Grow Your SaaS Business By Optimizing Churn Rates

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What can be considered an acceptable B2B SaaS (Software as a Service) churn rate? There are many reasons why customers sign up for a SaaS solution. For your software solution to retain as many customers as possible, it must be aligned with their value proposition. If it is not meeting their business objectives, they are simply going to unsubscribe and look for a better solution. This is especially the case if the solution is a premium service that the customer has to pay for on a monthly basis.

Customers sign up for a SaaS solution for a host of reasons including to save time, to make more money, to speed up processes, to get product recommendations etc. There are lots of nice to haves for your customers when it comes to SaaS implementation. If your software does not have these “nice to haves” or if it has them but it is not delivering as expected, then you can expect a higher churn rate.

As a software developer or SaaS provider, you will worry about the churn rate of your software as a significant growth solution. There is a certain level that you can consider acceptable and there is a rate that is simply haemorrhaging customers and is doomed for failure.

Ideally, we want a churn rate of 0% or less than 1% but it is impossible to achieve that because you cannot satisfy the expectations of end users 100%. So, no matter how good your solution is, you will still lose some customers. Most industry insiders agree that a churn rate of 5%-7% annually is considered acceptable.

This rate is supported by industry data. According to a survey by Bessemer Venture Partners, some 70% of SaaS companies have reported an annual churn rate that is less than 70%. Out of these, 75% have a churn rate of 5% or lower. This indicates that some 30% of SaaS companies have a rate of churn that is not considered acceptable according to industry norms.

Monthly and Annual Churn Rates For SaaS Companies

While the data on industry churn rate is encouraging, some SaaS solutions, particularly the more obscure ones have a customer retention problem. They might attract customers at a high rate but they are equally losing customers at a very high rate. Their solutions are a revolving door. Jordan Whelan, Co-founder of Toronto-based PR and Media Buying Firm Grey Smoke Media, quotes “Having worked with dozens of SaaS-based companies, there is a direct relation between churn and product obscurity. While the sales process is typically longer for obscure products, the “stickiness” and commitment toward that product are also much higher”.

Let’s translate the acceptable annual churn rate of 5-7% into a monthly churn rate. You will get a rate of 0.42% to 0.58%. Roughly put, if you are attracting 200 customers every month, you will only be losing one. Now if you have a SaaS platform that is losing a single customer for every two hundred acquisitions, you have a great platform that delivers on the needs of your customers. SaaS solutions with an annual churn rate of 1%, 2% or 3% are almost perfect!

With higher churn rates, you can keep on acquiring customers but because they don’t renew their subscriptions and the attrition rate is high, you will not really be growing your revenues. In effect, you will have a business model that doesn’t generate additional profits. You can keep on acquiring new customers but yet remain with more of the same number of customers and your solution will experience stagnation. That means your customer acquisition will almost be in vain. If you are spending a lot of money to acquire a customer and not retaining this customer long enough to recoup your acquisition costs, you are going to burn your cash and eventually go bust.

A robust customer acquisition strategy will all be in vain if your SaaS solution is bogus. To grow by just one customer in a SaaS solution with a higher churn rate, you will need to acquire several more customers and that means you will be depleting your cash.

In spite of its importance, a lot of SaaS CEOs do not take the churn rate seriously for a number of reasons:-

  • They could be spending a lot of marketing dollars and acquiring new customers at a faster rate than they are losing them. In this case, they will manage to just break even or “grow” slightly.
  • They may not understand the industry norms and assume a churn rate of say 2% per month is just ok.

Achieving a Negative Churn Rate

A negative churn rate often occurs when you lose some customers but the remaining ones pay you more to grow your revenues. You can achieve this in multiple ways:-

  • Use the current products to expand your revenues. The way to achieve this is via a tiered premium model where customers pay more to access more features.
  • Up-sells of higher tier packages to your customers
  • Cross sells so that your clients can purchase additional products and features

Market Category Can Impact Churn

However, not all SaaS products will behave the same way. The nature of the market you are operating in can drive or lower your churn in a way that is beyond your control. Some market categories like vendor management, for instance, may have a higher propensity for churn.

For example, competitive SaaS platforms such as online form software, email marketing and Over-the-Top TV services (i.e. Hulu) will typically have higher churn rates due to the number of alternatives in the marketplace, customer sensitivity to price, and changing trends in the marketplace.

How To Lower Your Churn

Given the importance of the churn rate in the growth and sustainability of your SaaS solution, every SaaS provider should be working towards lowering their churn rate. You can achieve this in multiple ways. One way is to get customers to use your solution without over-promising and under-delivering.

Help optimize your customer’s experience and help them in realizing the value of your product. This way, they will stay longer and learn to fully utilize your product in realizing the value proposition.

Image from http://www.roisinbyrne.co.uk/7-reasons-why-the-saas-business-model-rocks/

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