How to Improve Your SaaS Churn Rate with Segmentation

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We all know churn is an inevitable part of running a SaaS business. You can never eliminate it entirely, but of course, there are steps and strategies you can implement to reduce it.

But not all churn is equal.

Different customers have different experiences with your product along with varying needs and expectations, so naturally, they’ll churn for different reasons. Accordingly, you can’t lump all your churned customers together and assume they all have the same broad reasons for leaving. Nor can you assume they'll all create the same loss impact on your business.

If you really want to start fixing the various issues contributing to your churn rate, you’re going to need to start digging a little deeper.

Segmenting your customer churn based on shared characteristics can be a great way to start looking at your churn from new angles.

There are loads of different ways to segment your customers, and different segmentation methods can give different insights into the reasons for your churn, the impacts of that churn, and the overall health of your business.

Here are a few methods to get you started.

1. Segment by User Behavior to Identify Customers at Risk of Churning.

Before a customer churns, there may be telltale signs they’re on the verge of leaving from the way they interact with your product—or don’t.

Segmenting based on user behavior can help you spot these signs and then engage customers before they actually leave.

In one exercise to reduce churn, sales engagement platform Groove grouped its customers into two cohorts.

  1. Those that churned before 30 days
  2. Those that were retained beyond 30 days

Analyzing the behavior of both customer cohorts, Groove found customers in the second cohort logged into the platform an average of 4.4 times per day, while those in the first cohort logged in only 0.3 times per day.

Customers in the first cohort also spent much less time during their first session on the platform—only 35 seconds on average compared to customers in the second cohort, which spent at least 3 minutes.

With these findings, Groove began emailing new customers that were logging into the platform less frequently or that had short first-session durations. The business used these emails to offer help with completing the onboarding process and with using the platform in general.

The result?

Groove managed to reduce its churn rate from 4.5% to 1.6%.

2. Segment by Activation Cohort to Learn How a Customers Acquisition Impacts Churn

Segmenting your churned SaaS customers by activation cohort is useful for spotting churn trends among customers that signed up with you via certain methods or during a certain time of the year.

In a LinkedIn post, management consultant Robbie Kellman Baxter shared about an organization that realized many of its customers would churn seven months into their subscriptions. This trend was present regardless of how the customers were acquired or what time of the year they signed on.

Digging deeper, the organization discovered the seven-month mark was the time when their customers, namely startup entrepreneurs, “felt like they had either gotten the business off its feet or failed—and didn't see value with the membership for going concern,” according to Baxter.

To reduce its churn, the organization expanded its customer base to include more established businesses—those that had already found their footing and were therefore less likely to churn as a result of having an unworkable business model.

3. Segment by Deal Size to Analyze Churn Rates Across Different Customer Profiles

Your SaaS business likely offers different subscription plans that cater to the various needs of your customer base. Segmenting your customer churn by deal size can help you determine how your different customer profiles contribute to your overall churn rate.

Patrick Campbell, CEO of business intelligence platform ProfitWell, provided the hypothetical situation of a SaaS business having both a consumer plan and an enterprise plan.

Customers on the enterprise plan will have different profiles from the customers on the consumer plan. This may result in both plans having “wildly different” churn rates, he shared, “perhaps with a difference as great as 15% churn monthly vs. 0%.”

Founder of SaaS community SaaStr, Jason Lemkin, shared a similar sentiment.

“Churn should be naturally higher in smaller business segments than larger ones,” says Lemkin. “If you don’t segment it—no one will see that. Also, if you don’t segment churn, it will likely look higher with bigger customers than it really is.”

When you segment your churn by deal size, you may realize your churn is largely coming from customers on lower-value plans instead of the higher-value ones. Then you can dig into where and how to focus your retention efforts, because of course, keeping your smaller customers happy will look different than it will for the bigger ones.

4. Segment by Point in The Customer Journey to See Where Friction Leads to Churn.

Customers that face difficulty using your product may just decide to abandon it altogether. Segmenting by point in the customer journey is useful for analyzing whether certain stages of that journey are providing a poor user experience to the extent of causing churn.

When mindfulness app Calm wanted to boost its user retention rates, it first segmented its churn according to the five steps of its onboarding sequence.

  1. Intro screen: Landed
  2. Intro screen: Proceeded
  3. Breath Exercise
  4. Meditation Began
  5. Meditation Completed

Each step of Calm’s onboarding process inevitably saw some users churn out. However, the Breath Exercise step experienced significantly more churn compared to the others.

Calm therefore began working on decreasing churn from the Breath Exercise step in particular. What happened next? Keep reading…

5. Segment Using a Combination of Methods for Greater Precision in Establishing the Root Causes of Churn.

Once you’ve become comfortable with segmenting your SaaS business’s customer churn using a primary segmentation method—be it by user behavior, activation cohort, deal size, point in the customer journey, or something else—you can add a secondary segmentation method to drill down to the root causes of your churn.

Let’s get further into the example of Calm from above.

After establishing churn rates were highest for the Breath Exercise step of its onboarding sequence, it then evaluated this churn according to the top five countries users were based in.

It discovered churn during the Breath Exercise step was highest for users from India, China, and Brazil.

The Calm app is primarily available in English—which isn’t the first language of users in these countries. This suggested these users might have been churning due to a language barrier.

The data proved to be invaluable, and the business began rolling out measures to decrease its churn rate from users in the aforementioned countries.

In the process, it also discovered that prompting users to set reminders for their daily meditation sessions proved to be effective in increasing retention—to the tune of a tripled retention rate.

Reduce Your SaaS Churn Rate with Smart Segmentation Strategies

If you’re facing high levels of SaaS churn—or even just a level of churn you’d like to reduce—don’t panic.

“First you have to realize that churn is just a symptom of an underlying disease, and second you have to cure that underlying disease so the symptom of churn goes away,” says Lincoln Murphy, growth consultant with Sixteen Ventures.

“[...] too many companies simply treat the symptom and not the root cause, which results in symptoms either continuing or, usually, getting worse.”

Establishing the root causes of your churn starts with segmenting your churn data to figure out precisely where the churn is coming from.

Using a modern subscription billing management platform for example, you can easily segment your customer churn data to identify:

  • which customers churned over any specific period,
  • when a particular churned customer signed up with your business,
  • when they canceled, and
  • how much revenue your business lost due to the cancellation.

After segmenting your customer churn, you can then analyze the findings to determine possible reasons for the churn, before rolling out the appropriate countermeasures.

Reducing your customer churn rate won’t happen overnight. But by segmenting your SaaS churn data to pinpoint its root causes, and with the right tools, you’ll be well on your way to raising your retention rates—and revenue—over time.

Tags: SaaS SaaS Strategy Churn

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