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SaaS Churn: The Myths, benchmarks and strategies to Retain More Revenue -

Apr 26, 2022

The week before, I cancelled an annually renewed SaaS subscription (I had just three weeks to renew).

It's interesting that, despite having purchased a subscription for the whole year but the company refused to allow me to keep the final 3 weeks' worth of top features.

When I began to cancel, a pop-up alerted me I'd immediately be denied access to all paid features.

"This move will instantly reduce your account. Do you really want to stay?"

I did cancel the program, even though I knew I didn't need the tool in the future. As a result, in the terms of SaaS the tool, I turned on the engine. This experience led me to thinking:

  • Was the immediate elimination of features that cost money the best chance to keep me from turning?
  • Was it the day I was officially counted as "churned"? Did they count me as"churned" the day after I decided to cancel? The day that my subscription could have been renewed? Was it the case if I had downgraded or upgraded my usage?
  • What could they've done better to try to keep me from cancelling?

In this post, we take the best possible approach to answering these and many other questions regarding the process of churn.

In the first part, we cover benchmarks and the most common churn formulas.

In part two, we'll cover five churn-prevention strategies that have worked in other SaaS businesses.

Then, in the final part of this series, we'll conclude with a set of definitions to use in discussions about churn with your colleagues as well as some other sources.

If you'd prefer to use this table of contents to navigate between sections of this article.

Table of Contents

Part I: SaaS Churn Benchmarks

In the event that people from SaaS talk about churn, we don't always do an adequate job of making sure we're on the identical page.

If somebody claims to are churning at 5% rate, are they talking about monthly, quarterly, or an annual the churn rate?

Are they including customers who never made it through the trial?

Can you compare the rate of churn for a SaaS company targeting enterprise customers against one that is selling to the general public?

In setting churn benchmarks for SaaS companies, there's so many things to think about. In this article, we dissect it into smaller pieces so that you can run an extensive churn analysis of your own business and get a clearer picture of what you're up to.

What is the ideal Churn Ratio for SaaS?

It is often said that a 5% to 7% churn rate is perfect for SaaS firms. But is this purely anecdotal? Is it common for SaaS firms to achieve the requirements?

In other words 5 to 7% could be an ideal range, but what's the average?

To investigate, Ryan Law, former CMO and cofounder of Cobloom, performed an examination of the most recent six churn reports, or research studies. He found out that there is no consensus on the average rates of churn for SaaS businesses. The majority of the reports he studied showed an average annual churn rate of 10%. The three other reports revealed more and a wider spectrum of 32% to 61 percent annual churn.

What's the reason for such a broad range? Ryan believes that there isn't enough data out there to provide a better picture of SaaS turnover because it's not an area that most businesses want to make transparent.

He also observes some other elements that influence churn such as a company's size, and the industry it operates in.

The Churn of a product can vary based on the industry.

Industries can have very different values for churn.

"Look through your own technology stack and you'll see tools you think are important, while others are deemed 'nice-to-have,'" Ryan writes. "It's likely that a finance or sales tools are more resistant to being discarded as compared to a marketing tool due to the fact that it is believed as being more responsible in terms of revenue."

The author adds that niche applications that are less competitive will see less the rate of churn.

Corporate Size Influences Common Churn Rates

Ryan points out that many of the most reputable SaaS firms target enterprises which have longer contract durations, so their churn rate will be lower. The flipside is that SaaS firms that focus on individuals or small businesses with more customers and contract lengths that are shorter are likely to be more churn-prone.

When Ryan compares the common churn rates of large and small SaaS businesses the truth is that your churn rate is dependent upon how big your customer and your average contract value. The less your ACV greater the ease to make churn.

What's the Acceptable Level of Churn?

Hotjar creator David Darmanin understands that a churn rate doesn't mean much on its own. "Ultimately, churn and the quantity of churn matters as much as the magnitude of your market as well as how fast you're bringing on new customers," Darmanin said on an episode on the ChurnFM show.

If your market is small and churn is a major issue, it will matter greater. But if your target market is relatively large, using an approach to sales that is low friction and you are able to withstand an increase in churn and not have it significantly impact the business.

The realization caused David to break down churn into two categories: acceptable and worrying. A certain amount of churn is normal, perhaps even necessary -in particular if you're using a more B2C-style sales approach.

"Worrying Churn" is when you've identified an ideal customer, and they're coming to the party, but after which they cease using your product] or stop paying for it," David said.

That's why the churn rate can be a problem if you're losing a large portion of your best customers.

It could be a good thing to let go of users who don't meet your ideal customer profile (ICP). It's not the kind of users whom you'd prefer to spend your time asking for feedback or support from.

There's a second distinction which is important to David The question is how do the users perceive the product after they leave?

"Ultimately I believe that what has a much bigger impact in this type of flywheel you're making (in our case, at Hotjar) is that if individuals are leaving or stopping because of a negative feeling this can have an even greater impact than the fact that they stopped paying the company. Since word-of-mouth is actually much bigger source of revenue than any money we're collecting or churning or dropping."

This is where gathering feedback from customers that have already churned can be helpful (a topic we'll dive into farther below).

What is the best Churn Rate Formula?

For determining churn rate The simplest churn rate calculation is the amount of churns that occur during a specific period divided by the number of clients who have churned at the start of a period.

Churns per time
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Number of customers at the time of the first day of the period

In this case, for instance, if you're calculating monthly churn, and you start with 1,000 clients and then only lose 27 of them your churn ratio for the month will be 2.7 percent.

But this formula misses out on a lot of crucial details.

For instance, it doesn't take into account the number of new users you gained during that period and how many of they were churned out, as compared to the amount of customers who churned.

Also, it's not considered to be weighted by expansion. If you lose the same amount of users each month, yet you manage to attract more customers than you lose, the churn rate is likely to decrease however there has been no change in customer behavior.

If you employ this straightforward formula to calculate monthly churn, you might not even realize that the rate at which you churn differ based on the number of days in the month!

This is why the standard churn rate formula does not give you an accurate account of how theyou're expanding or losing. It's too easy.

When deciding how you're going to calculate churn, Outlier AI offers two suggestions:

  1. The formula for churn you select is one that aligns with your top business priorities. Choose the elements that are essential for you to keep track of and refine the formula accordingly.
  2. Make sure that the formula isn't complicated. "The more complicated it gets and more complicated, the higher the chance that you'll make a mistake when calculating it, and you'll have an inaccurate measurement."

Business analysts have created their own churn-based formulas. Steven Noble's post regarding the way Shopify evaluates churn is worth reading. Also, the Baremetrics post examines churn for different types of customers, such as users downgrading or annual plan users leaving.

One more thing: When people talk about churn, they're typically referring to the number of customers lost. But there are other types of churn that you can track, such as revenue and transactional the churn. Check out Outlier AI's article to learn more about these.

Monthly vs. annual Churn: What One Should You Monitor?

There's a huge distinction between annual and monthly the churn. If you lose 7% of your customers to turn over in a calendar year it's a distinct number from losing 7% of your clients every month.

It's not necessarily a bad idea to measure both of them your churn rates for the month, it is important to note that your monthly rate should be much, much less than your annual churn.

What exactly is negative churn?

When attempting to get the whole picture on the churn rate, don't only consider the number of customers are you losing. The full picture includes the behaviours of your existing customers, as well.

This is where the negative churn comes into play.

People have asked me if negative churn really is a myth. Actually, it's not. However, it could be different than the way you imagine it to be.

Negative churn occurs when the profits from upsells and cross-sells exceeds the revenue lost from the customers who have been churned over a certain duration of.

When you've reached the point where you can lose customers without any new customers and increase your revenue (at least for a while).

According to the VC Tomasz Tunguz the pursuit of negative churn must be a goal.

"Combined together with prepay annual agreements negative churn has the potential to be an extremely effective growth tool," Tomasz writes. "When you are pondering the pricing strategy and strategies for achieving customer success It's worthwhile to incorporate negative churn into your business."

Future Level Churn Rate Analysis: Who and Why

At a high-level, a churn analysis is simply analyzing the rate at which you are losing customers.

Don't end there. The churn rate you see only tells you the what you know, and not the reason as well as who who. If you want to really comprehend and do something about churn, you'll need to know the reasonspeople are leaving and the users you're losing.

SaaS growth specialist Fred Linfjard suggests a combination of quantitative and qualitative data analysis to determine who's turning and for what reason, as well as what actions to take.

Quantitative Data Gathering: Website and Product Data

Questions to test and then answer

  • Which of the user groups is more likely to be churning?
  • Do they have patterns in the use of their products?
  • What support documentation did they review prior to turning?

The Qualitative Data Gathering Method: Surveys and Exit Interviews

There are many questions to be tried and answered:

  • The reason they left?
  • What is the reason they should reconsider?

Hope this provides you with the comprehension of how churn impacting your business. Next, let's look at how to develop a churn-reduction action plan.

Part 2: Five Tested Strategies to Reduce SaaS Churn

The ideal churn-prevention strategy should be guided by the quantitative and qualitative studies you've done -- because once you understand who's churning and the reasons, it's easy to determine what strategies are going to have the biggest influence. But it's always helpful to know the strategies of other businesses which has been successful.

1. Update Your Dunning Management System

It's common to find 20 to 40% of customer churn to be uninvoluntary, caused by expired credit cards, technological issues approving transactions, etc. Fred Linfjard discusses why making sure that you've got a sophisticated dunning system is the top priority in fighting the churn.

2. Show Value as Quickly as you can

To prevent churn, it starts at the beginning of the customer's journey and an especially critical time is when the customer's onboarding process begins.

You're undoubtedly aware of how crucial it is to ease the process for SaaS users to start. If there's too much friction from the get-go, they're not going to continue using the service.

However, there's more and increasing discussion about the significance of offering "quick results." According to Lincoln Murphy explains, " Customers who realize their value in a short time are the ones that stick around the longest."

There are a variety of methods to organize quick wins inside the product itself. However, you can accomplish more easily by sending email.

When Christoph Engelhardt worked for Moz, he was able to decrease its monthly churn rate of new users by 40% through sending an email that showed the value Moz was providing to its customers within the first thirt y days. The process that which he employed in an extensive blog post.

3. Look for Red Flag Metrics

Search the product behavior of customers who have been churned to find patterns. This behavior could be indicators that the customer could be in danger of churning.

Groove, which is a shared email inbox specifically for companies, reduced churn by 71% using this analysis of data. Groove's team compared the product usage between new users that were churning before 30 days as well as those who stayed. They found that the users who had churned were less productive in their initial sessions, and had fewer frequent logins than those who were on for the initial 30 days.

4. Customize Your Cancellation Offers

A common churn reduction strategy is to send an automatic incentive to customers who choose to cancel their subscription, be it a coupon, the ability to pause the subscription, or some other.

Wavve, a popular social media platform for podcasters could reengage the more than 30 percent of those who hit the cancel button, by incorporating an incentive at the conclusion of a quick cancellation survey.

This method worked due to the fact that attaching the offer the cancellation survey allowed Wavve's team to personalize the offers based on reasons a user was canceling.

5. Automate What Works, Including the ability to collect feedback

Once you've reduced churn, how can you maintain it at a consistently low rate?

The feedback you collect is always through an automated process.

The cancellation survey lets you to keep collecting valuable information to keep track of what is making customers churn. "You can streamline or automate your qualitative feedback collection and for this instance, find out why they leave you. In general you would want to send an exit survey be sent out to a person who decides to cancel, by email or even on"Yes" to cancel. If you could automate the collection, that's going to continually provide feedback to you and you won't need to consider doing it," Fred explained in our interview.

If your products and clients evolve, so do the reason they decide to churn. Continuously evaluating feedback is an important part of making sure you have a low churn.

In addition, by automating the process of collecting feedback, it frees up your time to work on other projects.

Part III Part III: Churn Definitions and Other Resources

What is Churn?

The term "customer churn," also referred to as attrition of customers, refers to the loss of clients to a product or service. It's the opposite of customer retention.

What's the Average SaaS Churn Ratio?

There's no standardized churn rate for SaaS. According to multiple research studies it is estimated that the churn rate could vary between 10 percent to 60 percent based upon the scale of the company and its market.

Churn and Retention KPIs to Track

Apart from the annual or monthly churn rates, additional SaaS indicators that provide a more complete picture of customer churn and retention metrics include:

  • Dollar-based net retention rate (NDR)
  • Customer lifetime value (CLV)
  • Monthly Recurring income churn (MRR churn) and annually recurring revenue churn (ARR churn)

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