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5 Reasons for Churn and 5 Ways to Reduce It – SaaS Edition

In simple terms, churn is the enemy of any SaaS business.  When you’re starting to acquire your first customers, churn isn’t a big deal. However, as soon as you start getting customers to churn, it becomes crucial. Any by crucial, I mean it can be what separates your business from becoming a success or failure.  […]

Written By Sarah Mooney

On May 1, 2020

Dedicated wellness expertise each step of the way.

In simple terms, churn is the enemy of any SaaS business

When you’re starting to acquire your first customers, churn isn’t a big deal. However, as soon as you start getting customers to churn, it becomes crucial. Any by crucial, I mean it can be what separates your business from becoming a success or failure. 

High churn rates impact your business growth, your company valuation, and the satisfaction of your customers. Just how exponential growth is great for your company, high churn rates are exponentially bad. 

It’s important to keep track of retention metrics

If you’re a high-speed growth company, churn can be extremely annoying because it means you’ll have to spend your marketing budget to replace lost customers. Instead of increasing your customer base. Here are the basics:

For revenue:

  • New MRR: Revenue from new customers acquired
  • Expansion MRR: Expansion revenue from existing customers due to up-selling
  • Reactivation MRR: Lost customers that reactivated 
  • Contraction MRR: Lost revenue due to customers downgrading

For customers:

  • Churned customer: Number of lost customers
  • New customer: Number of new customers acquired
  • Reactivated customers: Lost customers that reactivated 

The chart pasted above represents customer churn for a year. You can even break down your churn report to analyze metrics deeper. You can look into a cohort analysis, and even churn reasons. It’s important to consider seasonality and most importantly, why they cancelled their services. 

These metrics are great to start with. However, as your company scales it’s crucial that you start diving deeper into these comprehensive metrics. That way you can gather clear insights on your company’s scalability and performance. 

Here are 5 Popular reasons that lead customers to churn

You can’t attempt to reduce churn until you have an understanding of what is causing your customers to churn. Every SaaS business struggles with churn – don’t ever think you’re the only one. 

  1. The customer isn’t the right fit

Quite simple, yet hard to realize. As a business owner, you want to believe that your product works for every type of customer. However, if you consider the use case thoroughly, you’ll notice they weren’t the right fit and you shouldn’t be thrown-off by their cancellation.

This customer will churn simply because they couldn’t reach the core value from your product or service. They could have used your product for a while, but once they realize they’re not getting any benefit out of it, they’ll cancel their services.

  1. Customer decides to move their services to a competitor

This one probably hurts the most. Your competitor is somehow better than you and your customer decided to move their services there. That’s it. It could be due to pricing, lack of features, or even a bad experience with your customer success team. If you’re working in a competitive space, this will happen – sorry, bud! But, don’t fret. Here are some things to take into consideration:

How difficult is it for a customer to move to a competitor?

Will it be difficult for your customers to cancel?  How much effort will they have to put into cancelling? How much effort will they have to put into migrating/ moving data from your platform to a competitor? Have you ever noticed those ‘import CSV’ buttons? It’s common practice for a competitor to have this feature ready – that way the customer can easily kick off. Don’t start removing your ‘export CSV’ feature, this might turn away future customers. The export feature isn’t always used for migrating to a competitor, however, it does facilitate the move. 

A better product doesn’t mean a better business

Building an amazing product is only half the battle. You could have a better product, better price, better customer support – but if your competitors market their product better, you may end up losing customers. How many ugly/ bad products have you seen thriving out there? Marketing something you don’t have is a bad strategy – it’s false advertising. But, if a competitor does that they can give you a hard time. 

TLDR: Don’t just build a great product. Market it! Make sure people know about it. 

  1. A customer might think you don’t care about them

This could seem unlikely, however, it’s widely known as one of the main reasons for churn in many industries. If you’re not engaging with your customers, and showing you care about them, they’ll simply leave you high and dry. You might think your product is great, and that it’s delivering value on it’s own – but that’s all about perception. 

If a customer believes that they’re just another one in the middle of hundreds or thousands of customers, there’s a massive chance they’re going to ditch you. Commonly, this is likely due to poor customer service.

  1. They get bigger, acquired, or go bankrupt

Your customer could be growing exponentially, and not require your services after 2 years. There are 2 options here: 1. Adapt your product for large business needs 2. Have your customer move to a competitor. Think of it this way – a business can’t use Quickbooks forever, there comes a time when a business needs to graduate from Quickbooks and move to Oracle. It’s inevitable.

If you’re a B2B (business-to-business) company, and especially if you’re targeting startups, bankruptcy or dead business can happen. Customers may cancel their services with you because their business has failed, and there’s no need for your product anymore. It’s unfortunate, but it’s something you need to be aware of if that’s your target customer.

Something less common, but still a possibility is that your customer was acquired. Your customer could have been using Microsoft Azure, and then gets acquired by a larger company using Amazon Web Services. They may consider moving their services to AWS

  1. Unintentional

The aforementioned are considered voluntary churn. Meaning your customer was actively looking to cancel their services. Unintentional cancellations happen when a customer isn’t trying to leave, but they still do. This happens due to billing problems, including: credit cards going over their limits or expiring. 

Unintentional churn is actually extremely common, and one of the more preventive issues. Many times, your customers aren’t aware their card has expired, or is about to. You have the ability to automate some notifications, that way they can update their billing information.

Here are some effective ways you can reduce SaaS churn

You most likely know why your customers are churning. But, if you don’t, here’s a start. 

These five ways are almost related to the five most common churn reasons. It’s not a coincidence. There’s no guarantee that a customer won’t churn, however, it’s important that you do your best to reduce the churn as much as possible. 

  1. Target the right customers

Rejecting a customer sounds insane. But, believe me, it’s not that crazy. Here’s why: You spent money to acquire that customer (now, if your marketing team is doing some poor targeting, that’s on them), and you don’t want to spend money on a customer that will churn quickly. In fact, if that happens you’re going to lose money. In order to have a successful SaaS business your  LTV (Customer Lifetime Value) needs to be at least 3x your CAC (Customer Acquisition Cost)

Customer Acquisition Cost (A massively important KPI for any business)

Let’s dive into some math. Let’s say you spent $100 to acquire a customer. Now let’s say your Average Customer Lifetime is 12 months, and your Average Revenue per customer is $50/ mo with a 50% Gross Margin. This would leave you with $25 of Net Profit per customer. Given that, you’ll need 4 months to recover the $100 you invested into acquiring that customer. If the customer churns before 4 months, you lost money. I know, your mind was just blown.

If targeting the right customer is difficult, you can look into encouraging a yearly contact. People are usually encouraged to sign up for yearly contracts if they involve a discount. 

Now, I don’t want to scare you some more. But, we’re not even considering how much of a distraction these customers will be. They’ll eventually start opening support tickets, requesting features, and much more.  

Make sure your sales funnel is optimized

You’re going to want to start by qualifying your leads better near the top of the sales funnel. You can do this by adding qualifying questions to the form in your landing page, such as the size of the company, industry, current solutions, etc. 

You’re going to want to really engage with leads that fall within your sweet spot.

Trials 

It’s common to use a free trial as a hook while you’re marketing your product. And, it’s definitely a great opportunity to qualify your leads. Usually, trials are around 14 days – which is pretty short. However, it gives the lead the opportunity to see if your product can be of value to them. Here you’re allowing the customer to figure out it’s sales qualification. 

  1. Onboarding needs to be done right

Onboarding needs to be done properly, in order to be effective. It generally begins at the time of a signup/ purchase and may continue for up to three months, depending on the complexity of your product. 

Customer onboarding is about fusing loyalty early and leveraging that critical honeymoon phase within the relationship. The first impression is critical, and the first in-app experience your customer has with your product is that first impression. The first impression sets a tone for your relationship. The seeds of churn are planted early, and they start planting during onboarding. If they had a crappy first impression, they’re left with a sour taste in their mouth. 

  1. What are your customers doing?

“Actions speak louder than pageviews.” This is Mixpanel’s headline, one of the leading analytics platforms for web and mobile. Being able to see what customers are doing within your product is massive! You must know it. You need to crave this data. If you don’t know how your customers are interacting with your product, there’s no chance you’re going to retain them.

Here are some questions you need to know answers to:

  • How are your funnels doing?
    E.g. Do people go to the check-out page but never complete a purchase?
  • Did customers make important actions?
    E.g. How many support tickets did a customer submit? Are they interacting with the features? ARE THEY EVEN USING THE PRODUCT?!?!?
  • Who is coming back and using your product day after day?
    E.g. How many people are actually using your product? How often are they using it? 

Triggers are so epic

Once you’re monitoring how your customers are interacting with your product, it’s time to be smart about it. Just like you do with your onboarding process, triggered messages are epic. Keep in mind that sending a message the right way is important and those include; emails, SMS, and push notifications. 

There’s Groove, a support tool for small businesses. They offer something called  “Red Flags” metrics. Red flags are indications that a customer is about to churn. The issue is that once a customer cancels you’re going to have a hard time winning them back. If you can spot a churning customer, before they churn, you have a strong position to coax them to stay.

Customers don’t usually disappear. They tend to stop using/ engaging with your product over time, and you’re able to see that via analytics. Mixpanel’s retention report will show you exactly that. 

Trigger-based, means that a message was sent because a customer took a certain action. Ex. Someone signed up, but never fully completed their profile. That’s someone who needs to be engaged with to prompt completion of their profile. 

  1. Make it sticky

David Skok, VC at Matrix Partners and one of the greatest SaaS thinkers, states that there are two main ways to increase product stickiness: become an integral part of their workflow or become the central repository for key data.

Take into account how people use your product. How can you ingrain yourself in their business? How can you ingrain yourself so much that competitors with cheaper pricing, and extra features won’t be worth the move? Determine which of your features are stickiest, and find out which customers aren’t using them. Those customers are at the highest risk of churning. 

Alternatively, consider the data your product is holding. Is it critical data? Can it be easily transferred to a competitor? 

  1. Offer a yearly contract instead of month-to-month

Some companies believe in this so much that they only bill customers annually. HubSpot is a good example of a company doing that. HubSpots contracts are billed annually by default. 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 find an optimal level. It’s also possible to encourage sales to sell these longer contracts without forcing it.However, be mindful. Steli Efti from Close.io says that if your SaaS company is below $1MM ARR then you shouldn’t focus on annual contracts. Instead, keep your customers on monthly plans. Why? Because you need to understand your churn first, and see how long people will stick around. If you’re above $1MM ARR it’s probably a good opportunity to offer annual plans.

Dedicated wellness expertise each step of the way.