Churn Rate for SaaS: An Introduction

If there’s one thing that successful SaaS businesses bank on, it’s customer retention. This especially holds true for all SaaS businesses whose customer acquisition costs often outweigh the customer retention costs. It is, therefore, important for SaaS businesses to keep a tab on how much churn is happening and more importantly, why the churn is happening.

The “churn rate,” is a measure of the number of customers or employees who leave a company during a given period. It can also refer to the amount of revenue lost as a result of the departures. Put simply, the churn rate is the percentage of your customers or subscribers that decided to stop their subscriptions. And this can have a negative effect on your average customer acquisition cost (CAC), too!

 

Types of Churn Rate and How to Calculate Them

Let’s face it. Customers bidding sayonara to their monthly or yearly subscriptions is an inevitability for SaaS businesses. However, one way to control how many customers opt out of your service offering is to monitor your Churn Rate, and then to act on reducing it. As Churn Rate simply means the percentage of lost customers or lost revenue during a particular period of time, there are two major types of churn rate:

1. Revenue Churn Rate:

Is the percentage of revenue that you are losing monthly, quarterly, bi-annually or annually. Most companies calculate churn rate on an MRR (Monthly Recurring Revenue) basis, which means dividing your churned monthly recurring revenue by the monthly recurring revenue at the beginning of that month. Sometimes, you may not have easy access to the churned revenue number. In that case, you can find that number by backing out the revenue from new customers, and the revenue from upgrades from the end of the month MRR. Here are the two MRR Churn Rate formulas:

MRR Churn Rate = MRR from lost customers / MRR at the beginning of that month
MRR Churn Rate = (MRR at end of month – MRR from new customers – MRR from upgrades – MRR at beginning of month) / MRR at the beginning of that month

 

2. User/Customer Churn Rate:

Regardless of a steady revenue or account growth, the users of your SaaS products could be bidding adieu or not using your product consistently. If there is a high user churn, it is important to calculate the percentage of churn and figure out the patterns of your product usage in terms of which features seem to be working better than others. User or Customer Churn Rate can be calculated by dividing the number of lost customers by the total number of customers that were onboard during a particular period of time.

Customer Churn Rate = Number of lost customers / Number of customers at beginning of that month

 

 

Why Should You Care About Your Churn Rate?

If you run a subscription-based business, you must’ve heard of the ‘leaky bucket’ approach, which is when you concentrate solely on customer acquisition rather than that plus customer retention. Under this scenario, you will fill your bucket with new customers, but will end up losing existing ones. Therefore, your bucket never really fills up! This is why you need to manage your customer churn rate. In fact, the cost of retaining your customers is at least five times less than the cost of acquiring new customers.

Analyzing churn rates for SaaS-based companies helps not only predict future churn rates but also helps with insights about what future revenues may look like. To sum up, analyzing your churn rate is important to help you understand the reasons why your customers are leaving and devise strategies that would preemptively minimize these losses.

 

Why does Churn Happen in the First Place?

Although the reasons for customer churn can be unique to every customer, there are a few common underlying reasons for a high churn rate:

  • High Prices: If your churn rate is blowing through the roof, chances are that your sales and customer success team may be struggling with existing and potential customers not seeing the value of your SaaS for the price you charge. It is important for you to take a step back and do a comparative analysis of your competitors’ prices and rethink your product’s features to make it more cost-effective and compelling for your customers.
  • Poor UI/UX: If the look, feel and accessibility of your SaaS product or service is buggy, aesthetically displeasing or does not fulfil your customers’ requirements, you could be looking at the root cause for high churn.
  • A not so great customer experience: For any brand or service, the journey of the customer right from the point where they first come into contact with your product to the way your customer success team helps onboard or service them, should be handled with care. It’s extremely important to build a long-term relationship with the customer. However, if the consumer sees poor customer experience at any point throughout this journey, it could lead to churn.

 

Tackling your Churn Problem   

Here are a few important ways to reduce churn as well as to improve your customer experience: 

  • Feedback is Key: Customer feedback is perhaps one of the most important ways to deconstruct and tackle a high churn rate. Their frustration is one of the main reasons that businesses incur losses. To understand the root causes, it’s a good idea to conduct regular surveys and share feedback forms with your customers.  
  • Proactive Communication: According to Hubspot, identifying at-risk customers and sending them automated “It’s been a while since we’ve seen you” emails actually help cut down your churn rate. Similarly, trigger-based emails that are pre-scheduled over relevantly researched intervals of time also help a lot with maintaining contact. You can also use ‘fun facts’ or ‘pro-tips’ emails to better engage with your customers and keep them interested.  
  • Regular Competitor Analysis: In order to analyze and increase your customer happiness index (CHI), you have to keep an eye on your competitors and assess their customer satisfaction performance, as well. If you can figure out a way of keeping your customers from switching onto your competitors, you’ve won the churn battle already!  

 

To wrap it up, analyzing your churn rate is important to not only regularly realign your SaaS product marketing strategies to what your customers need but also provide avenues of continuing growth to keep your product relevant in the market. In the end, it’s all about your customers!