A Primer for Reducing SaaS Customer Churn

You're losing customers.

Even if you aren't, your company will be at some point. The question is whether or not you'll recognize it and take action.

Churning customers (customers who stop using your product/service) is unavoidable, but there are ways to reduce it. If a customer is churning away from your business, the opportunity to earn revenue from them has been lost forever—but it doesn't have to be gone for good. There are steps you can take to reverse that trend, such as automating customer service processes and training employees on how best to serve customers.

What is SaaS churn?

The first key concept to understand is churn. Churn (sometimes called customer churn) is the percentage of customers who discontinue their service with a company over a given time period.

Churn can be calculated for different periods of time, such as monthly and yearly, but for simplicity’s sake, we will use monthly churn here. A 1% monthly churn rate means losing 1% of your customers over one month, or 100 people, if you had 10,000 subscribers at the beginning of the month.

Customer retention refers to the opposite metric—how many customers stay with your product or service instead of leaving? The better you do at retaining your users, the lower your churn rate will be and vice versa.

Churn is critical to SaaS businesses because recurring revenue is affected by it directly. If you have a high churn rate, new users need to sign up continuously to keep revenue stable, and ongoing growth becomes very difficult without significant increases in sales and marketing spend.

Why should you track and optimize your SaaS customer churn?

• It can be a matter of usability. A difficult feature to use will lower the overall value of your product for some customers, which may lead to churn and bad reviews. But you can fix that by making sure your product is intuitive and easy to use.
• It might be due to a missing feature. If you don't have the right features, you won't satisfy everyone who uses your software. But if you find out what those features are, you'll know exactly how to improve your software and prevent more people from leaving.
• It could even be because they're using the wrong pricing plan for their needs (and yours). That's why it's important to get feedback from each customer on why they're leaving—so you can adjust accordingly for future customers as well as previous ones who still want to stick around.

By now, it should be clear that reducing SaaS customer churn isn’t about making minor fixes here or there: it’s about finding the root cause to make more considerable changes where they count most.

How to deal with SaaS customer churn?

The first step to reducing churn is to identify a churn risk. SaaS companies can predict customer churn by building a model that analyzes the company’s data and identifies variables that influence churn rates. Once you have identified your churn risks, you need to take action.

Action types:

• action taken before the sale (eg: changing the sales process or promoting employee training)
• action taken during the sale (eg: offering free onboarding services or providing round-the-clock support)
• action taken after the sale (eg: improving existing products or offering free trials for new products).

The last step is measuring the impact of your actions. You should measure whether your actions effectively reduce customer churn and use a “churn score” KPI to prioritize your efforts against each other.

Reducing churn is about finding the root cause.

As a software company, you need to understand your churn rate. Every step you take to reduce your churn, from the initial identification of a problem to finding its root cause and then implementing a solution, is about understanding your customers and working out how to keep them happy.

Here are some questions that can help you understand how to diagnose the problem:

• What are your goals for customer success?
• What does an average customer lifecycle look like? (when do users join, what features do they use, when do they cancel)
• How does user behavior relate to their likelihood of canceling? (Do users who tend to cancel early behave differently than those who stick around?)
• Are there any patterns in cancellation reasons?
• How can you measure these patterns?

Stay on top of your customer base's health.

To begin, you need to know your role in customer churn. To identify the customers at risk of churning, it's crucial to track and report on your customer success metrics—which is why it's a good idea to use a software solution for managing this process. Ideally, you'll be able to track each customer’s health score in an automated way, enabling you to prioritize those customers most likely to churn. Once that's set up, you should ensure that you can easily filter down and sort through your list of customers to spot trends that might indicate who is more likely than others to churn.

Finally, once all these processes are in place and you've identified the customers most likely to churn, it's time for the second half of the equation: taking action. With data and insights on hand about which customers are at risk of churning, it should be clear which actions will have the greatest positive impact on those customers—whether it be increased onboarding training or an outbound phone call from their account manager with recommendations on how they can best use your product or service.

Make good use of free trials.

Free trials are your opportunity to show potential customers why your product is the right solution for their business needs. For this reason, you need to set yourself up for success by providing a friction-free experience. The goal of a free trial that ends with a paying customer is not only to get the customer on board and purchasing—it's also to help ensure they will remain with you as a happy customer further down the road.

To make good use of free trials, make sure:

• The product is easy for the future customer to use and understand how it works so they can see its value quickly
• They are shown how the SaaS product solves their specific, individual problems

Penalties for early cancellation are an option.

Penalties for early cancellation are an option, though they must be implemented carefully. Penalties can be good for both the customer and your business, but only if they are fairly assigned and easy to understand. If not, you might find that customers considering staying decide to leave anyway rather than deal with unfavorable terms.

A penalty may prove effective when it is targeted at an individual or company more likely to churn (e.g., those using less than 50% of their allotted services), and provides them with a discount if they agree to stay on (e.g., 10% off their next three months). It may also prove effective as a "loyalty discount" for customers who have been with you for 12 months or more — give them a 15% discount off their next six months after that point so long as they commit right away (this sort of loyalty bonus is more common in service industries like cable television).

The longer customers stay with you, the more they grow to appreciate your service. It’s up to you to make sure they never have to look elsewhere.

Customer churn is a huge problem for any SaaS company that relies on customers making recurring payments. It's an industry-wide struggle: as per Bain & Company, reducing churn by just 5% can increase profits by 25% to 95%.

What's most important is retaining your customer base. The longer they stay with you, the more they appreciate your service and understand its benefits. Ideally, they'll never have to look elsewhere to fulfill their needs and achieve their goals—it's up to you to make sure this is the case.