Churn Management 101 for SaaS Companies
Subscriptions are an attractive selling model for SaaS companies. Consumers increasingly want access to the latest, greatest version of your product and don’t feel the need to own a copy outright. Paying a recurring fee to access your software versus buying a license outright gives consumers the flexibility they desire, while also providing a host of benefits for your business. The “set it and forget it” nature of subscriptions gives SasS companies more predictable revenue streams and the ability to build long-term relationships with customers.
However, the advantages of a subscription billing model can only be realized if you develop strategies to manage churn. Customer churn is the cycle in which you lose and acquire new customers. And while churn is a natural part of every SaaS business, if you lower your churn rate while maintaining, or even growing, your customer acquisition rate, your business will grow faster and be more profitable.
So what goes into successful churn management? We’ve put together this list of eight churn management strategies to help you get started.Churn Management: A Guide to Keeping Your Customers Coming Back for More
First step of Churn management 101 for Saas companies, you can’t manage your churn if you don’t understand it. Luckily, SaaS companies have an abundance of data that can be used to begin to understand your customer churn.
Start by simply calculating your churn rate — the number of customers who stop using your service over a certain period of time — so that you know your baseline.
A basic formula to calculate your churn rate is to take lost customers over a certain time period and divide it by the total number of customers at the start of that same time period, and then multiply that number by 100.
For example, if your business had 1,000 customers at the beginning of the month and lost 25 customers by the end, you would divide 25 by 1,000 to get 0.025. You then multiply 0.025 by 100, resulting in a 2.5% monthly churn rate. We recommend calculating both monthly and annual churn rates as these can differ dramatically.
In addition to understanding your churn rate, your data can give insight into why customers are churning. For example:
Is it voluntary (meaning the customer made the decision to cancel) or involuntary (meaning there was an issue with the payment method that the customer is likely unaware of)?
Is there a “churn cliff” when after a certain amount of time people are most likely to cancel? This often happens after the completion of a free trial.
Is there seasonality when more churn typically occurs?
Did the rollout of a new product feature cause an increase in churn?
By regularly looking at your data to answer questions like these you can begin to devise churn management strategies specific to your business.
Now that you know your typical churn rates and are learning the characteristics unique to your business’s churn, you can set goals for how you want to increase customer retention and reduce churn. Make sure it’s specific, time-bound, and realistic.
While setting a goal is important, be cautious to not let this step hold you up. You are hopefully embarking on a long-term churn management journey and will continually measure the results of your efforts to get insights about what is realistic for your business. The point is to set a target, get started, see what works, and improve the program (and goals) as you learn. Over time you will figure out the right monthly and annual churn reduction goals for your business.
How do you know what’s realistic? While churn rates vary greatly across industries and business types, the average churn rate is estimated at 5.6%. For SaaS companies, this average drops closer to 3.7%. Although, this lower average is largely a result of B2B SaaS companies that typically experience less churn.
When you’re dealing with small percentages like these, even small reductions in your churn rate can have a big impact on your revenue. By implementing dedicated churn management strategies we’ve seen SaaS companies retain upwards of 500 customers — which resulted in 10s of thousands of dollars — in only a few months.
What’s the best way to understand why your customers aren’t renewing? Part of churn management 101 is just - ask them! There are great tools available that can plug directly into your billing platform and CRM to allow you to serve up customized offboarding surveys at the point of cancellation. This means customers can tell you exactly why they aren’t renewing; for example:
If you just rolled out a major update perhaps you’ll learn you didn’t communicate the changes effectively leaving customers frustrated or confused.
If you’re considering a price hike, understanding the current perspective on price vs. value will help you predict how an increase will be received.
Taken a step further, these tools use automation to immediately start reducing churn by serving up tailored incentives to win customers back at the point of cancellation.
Also note, you don’t have to wait until the point of cancellation to ask customers for feedback. Consider periodically surveying to get a pulse on how customers feel about your product or service.
The hard truth is, not all customers are created equal. And understanding how to prioritize your efforts for customers most likely to respond positively is essential.
Using the data analysis you’ve already completed, look for segments of customers that you can quickly offer an incentive to so you see an immediate ROI. For example, customers who are about to have a sign-up deal expire. Next, identify if there are long-term customers who might be on the brink of churning — maybe their usage has recently declined. While retaining these customers might take a bit more effort, it is worth exploring since they have been profitable customers in the past.
Bottomline, there is no one-size-fits-all approach that is going to work across segments. A tailored approach that addresses each segment's unique circumstance is going to achieve the best long-term results.
Incentives — we know — SaaS business owners both love and hate them. But the reality is they work. A discount, promotion, or upgraded subscription level, gets customers in the door, and it is one of the best ways to keep people from churning.
And when you consider it costs up to 7x more to acquire a new customer than to retain an old one, offering an incentive to keep a customer from canceling becomes a no-brainer. Here are three types of incentives to consider trying:
Sign them up for a loyalty program
Let them try a premium feature while keeping them at the same price
Provide a time-sensitive discount or free trial offer
Your customers are continually evaluating whether your product provides good value for the cost. It’s imperative that when they see that charge come through each month, they think it was a worthwhile expense. Much of this value comes from the product itself, but an effective communication strategy goes a long way to showcase your value. Here are a few types of communication to consider to build loyalty.
Date-based comms — Can you send a message on a customer’s birthday or the anniversary of when they first signed up? This personalized touch goes a long way to make your customer feel like you care about building a relationship with them and that they aren’t just one of thousands. This is especially true if you include a discount or deal.
Usage-based comms — People get a kick out of learning about their day-to-day usage habits. Spotify’s annual Year in Review update has become notorious and has grown to not only be a time Spotify connects with each customer every year, but also a massive marketing opportunity since people often share their Most Played lists on social media. Another idea is to send the, “we noticed you like X, have you given Y a try” email to encourage deepening the customer’s knowledge of your product's features based on past usage habits.
Onboarding comms — We know that hooking people past that free trial is critical to maintaining long-term success. Communicating often during that initial onboarding to educate and encourage a customer to explore all the various features of your product makes sure that you're staying top of mind in those first few months.
In all instances, communication should add value, be tailored by segment, and be personalized to make the receiver feel like you’re communicating to them directly.
Whether you have a dedicated customer success team or this function sits within marketing, those closest to the customer need to be empowered to act quickly if they spot an opportunity to increase loyalty and keep a customer from canceling.
Any churn management tools you implement should be user-friendly and not require cumbersome development time to make simple updates to the cancellation flow. Armed with customer intent data, customer-focused teams should have the authority to:
Customize questions and interventions at any time, instead of vying for limited development resources.
Identify at-risk customers (e.g. those who have viewed your cancellation page) so they can proactively reach out.
Build processes to gain feedback to understand why customers leave.
Tailor the win-back message to use the right offers and messaging, based on each customer’s feedback.
Run A/B tests to learn which messages resonate best with each audience segment.
As your churn management 101 program becomes more sophisticated, you’ll likely start to identify underlying trends that give you a better understanding of your customers, your company's perceived value, and even your product. This insight is invaluable and should not be ignored. While you will never stop needing to implement win-back strategies at the point of cancellation, you can also move your churn management efforts up the funnel to fix commonly identified issues. For example:
Are your pricing plans aligned with the various usage models that your customer wants?
Is there a product feature that customers desire that you can prioritize on your product roadmap?
Is there a UX issue or feature bug that should be fixed?
Reducing customer churn, churn management 101, should be a top priority for any business, but this is especially true for SaaS companies. Competition is fierce and the stakes are high, so developing comprehensive churn management strategies to increase customer retention and decrease your churn rate is critical to keep your customers loyal and renewing for many years to come.
With ProsperStack’s hosted cancellation flow, in a matter of hours you can start retaining your customers, driving down your churn rate, and growing your revenue. Schedule a demo and start reducing your churn today.