures your customer satisfaction and loyalty. It is based on a single simple question: How likely is it that you would recommend [Company/Product/Service] to a friend or colleague?
Respondents give a rating between 0 and 10, 0 meaning not at all likely and 10 meaning extremely likely. Depending on the number they choose, they will fall into a specific category:
Detractor (Score 0 to 6) - Detractors are respondents who choose a score between 0 and 6. These are unhappy customers who are unlikely to buy from you again and may even discourage others from buying from you.
Passive (Score 7 or 8) - Passives are not unhappy, but they may not be as enthusiastic as promoters. These respondents choose either a 7 or an 8.
Promoter (Score 9 or 10) - Think of promoters as your brand champions. Promoters are the respondents who chose 9 or 10 on the scale. They are very loyal and likely to be advocates.
To find your score, subtract the percentage of detractors from the percentage of promoters.
Net Promoter Score = Number of Promoters % - Number of Detractors %
Your NPS is important not just as a KPI for your support or customer success team but for understanding the entire organization's health. You'll discover how connected you are with your customers and what your likely level of churn will be for the future.
Watching your NPS score is an excellent way to detect potential problems and stop increasing customer churn.
An NPS score around 30 is considered to be good for SaaS companies.
SaaS pricing models can vary widely, but often they are based on subscriptions or contracts. Many companies offer month-to-month subscriptions. Monthly pricing remains a popular option when serving SMBs or individual consumers. However, even if monthly pricing attracts customers, it could be contributing to churn.
Why do annual contracts reduce churn? Well, for starters, annual contract customers have fewer opportunities to churn since they can only cancel once a year instead of monthly or quarterly. Additionally, these types of customers will likely pay more upfront. Because of this financial commitment, they will make an effort to get the most use out of your product and integrate it into their essential work operations.
As your SaaS business grows and you've had some time to acquire customers, prove your product-market fit and earn loyal brand champions, you'll probably start to expand your product line. A great way to drive more expansion revenue is by creating new products or adding additional services that enhance your value further to your customers.
If you're able to build on your original product offering with additions that help your customer base, you'll reduce churn in the long run because you're making your product more valuable for them.
If you're just starting out, you're likely catering to lots of SMBs, and that can be a great thing. However, it can limit you to a higher churn rate. Of course, when you move upmarket, that changes.
Moving upmarket means you can pursue those large enterprise clients who favor more extended contracts. These high-value clients will help you expand your revenue and reduce your churn. In fact, SaaS companies often make a move upmarket for this very reason. The pool of enterprise customers is smaller, but the chance of churn is less.
Remember, Rome wasn't built in a day. Moving upmarket will be something that is achieved slowly with time. You'll notice that you will attract more enterprise clients when your product expands and matures, your workforce grows, and you develop your accounts team to serve enterprise clients.
• SaaS companies often focus on new customer acquisition numbers but neglect to address their churn rate. SaaS companies need a strategy to improve customer churn as early as possible. It should be just as high of a priority as acquiring new customers.
• Industry-wide, a good SaaS churn rate benchmark falls between 5% - 7% for annual churn, roughly 0.5% monthly churn.
• Industry-wide a good NPS score benchmark is roughly 30 for SaaS businesses.
• Target different parts of the customer lifecycle to reduce churn. Build rapport in the early stage by creating a thorough and helpful onboarding experience. Improve customer success through helpful self-service tools, attentive staff, and gathering customer feedback consistently. Look for revenue expansion opportunities in the later stage of the customer lifecycle.
• Dunning emails can help recapture customers and stop them from churning.
• Track your NPS score to make sure your users are happy with your product and service.
• Increase your net revenue retention rate by introducing new products and upsells to your existing customer base.
• Move upmarket to attract higher-value customers and reduce your churn rate.
Remember, you don't need to have it all figured out right now. Improvement takes time, iteration, and dedication!
I am the founder and CEO of Messaged, the email marketing automation platform built for SaaS companies.
My email is [email protected] and I am @tldrdan on Twitter; if you have specific feedback or questions related to this guide, I would love to hear from you!
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