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SaaS Churn: myths, benchmarks and strategies to Increase Retention of 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 paid for a year-long subscription, the company didn't let me keep the last three weeks of access to its exclusive services.

When I began making a decision to cancel my subscription, a popup informed me I'd right away lose access to all paid features.

"This step will instantly lower your account. Are you sure you want to keep your subscription?"

I did cancel the program, even though I knew that I would not need the tool in the future. As a result, in the terms of SaaS the tool, I churned. And the experience got me thinking:

  • Did immediate the removal of all paid features is the best way to prevent me from going through the motions?
  • What date did I count in the official count as "churned"? Did they count me as"churned" on the day that I decided to cancel? On the day my subscription was due to renew? Would I have been able to cancel, upgraded, or changed my usage?
  • What would they have done differently to stop me from cancelling?

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

In Part One the first part, we discuss benchmarks and common churn formulas.

In part two we'll go over five churn prevention strategies that have been successful in different SaaS companies.

And in part three the final part, we'll provide a set of definitions you could use to talk about churn with your colleagues -- and some additional resources.

If you'd like using this list of contents as a way to move between sections of this article.

Table of Contents

Part I: SaaS Churn Benchmarks

In the event that people from SaaS speak about churn we're often not doing a good job of making sure we're on the same level.

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

Do they include those who have never made it through a trial?

Do you know the churn rates of a SaaS firm that targets enterprise customers to one selling to the general public?

When we set churn benchmarks for SaaS firms, there's much to take into consideration. And in this section, we dissect it into smaller pieces in order to let you perform a comprehensive churn analysis on your own company and be able to better understand the way you're performing.

Is There an Ideal Churn Rate for SaaS?

I frequently hear that a 5 to 7% churn rate is perfect for SaaS firms. But is this purely anecdotal? Is it common for SaaS businesses to be able to meet this benchmark?

That is 5 to 7% might be the best However, what's the median?

To find out, Ryan Law, former CMO and cofounder of Cobloom, performed an study of six recent churn report or studies and found that there is no consensus regarding the average rates of churn for SaaS businesses. The majority of the reports he studied showed the average annual churn of 10%. The other three showed more and a wider spectrum: from 32% to 61% annual rate of churn.

What's the reason for such a broad range? Ryan suggests that there's not enough data out there to get a more accurate view of SaaS the churn rate because it's an area that most businesses want to make transparent.

However, he also sees other factors that affect churn, including the company's size and the sector it is in.

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

Industries can have very different churn benchmarks.

"Look through your own technology stack and you'll likely see some products you view as essential, and others deemed 'nice-to-have,'" Ryan writes. "It's likely that a financial or sales tool are less prone to losing customers as compared to a marketing tool since it's believed as being more responsible in terms of revenue."

The author adds that niche applications with fewer competitors will also see lesser the rate of churn.

Company Size Impacts Common Churn Rates

Ryan mentions that a lot of the biggest SaaS companies target enterprise customers which have longer contract durations which means their churn rate is lower. So the flip side is that SaaS firms that focus on customers who are small or individuals with a larger customer base with shorter contract durations tend to be more churn-prone.

When Ryan analyzes the typical ratio of churn of big as well as small SaaS companies, what he's really saying is that your churn rates will vary based upon the size of your customers as well as your average contract price. The less your ACV greater the ease it is to churn.

What's the Acceptable Level of Churn?

Hotjar founder David Darmanin understands that a percentage of churn doesn't necessarily mean anything in and of itself. "Ultimately the churn rate and volume of it is as important as the size of your market and the speed at which you're attracted more customers." Darmanin said on an episode on the ChurnFM podcast.

If your target market isn't large and churn is a major issue, it will matter greater. But if your target market is large and you use an approach to sales that is low friction that is, you will be able to handle the higher rate of churn, without it dramatically impacting your company.

The realization caused David to break down churn into two categories acceptable and concerning. Some churn is acceptable, perhaps even necessary -- especially when you're using a traditional B2C sales model.

"Worrying churn is where you've identified an ideal customer, and they're coming on board, the moment they quit using your product] or stop paying for it," David said.

In other words, churn really starts to matter if you're losing a large portion of your best customers.

In fact, 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 helping or getting feedback from.

However, there's another aspect that matters to David What do customers think about the service after they quit?

"Ultimately, I think what can have a greater impact on the kind of flywheel you're making (in our instance, Hotjar) is that if people are exiting or pausing because of a negative feeling this can have an even greater impact than the fact that they have stopped paying the company. Because word-of-mouth for us is a much more powerful fuel than the revenue that is being collected, churning out or dropping."

This is where collecting feedback from churning customers is crucial (a issue we'll discuss further down).

What's the Best Churn Rate Formula?

For determining churn rate to determine churn, the simplest churn percentage calculation is the amount of churns that occur during a specific period , divided by the number of customers who have churned at the start of a period.

Churns per period
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Customers at the start of a time

In this case, for instance, if you're calculating monthly churn, starting with 1,000 customers, but lose 27 of them, the churn percentage for that month would be 2.7 percent.

However, this formula is missing the mark on many important specifics.

It doesn't consider the amount of brand new customers you acquired over the course of time, and the number of them converted, in comparison to the number of existing customers who churned.

It's also not weighted for growth. If you're losing the same quantity of users every month, yet you manage to acquire more customers than you losethem, 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 vary depending on how many days are in a month!

For these reasons, the standard churn rate formula isn't an exact picture of how theyou're increasing or losing. It's simply too simplistic.

In deciding on how to calculate churn, Outlier AI recommends two things:

  1. The formula that you pick for churn is one that aligns with your top business priorities. Determine what aspects are the most important for you to keep track of and refine the formula accordingly.
  2. Make sure that the formula isn't complicated. "The more complicated the formula becomes and more complicated, the higher the chance that you'll make a mistake calculating it at some point or else you'll get an incorrect metric."

Business analysts have created their own churn-based formulas. Steven Noble's blog post about the way Shopify measures churn is a must-read. It also contains the Baremetrics article looks at churn of various types of customers such as users downgrading or monthly plan customers quitting.

A final note: when we talk about churn they're typically referring to the number of customers lost. There are many other kinds of churn you can measure like revenue or transactions-related the churn. Check out Outlier AI's article to learn more about these.

Monthly and Annual. Yearly Churn: Which Should You Track?

There's a significant difference between monthly and annual the churn. If you have 7% less customers to turn over throughout the year it's a distinct number from losing 7% of your clients each month.

It's not necessarily good to be measuring both, your monthly churn rate should be much, much lower than your annual churn rate.

What exactly is negative churn?

In order to understand the whole picture on the churn rate, don't only look at the amount of customers you're losing. It's all about the behavior of your regular customers, as well.

And that's where negative churn enters the picture.

People have asked me if negative churn is a myth. Actually, it's not. However, it might not be as you believe.

Negative churn occurs when the profits from upsells and cross-sells is greater than the loss of revenue due to churned customers over a period of time.

When you've reached this stage, you may continue losing customers with no new customer acquisition and still grow your revenues (at at least for a time).

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

"Combined with annual prepay contract Negative churn can be an extremely effective growth tool," Tomasz writes. "When you are pondering your pricing structure and strategies for achieving customer success It's worthwhile to incorporate negative churn into your startup."

The Next Level Churn Rate Analyze: Who and What is the reason

In a broader sense an analysis of churn is simply looking at the speed of loss customers.

Don't end there. Your churn percentage only tells you the what you know, and not the reason or what or whom. If you want to really comprehend and do things about it you'll have to understand the reasonspeople are turning away and what customers you're losing.

SaaS growth expert Fred Linfjard suggests a combination of quantitative and qualitative data analysis to understand who is churning and why and what actions to take.

Quantitative Data Gathering: Website and Product Data

Try out some sample questions and the answer

  • Which user groups are more likely to be churning?
  • Are there patterns that can be seen in their use of products?
  • What supporting documentation did they review prior to the churning process?

Qualitative Data Collection such as exit interviews and surveys

To try to answer questions:

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

Hope this provides you with the knowledge of how churn impacting your business. Next, let's look at ways to come up with a churn-reduction actions plan.

Part II: Five Tested Methods to Reducing SaaS Churn

The ideal churn-prevention plan is based on your quantitative and qualitative research that you've conducted since once you have a clear picture of who's turning and the reasons, it's much easier to prioritize which strategies will have the biggest influence. It's also useful to find out what other companies have done that has worked well.

1. Make sure you update your Dunning Management System

It's typical for 20 % to 40% of the churn experienced by customers to be involuntary: caused by expired credit cards, technological issues approving transactions, and so on. Fred Linfjard explains why making sure that you've got a sophisticated dunning process should be the top priority in fighting churn.

2. Show Value as Quickly as you can

To prevent churn, it starts at the beginning of the customer's journey and a crucial time is during the onboarding process.

You're undoubtedly aware of how important it is to ease the process for SaaS customers to get started. If they experience too much hassle right from the beginning it's unlikely that they'll use it for long.

However, there's more and discussions about the importance of offering "quick wins." According to Lincoln Murphy explains, " Customers who realize that they are getting value fast are those that stick around the longest."

There are a variety of methods to create quick wins in the product itself. It's also something that you can accomplish more easily by sending emails.

In the past, when Christoph Engelhardt worked for Moz the company, he managed reduce the monthly churn rates for new users by 40% through posting an email that highlighted the value Moz was providing to its clients within three days. He explains the process which he employed in an in-depth post.

3. Look for Red Flag Metrics

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

Groove, an inbox shared for businesses, reduced churn by 71% through this data analysis. Groove's team has compared utilization between the new users who had churned prior to 30 days, and those who stayed. They found that the users who churned had much shorter initial sessions, and had fewer frequent log-ins than users who continued to use the service after the first 30 days.

4. Customize Your Cancellation Offers

An effective strategy to reduce churn is to automate sending an invitation to those who opt to terminate their subscription regardless of whether it's a discounted rate, the ability to pause the subscription or anything different.

Wavve, a popular social media tool for podcasters, has been able to recoup the more than 30 percent of the users who pressed the cancel button, by incorporating an incentive at the conclusion of a brief cancel survey.

The strategy was successful because attaching the offer to the cancellation questionnaire allowed the Wavve team to tailor the offers based on reasons a user was canceling.

5. Automate What's Work, which includes the ability to collect feedback

When you've decreased churn how do you keep the churn rate at a consistent low rate?

The feedback you collect is always through an automated process.

This survey lets the company to collect valuable feedback to stay on top of what is making customers churn. "You can streamline or automate your qualitative feedback collection and, in this case, find out why they decide to leave your company. So typically the exit questionnaire would be sent out to a person who has cancelled, whether by email or even after they click the cancel button. If you are able to automate this survey, it will constantly provide you with feedback which means you do not have think about it," Fred explained in our interview.

If your products and clients alter, so will the reasons they churn. Monitoring feedback on a regular basis is an important part of keeping a low rate of churn.

And by automating the process of collecting feedback, you can free up time to work on other projects.

Part III: Churn Definitions and additional resources

What is Churn?

Customer churn, sometimes referred to as customer attrition, is the loss of clients for a service or product. This is opposite to customer retention.

What is the average SaaS Churn Ratio?

There is no consistent average turnover rate for SaaS. Per multiple studies The churn rates is ranging from 10 up to 60% based on the size of the company as well as its marketplace.

The Churn and Retention KPIs are used to Follow

Besides monthly or annual customer turnover rate, some other SaaS indicators that give you a fuller view of customer churn as well as retention include:

  • Net retention rate calculated in dollars (NDR)
  • Customer lifetime value (CLV)
  • Monthly recurring revenue churn (MRR churn) as well as annual the recurring revenue churn (ARR churn)

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