Sad though it might be, a little bit of customer churn is inevitable for SaaS businesses. Things happen: A customer’s needs might change, or perhaps they were never quite the right fit for your product to begin with.
A healthy SaaS churn rate hovers at around 3-8% monthly churn and 32-50% annually. Of course, SaaS companies with a high customer acquisition cost or a low number of customers may need to establish a strategy to bring their numbers well below the average churn rates.
So, clearly, the actual ideal number varies from business to business. What is universally true, however, is that customer retention helps drive high monthly recurring revenue.
By paying attention to the right factors, you can avoid preventable loss and keep your churn rates low.
1. You’re signing too many bad-fit customers that contribute to your SaaS churn rate
New customer acquisition is often thought of as one of the most important SaaS metrics. While no one would deny the positive benefits of new customers who are a good fit for your product, bad fits can easily result in lost revenue.
It’s a classic “It’s not you, it’s me,” scenario.
A SaaS company business model that focuses on acquisition over everything else experiences higher churn because it brings in more customers that never really stood to benefit from the product, to begin with.
It can be an honest mistake. Early-stage businesses may not know what sort of customers do best with their product. They learn to better target their marketing efforts only after a series of unprofitable subscribers teaches them to do so.
Other times, company age has nothing to do with it. The “churn and burn” strategy is when sales targets as many customers as possible, with no discretion.
Regardless, the number of customers you have on your roster is ultimately much less impactful than customer satisfaction.
Bad fit acquisitions:
- Contribute to a high SaaS churn rate. This means unstable revenue and unpredictable growth.
- Actively lose money. An average B2B SaaS business has an acquisition cost of $205. If a customer leaves before bringing that much in revenue, they are actively losing your business money.
- Squander resources. A subscription service may spend $15,000 a year or more on marketing. It may also spend tens of thousands of dollars maintaining a customer success team. When these resources are applied to bad-fit customers, they are not nearly as impactful as they could be.
Loyal customers are key when it comes to avoiding revenue churn. Instead of casting as wide a net as possible, businesses can reduce churn by focusing on appealing to the right people, and improving customer retention strategies.
It’s also worth noting that sales teams wanting to boost their numbers may find more luck appealing to existing customers. Up to 95% of revenue comes from upsells and renewals. By focusing on these, customers are happier, and your average churn rate goes down.
2. Customers don’t see value in time to prevent revenue churn
Sometimes a good-fit customer can add to your churn numbers if they don’t realize enough value from your product. There are many reasons customers might sign on at the beginning of the month, only to make their exit during the same period of billing: The software wasn’t right for them. They found a better deal somewhere else. Their financial status changed.
The issue might be with the product itself. If the features are unintuitive, your customer base may have a hard time getting acquainted with them in the beginning. Similarly, you may look towards your customer success team to explain a bad monthly retention rate.
Certainly, these are all factors to consider when higher churn rates begin to show up. The issue could also be your contract lengths.
An annual contract:
- Secures future revenue. A little obvious perhaps, but also very important. Annual contracts produce predictable revenue. Businesses wishing to plan for the future can reasonably assume most customers with annual contracts will at least stick around for the length of their agreement.
- Churn less often: Month-to-month contracts experience a staggeringly high average churn rate of almost 17%. Longer contracts, on the other hand, come in at only half that much.
Lengthier contracts allow SaaS customers to acquaint themselves with your product. This means customer success has more time to work its magic, and the customers have more time to get their early wins with your product.
Unfortunately, most SaaS companies don’t hit that sweet spot. Only 11% of SaaS contracts are for one year or longer. For businesses wishing to reduce churn and increase revenue, however, it’s a valuable metric to consider.
3. Accidental customer churn is hurting your retention rate
Customer churn rates don’t necessarily have anything to do with your product. Payment failure can also be a culprit. Customers who can’t pay are typically put through the dunning management process. Depending on the tools available to your SaaS business, however, this process might not be doing you any favors.
Manual dunning is often frustrating and fruitless. Busy employees try to make contact. If they don’t succeed, involuntary churn often follows—after all, your billing team only has so many hours available in the day to chase customers. Churn numbers grow, customers are forever cast away, and revenue takes a hit.
It makes sense to cut ties with customers who don’t pay, even when it comes at the cost of your retention rate. However, it’s important to keep in mind that payment failure happens for many reasons.
Credit cards expire. Customers don’t have enough in their account the first time they are billed. Cards get canceled or changed. These issues may not be the culprit for churned enterprise companies, but for smaller business customers or consumers, they are common, innocent mistakes that don’t have to cost you revenue.
A good billing platform can help reduce your monthly churn rate with a sophisticated dunning management system, all while simplifying your monthly billing process. Automated customer communications, automatic credit card retries, and in-depth AR aging reports all serve to lower customer churn rates while preserving revenue.
4. Monthly recurring revenue is hurt by a reactive CS strategy
Unfortunately, some businesses don’t really begin to examine the issue of customer success until they start to experience higher churn rates. While the phrase “better late than never” might still apply, it’s better to be proactive.
You know the saying, “you can lead a horse to water, but you can’t make it drink”? It’s true in some cases, but it also ignores the fact that horses like water. They get thirsty. Similarly, your customers are thirsty for their first win. Guide them to it and they will drink eagerly from the waters of customer success.
Businesses can lower churn and increase revenue by amplifying the emphasis on CS right from the beginning of a contract. The number of customers with software they have but don’t use is staggering. A recent study showed that workers have hundreds of dollars of neglected software.
If your product falls into this category, you’re destined to experience higher annual churn rates eventually.
Your CS team can help you avoid unnecessary MRR churn by helping new customers get started with your product right away. Faster customer success means higher revenue and lower churn.
Calculating your churn
It’s relatively easy to calculate churn. The churn rate formula is the number of customers you lost over a certain period, divided by the number of customers you had at the start of it. For example, if you lost fifty customers in November but started with 500, you come up with 10%. This number would be your monthly churn rate.
For a more granular understanding of your median annual churn rate, it’s a good idea to factor in other things such as upsells and account upgrades or downgrades—AKA expansion and contraction MRR. These factors can provide businesses with a much more accurate look at their financial health.
As you make your calculations, keep in mind that not all churn is equal. Two whale-sized accounts can easily have the MRR value of several dozen smaller ones. Similarly, losing a customer who is apt to take on upgrades is more impactful than losing one who is not.
Software that generates granular customer reporting can give you a much better idea of what sort of churn you’re actually experiencing.
The right tools help identify churn benchmarks and reduce your annual churn rate
A good tech suite can go a long way towards lowering your annual churn rate. Automated billing platforms improve customer experience, automate dunning processes, and enhance efficiency so more attention can be given to important business strategies.
It can also produce reports that measure customers based on spending and other useful analytics. Not only that, but it provides insights into churn benchmarks such as the point in the subscription lifecycle where most customers leave.
Reducing your annual churn rate is a vital component of success. Almost all SaaS companies that grow by less than 20% each year fail. A high annual churn rate makes it impossible to succeed at the level SaaS companies need to survive and thrive.
Quick FAQs about Churn Rate
Q: What is the ideal churn rate for SaaS businesses?
The ideal churn rate varies for different SaaS businesses. However, a healthy SaaS churn rate is generally considered to be around 3-8% monthly and 32-50% annually.
Q: How does customer acquisition affect SaaS churn rate?
While new customer acquisition is beneficial, bad-fit customers can result in lost revenue and contribute to a higher churn rate. Therefore, a SaaS business model that focuses solely on acquisition could experience higher churn rates.
Q: Why do bad-fit customers contribute to a high SaaS churn rate?
Bad-fit customers contribute to a high SaaS churn rate as they can cause unstable revenue and unpredictable growth. Moreover, if they leave before generating enough revenue to cover their acquisition cost, they can actively lose money for your business.
Q: How can focusing on customer retention help reduce churn in SaaS?
Focusing on customer retention can help reduce churn by ensuring that your product is appealing to the right people. Moreover, sales teams can generate up to 95% of revenue from upsells and renewals, which can increase customer satisfaction and decrease the churn rate.
Q: How can the length of contracts affect SaaS churn rates?
Longer contracts, such as annual contracts, tend to have lower churn rates because they provide more time for customers to familiarize themselves with the product and for customer success teams to engage with customers.
Q: What role does payment failure play in customer churn rates?
Payment failure can significantly contribute to customer churn rates. Manual dunning processes can often be frustrating and fruitless, leading to involuntary churn. A sophisticated dunning management system can help reduce churn caused by payment failure.
Q: Why is emphasizing customer success important in reducing churn?
Emphasizing customer success from the beginning of a contract can help reduce churn. Getting new customers started with your product right away can lead to faster customer success, which results in higher revenue and lower churn.
Q: How can different software help reduce churn in SaaS businesses?
Software that generates granular customer reporting can provide valuable insights into what type of churn a business is experiencing. Automated billing platforms can improve customer experience, automate dunning processes, enhance efficiency, and provide insights into churn benchmarks.
Q: Why is reducing annual churn rate important for SaaS businesses?
Reducing annual churn rate is crucial for SaaS businesses as high annual churn rates can make it impossible to achieve the growth needed for survival and success. Almost all SaaS companies that grow by less than 20% each year fail.
Q: Is calculating churn rate crucial for SaaS businesses?
Yes, calculating churn rate is crucial as it provides a more granular understanding of your median annual churn rate. Factoring in upsells, account upgrades, or downgrades can give a much more accurate look at the financial health of SaaS businesses.
