In the fast-paced realm of software as a service (SaaS), customer retention is every bit as critical as acquisition. It’s no wonder why churn rates—that dreaded metric reflecting customer drop-offs—has taken center stage in many organizations’ measurement strategies.
Learn more about what’s behind SaaS churn, where you should be benchmarking your own SaaS churn metric, and what you can do to reduce churn rates, maximize retention, and optimize your revenue.
What is SaaS Churn Rate?
At its core, the term “SaaS churn” represents the percentage of subscribers to a software service that stop their subscription within a given time frame. In other words, if you start a month with 100 customers and lose 5 by the end, your monthly churn rate would be 5%.
This single number serves as an indicator of the number of customers who ‘churn out’ or leave your service. For SaaS businesses who rely wholly on a subscription-based model, it’s perhaps easy to see why churn rate amounts to much more than just a number. It can be seen as a reflection of customer satisfaction, product quality, and overall experience. In short, churn rates can provide a snapshot of the company’s overall health.
Why Churn is so Important to SaaS Organizations
SaaS businesses typically operate on a subscription-based model. Unlike traditional businesses where revenue is generated through one-time sales, SaaS brands rely heavily on retaining customers over time. As a result, churn metrics contribute to or color a number of key indicators at a business:
- Recurring Revenue: SaaS companies depend on monthly or annual subscription fees for revenue. Churning customers means not only a loss of that month’s revenue but also a loss of potential future revenue from those customers.
- Customer Acquisition Cost (CAC): It’s generally more costly to acquire a new customer than it is to retain an existing one. A high churn rate can, therefore, dramatically increase the CAC, impacting profitability.
- Customer Lifetime Value (CLV): Churning customers directly reduce the lifetime value of a customer to the business. As CLV decreases, profitability diminishes.
- Brand Reputation: High churn rates can signal dissatisfaction. When customers leave, they often share their reasons with peers, which can deter potential customers.
What’s the Average SaaS Churn Rate?
Many SaaS businesses grapple with understanding whether their churn rate is high or low. Overall, studies indicate that the average churn rate for SaaS companies is likely somewhere around 5%. However, there is some debate about the veracity of these numbers—and even over whether they refer to annual or monthly churn.
What is a good churn rate?
This average may hold little value to many businesses trying to benchmark their own churn rate. That’s because average and expected churn rates can vary greatly based on the industry, target audience, and the maturity of a SaaS company.
For most SaaS companies, a good churn rate is probably between 5-7%. However, in practice, a higher churn rate tends to be more viable or sustainable for larger, more established SaaS brands. No matter the size of your business, you should focus on maintaining a low, steady (or steadily declining) rate. You should also work hard on understanding the reasons behind customer churn so you can continually improve your services.
How to Reduce Churn in SaaS
Understanding the causes of churn will be crucial to reducing losses for your business. In addition, these best practices can typically help you stem the tide of turnover:
Enhance the Onboarding Experience:
A stellar first impression can set the tone for the entire customer journey. A comprehensive, user-friendly onboarding process ensures customers grasp your product’s value from the start. Investing in intuitive tutorials, user guides, and providing hands-on support during this initial phase can drastically reduce early churn.
Drive Active Customer Engagement:
Keeping customers engaged isn’t about inundating them with information but providing relevant content that enhances their product experience. Regularly hosting webinars, sending out informative newsletters, and fostering active user forums can keep users connected to your brand, fostering loyalty.
Prompt Customer Support:
In today’s fast-paced world, waiting days for a support ticket to be addressed can be a deal-breaker. Ensuring customers can access timely and effective support is paramount. Consider investing in AI-driven chatbots for immediate queries and maintaining a robust, localized support team for more complex issues.
Create a Feedback Loop:
Incorporating a feedback mechanism isn’t just about collecting data. It’s about listening so you can take informed action. Whether it’s through periodic surveys or feedback forms, understanding your customers’ pain points and acting on them not only reduces churn but also catalyzes product innovation.
Flexible Pricing Models:
Financial considerations are often some of the biggest drivers of churn. While maintaining profitability is essential, flexible pricing models can accommodate a diverse customer base. Consider sliding-scale pricing based on usage or offering loyalty discounts to long-term customers.
Monitor Usage Patterns:
With the power of analytics, SaaS companies can predict potential churn before it happens. Monitoring usage patterns can offer insights into customer behavior. A sudden drop in usage, for instance, can be a red flag. Proactively reaching out to such users can help you get out ahead of potential issues.
Educate Your Customers:
Awareness drives usage. Customers may not utilize a product fully simply because they’re unaware of some of its features. Holding regular training sessions, webinars, or sending out feature highlight newsletters can keep your users in the loop, maximizing their product experience.
Minimize Involuntary Churn:
Too often churn isn’t the result of customer disinterest or dissatisfaction. It’s the result of a breakdown in technology. Solutions like automated credit card updates, built-in expired card extensions, intelligent payment routing and sophisticated retry logic can dramatically improve retention and continuity for SaaS organizations.
This requires having the right partner on your side. Digital River combines a deep global acquiring network with powerful machine learning intelligence to keep your revenue flowing. And with MyCommerce, our configurable, all-in-one ecommerce platform for digital products, you can have a comprehensive solution up and running in a matter of days. Learn more about how to optimize your SaaS renewals and reduce costly churn today.