Why Monitoring Your SAAS Churn Rate is Essential: Understanding a Key Metric
We all know it costs way more to acquire a new customer than to retain an existing one. Depending on who you ask, this figure could be anywhere from five times more to 25X higher than it costs to keep a current customer onboard. The math is simple: your current customers should STAY your customers.This practice holds true in any industry or business model. A car manufacturer wants you to love their brand so the next time you put a new car in your driveway, it’s one of theirs. A PC manufacturer wants you to buy their new model in two or three years when you’re ready to upgrade. The laundry detergent maker wants you to reach for their bottle when you’re walking down the aisle. They’ve won you over once and now they want to keep you.But in a SaaS business, a healthy (see: low) churn rate is even more significant because a) you’re getting money from a customer on a regular basis, so every month or year they stay with you is that much more revenue; b) you often didn’t get nearly enough money from them for that first month or year to justify their cost of acquisition and c) it’s incredibly hard to grow your total SaaS business if you can’t keep the customers you already have.Reducing churn rate also significantly impacts overall margins, with a 5% decrease in churn rate often making companies 25% more profitable. It’s critical to your company’s ability to survive and thrive.“Return customers tend to buy more from a company over time. As they do, your operating costs to serve them decline,” says Fred Reichheld of Bain & Company. “What is more, return customers refer others to your company. And theyíll often pay a premium to continue to do business with you rather than switch to a competitor with whom they’re neither familiar nor comfortable.”The flip side of this is that every customer who abandons ship is now falling into the “detractor” bucket for your product’s Net Promoter Score. Not only are they not recommending that others give it a try, they’re likely to influence others into NOT signing up.
Customer churn rate vs. retention rate
Your churn rate is what percentage of customers abandon your SaaS offering each period, while your retention rate is how many stick around. These numbers will always add up to 100%, so in many ways there’s no difference whether you report on one vs. the other. But just like the glass is half-full vs. half-empty, telling stakeholders how many customers or recurring revenue you LOST each month has a different emotional response than how many customers you KEPT.People don’t like to lose - it’s human nature. So reporting on churn rate is far more likely to inspire action and raise alarms. Telling the CEO “we lost 12% of our customers last month” will get them on the warpath to improve the situation, while telling them “we kept 88% of our customers last month” might inspire nothing more than complacency or a “let’s keep an eye on that” response.
Hunting vs. nurturing customers
The sales rockstars are always on the hunt. They’re looking to land new customers, they get handsomely rewarded with commissions, they have quotas to meet and forecasts to live up to. This means they also get a lot of attention from management, both positive and negative.But in the quest to “hit their numbers,” sales organizations can often prioritize quantity over quality. Their efforts can lead to a surge of new customers, and while usually a positive thing, new users require proper training, support and nurturing (which your organization may or may not be staffed for and sufficiently committed to). It could also turn out that you now have a block of users that aren’t particularly great fits for your solution, laying the groundwork for a future spike in your churn rate.“Many firms are attracting the wrong kinds of customers. We see this in industries that promote price heavily up front. They attract deal seekers who then leave quickly when they find a better deal with another company,” says Jill Avery of Harvard Business School. “Think about the customers you want to serve up front and focus on acquiring the right customers. The goal is to bring in and keep customers who you can provide value to and who are valuable to you.”In your role as a product manager you likely wield little influence over the sales team, but you can use churn rates (and deeper data dives into which types of users are disproportionately abandoning your service) to educate your sales and marketing teams regarding the characteristics and demographics of long-term users vs. those that don’t stick around. Just as important is ensuring that the end-to-end customer experience includes the right amount of onboarding, training, support and account management.[Tweet ""Use your churn rate to educate Sales & Marketing about long v. short-term users""]
Learn from the churn
While churn is a negative in the revenue column, it can be a positive in the information-gathering department. By looking at data from customers who have left, you can start spotting trends and patterns to predict which users are in danger of joining them in the future.“Ask yourself if you know what are the key features that make your product sticky, and then use measurements of customer engagement to see which customers are not using those features,” says David Skok of Matrix Partners. “Those are the customers most at risk of churning.”For example, Groove compared the behaviors of those who stuck with their platform and those who quit to identify the “Red Flag Metrics” of at-risk customers, such as session lengths and how long it took users to complete certain tasks. Using this data and with the goal of preventing further churn casualties, they created email campaigns triggered when customers displayed this Red Flag behavior, offering tips and support to help customers getting stuck in certain areas.“Unless you do some digging, you won’t know when your customers are struggling,” says Casey Armstrong on ConversionXL. “Look for behaviors that signal when customers are having trouble and think of ways you can help them along.”[Tweet ""Learn from your churn [rate].""]
Why a “steady churn rate” could put your company out of business
Your churn rate will likely settle in and hover at some particular percentage (1-5% is the typical range). Your management team may become comfortable with this number and accept it as the cost of doing business…but this is a HUGE mistake.Churn rate is proportional — not only to your initial batch of users but to how many customers you have now. So as your business grows, losing 5% each month means you are losing more and more users each month. Now you must spend money on customer acquisition to replace that 5% before you can even begin counting new users as growth. If your customer acquisition cost is significant or you have a long sales cycle, this can put your company in a constant state of playing catch-up just to get back to the total number of users you already had before you can even contemplate incremental gains.[Tweet ""For growing SAAS companies, accepting a steady churn rate is a HUGE mistake.""]
All churn is not created equal…unless it is
If your company sells the same exact SaaS widget to every single user with no opportunity for discounting, upselling or account expansion, you can skip this section. But if your solution has tiers, add-ons, or there are cross-selling opportunities, calculating churn can and should be a little more complicated than just saying “We lost 15 customers this month.”To accurately reflect reality and provide meaningful metrics to the business, you must assign a dollar value to each churned customer fully quantifying the impact of their loss. This can easily be pegged as an Annual Recurring Revenue (ARR) value for each customer (essentially how much money you’ll make every year off of the account based on the number of seats they license, the product mix they have selected, etc.). Now, when you lose Single-Seat Sally ($60 ARR) and Enterprise Edith ($12,500 ARR) your numbers will be a more accurate reflection of reality.
- Customer churn rate is a product metric — you must take ownership of it, even if it means being the bearer of bad news.
- Use churn rates to inform selling strategies and customer retention activities.
- Use churn predictors to prioritize product development activities.
- Take an ARR approach to accurately quantify and measure churn rate.