Reducing SaaS churn rate: The what, why, and how?
According to a study on SaaS growth and churn, churn rate costs companies worldwide a collective $1.6 trillion every year. If an SaaS business can keep its customers happy, their chances of building a thriving business are much higher. This is where customer churn rate comes into play – it’s a critical metric in determining the overall business success.
The SaaS (Software-as-a-Service) market has had a truly transformative impact on the business world. By offering various digital solutions in exchange for a subscription fee, this technological innovation has enabled companies to acquire flexibility, productivity, and affordability benefits that would not have been possible through a traditional approach of software delivery.
One of the biggest challenges SaaS businesses face is customer churn – a process of losing customers, usually through discontinuation of subscription services. What those companies often don’t realize is that it takes from 5 to 25 times more resources to acquire new customers than to retain existing ones (source). Therefore, if an SaaS business can keep its customers happy, their chances of building a thriving business are much higher. This is where customer churn rate comes into play – it’s a critical metric in determining the overall business success.
WHAT IS SAAS CUSTOMER CHURN?
“SaaS Customer churn” occurs when customers of SaaS companies decide to stop engaging with the business and unsubscribe from their software services, causing the churn rate to increase. The types of customer churn can include things like:
The following questions can help you understand if you are currently experiencing a growing churn rate – if you answered “yes” to at least one of them, keep on reading to learn about ways to reduce the churn rate:
WHY IS CHURN CRITICAL IN SAAS?
SaaS businesses across the globe are constantly adding and losing customers at the same time, and as the company grows, customer churn is inevitable. However, any significant imbalance between newly acquired and leaving customers can damage your business.
When churn is not being addressed, it:
Since it is so important to understand that the churn rate has a significant impact on SaaS businesses, here are some additional critical points to keep in mind when it comes to customer churn (source):
WHAT IS A NORMAL CHURN RATE?
As it was already stated before, some customer churn is completely normal. But at what churn rate a business should be worried? In general, a churn rate of 5-7% per year is considered pretty low, whilst any rate above 20% is high. An acceptable customer churn rate depends on various factors, including the value brought in by the retained customers, versus customers lost, new acquisitions over the same period, and your customers’ lifetime. Obviously, the lower your churn rate is, the better.
It is important to look at the churn rate together with the other factors as already mentioned. A 10% annual churn rate could seem high, but if your company is growing rapidly by adding more customers, and the retained ones are paying more and more for the services, then the 10% churn rate doesn’t seem so surprising and is only natural at this stage. You may also measure the churn rate on a monthly basis, but keep in mind the customer losses over the whole year, as the monthly rate number might seem small at the first glance.
Your churn rate will also vary depending on:
Do set a goal, however, to achieve a single-digit annual churn rate.
SIGNS THAT YOU HAVE A CHURN PROBLEM
Since there’s no universal number for a normal churn, what are some big warning signs to look out for? Thankfully, there are some red flags that you should watch out for, so here are some tips that you may have a churn problem:
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KEY CAUSES OF CUSTOMER CHURN AND GENERAL TIPS ON REDUCING THE CHURN RATE
Now that we know how dangerous churn can be for any SaaS business, and how to identify that there’s a problem, let’s examine what causes churn. Look at it this way – an SaaS user decides to buy a product because they think it will help them achieve a goal. However, if the tool doesn’t meet expectations, they will abandon the boat, and as always, the devil is in the details.
1. Poor onboarding – the #1 reason for customer churn
Onboarding is essential. According to a study from Harvard Business Review, successful onboarding procedures can significantly improve revenues, client renewals, and client referrals. Therefore the company has to make sure that their onboarding process is seamless, minimizing the amount of questions the customer might have about the software and its use.
2. Weak customer relationships
Engaging with your customers and maintaining healthy relationships with them should be an ongoing process. The key is to make them feel appreciated and sought after. Therefore, you need to follow a proactive approach and connect with your customers in every possible way through multiple channels.
3. Poor customer service
Excellent customer service should be a vital component of any company’s strategy to build long-term customer loyalty. Unfortunately, many companies perceive customer service as an unnecessary expense rather than an investment in retention rates. Almost 9 in 10 customers leave a business due to poor customer service. In contrast, 86% of customers are willing to pay more just for a better customer experience.
4. A challenging user experience
User experience starts with the onboarding process, and is followed by customer support. These two points were already covered and they have a direct impact on the churn rate, However, the usability of the software/platform offered, and its first-user friendliness is equally as important, since if the customer is unable to understand how to use the service, they will cancel it.
5. Consider your customer’s complaints
If a customer is reaching out with regards to a certain issue, there is a good chance that other customers have experienced a similar problem, but didn’t say anything about it. For every customer who complains, 26 other customers remain silent. Agents need to empathize with customers and take immediate steps to rectify the problem. Once the problem is considered resolved, follow-up is key to making sure the customer remains satisfied.
Conclusion
Historically confined to the entertainment and telecommunications industries, subscriptions are now highly popular with consumers looking for new ways to consume digital products. This is particularly true for video games and PC software industries and mobile applications that are more flexible and better adapted to their needs. As a result, the move to subscription represents a tremendous opportunity for growth. Still, it also constitutes a challenge for digital publishers and retailers because it requires fundamental changes in how they design and market their digital products.
Churn is a critical metric directly linked to revenue and provides statistical data about your retained customers. That’s why every business must understand the issues that lead to churn and fix them. Remember, you need to solve churn before it becomes a significant issue. It will help if you are proactive in nurturing your existing customers throughout their journey.
In a nutshell, the companies that will successfully meet this challenge can deliver a high-value proposition and a first-class user experience.
Some tips on reducing the churn rate include:
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