When you notice that quite a few customers have decided not to renew their subscriptions, you may be tempted to go out and seek as many new customers as possible. But without understanding more details about what causes these cancellations, you may continue to lose customers.
For this reason, it’s essential to carefully and regularly monitor your customer’s cancellations via a churn rate metric.
In this article, we’ll discuss the churn rate in more detail and how to reduce customer churn strategically.
What is SaaS customer churn?
The customer churn rate in SaaS refers simply to the rate that your customer base or cancels their software subscription over a specific time period.
This metric is critical to understand, as it can tell you much more than what you may initially consider. It can provide insights into:
- Customer satisfaction: If the churn rate has increased, for example, there must be some source of dissatisfaction for the customers
- Pain points: Often, cancellations are symptoms of larger underlying causes such as technical glitches, latency, and limited feature availability
- Financial projections: In addition to the immediate financial repercussions, the number of lost customers can help you predict future revenue.
To calculate the churn rate, simply divide the total number of customers lost within a time period by the total number of customers. Multiply this by 100 and you have your churn rate expressed as a percentage.
Chrun Rate = Lost customers in the last X days / Total number of customers * 100
For example, let’s say in the month of April you lost 67 out of a total of 569 customers. Your overall customer churn rate can be calculated by dividing the total number of lost customers (67) by the total number of customers (569) and then multiplying the result by 100. So, in this example, your churn rate would be 11.8%
It’s good practice to set a regular time period for evaluating the churn rate—perhaps monthly or quarterly. Then, you can address the underlying cause of any increases in churn and measure the effect of your solutions.
Additionally, it’s wise to schedule an annual review of your churn data from the previous year. This can help you identify any long-term trends and make more strategic decisions.
Types of churn rates
In addition to the overall customer churn, there are a few other ways to pinpoint specific aspects of the churn that provide more information.
SaaS Onboarding Churn
This refers to customers lost specifically during the earliest phases of their subscription. Rather than focusing on the time period in terms of the calendar—a quarter or a month, for example, the onboarding churn considers the length of the customer’s subscription.
Specifically, the onboarding churn refers to the earliest period of the subscription—perhaps the trial period or the first thirty days .
To calculate this, divide the number of customers who canceled before or at the end of their trial (or at the 30-day mark) by the total number of customers, and multiply this number by 100.
Let’s modify the hypothetical example above to clarify.
Let’s say that in April you lost 67 of 569 customers, but upon taking a closer look at the age of their subscriptions, only 12 of those customers were lost during their initial subscription period.
Your onboarding churn rate can be calculated by dividing the total number of customers lost during the onboarding phase (12) by the total number of customers (569) and then multiplying the result by 100. So, in this case, your churn rate would be 2.1%
Given that your overall customer churn rate is 11.8%, this metric clearly shows that the onboarding phase is not the major cause of customer loss. Should that number start to increase over time, however, you would know that there is some kind of underlying issue with customers’ first impressions of the product.
This could be a steep learning curve for users, a failure to create attractive and functional user interfaces, or perhaps users failing to see potential uses for the product.
Voluntary and Involuntary Churn
Sometimes an overall customer churn rate may be misleading or perhaps fail to reflect the overall trend of customer cancellations. Often this is connected to a failure to consider whether these cancellations are voluntary or involuntary.
A customer may cancel a subscription for many reasons completely disconnected from the quality and functionality of your product.
For example, they may lose customers due to a global pandemic, they may change their business model, or their SaaS business could unexpectedly be shuttered due to regulatory/compliance lapses or bankruptcy.
Removing these involuntary cancellations will increase the relevance of your churn rate and help you assess customer satisfaction more accurately.
So, let’s consider that loss of 67 customers in April another way. Upon closer examination, you realize that 47 of those cancellations were due to circumstances beyond your control. You should simply subtract those 47 customers (the involuntary cancellations) and continue the standard calculation.
In this case, your voluntary churn rate can be calculated by dividing the total number of remaining customers after subtracting the involuntary cancellations (20) by the total number of customers (569) and then multiplying the result by 100. So, in this case, your churn rate would be 3.5%
In this case the number is relatively low, and implies that there isn’t necessarily something wrong with your product, but a more significant problem in the market. This should tell you that no significant changes are necessary to your product and that making substantial changes might cause unanticipated effects.
Revenue Churn Rate
The other two types of churn rates we’ve discussed so far emphasize the number of customers who cancel their subscriptions. While this is certainly useful, it may not be as relevant to SaaS products that use a tiered pricing system.
In other words, if there are basic, advanced, and professional tiers for your product, your bottom line will be affected differently based on which tier the customer has canceled. You could conduct targeted churn rates for each customer group to get the most accurate information, but this can be time-consuming, especially if your product has many tiers.
Instead, you can calculate the revenue churn (also known as the “dollar churn”).
To calculate this, you’ll first need to make a few calculations:
- Expansion Revenue (ER): how much additional revenue did you earn from new customers (and customers who upgrade their tier) in the current period?
- Starting Revenue (SR): how much revenue did you earn during the previous period?
- Lost Revenue (LR): how much revenue did you lose from cancellations?
The revenue churn rate is the LR divided by the SR, less any ER.
Let’s expand that example one more time.
Let’s say in March, your total revenue was $14,000, so your SR=14000.
During April, you lost 67 customers: 50 of them had subscriptions at $18 each, and 17 of them had subscriptions at $30 each. So, your LR = 1410.
In April, you also gained 15 new customers at $18 each. So, your ER=270.
The revenue churn rate can be calculated by dividing the lost revenue (1410) by the starting revenue subtracting the expansion revenue (14000 - 270) and then multiplying the result by 100. So, in this case, your churn rate would be 10.3%
So why does this matter?
If we compare the revenue churn rate (10.3%) with the overall customer churn rate (11.8%), we can see how losing lower vs higher-tiered customers can affect the bottom line differently.
This number can help you reflect on whether it may be worth it to adjust your prices or tiers for more reliable income.
What causes an increase in the SaaS churn rate?
Two of the top reasons for high customer churn at any stage of their journey with your organization are 1) Poor customer experience and 2) Value Perception. Let’s take a closer look at these.
Poor Customer Experience
Of course, it’s hard to quantify something as subjective as a customer’s overall experience of your product, but you can still ask yourself questions to determine whether this is causing your increased SaaS churn rate.
- Do the features offered fit your customers’ needs and expectations?
- Can the customer effectively (and ideally, in a pleasurable way) navigate your user interface and design?
- How does your company communicate with its customers? Are there slow response times to queries? Does your team truly consider and act upon feedback?
These questions may be challenging to answer without soliciting feedback from your customers or conducting a study to analyze user’s experiences.
Value Perception
How your customers perceive the value is just as (if not more) important than the actual value your product provides. Ask yourself the following questions about how your customer is able to perceive the value of your product:
- How does your customer learn about the various features available in your product and how they could be potentially used in their business?
- Does your product include any metrics that help the customer understand how much time/money they have saved using the product? In other words, is the customer easily able to calculate their return on investment (ROI)?
- How does your pricing plan compare to your competitors?
Maintaining an online presence (a blog, a discussion forum, a public-facing roadmap) can help customers realize the value your product can add.
Onboarding
While these methods are effective in preventing an increase in churn rate, we haven’t yet discussed how to decrease your churn rate. By far, the best method is thorough and painless onboarding.
The onboarding process is the phase where clients first begin to use your product and understand its features and value.
Learning a completely new system can be challenging and overwhelming, so it’s important to do all you can to demystify the process.
Some considerations:
- User Interface: Focus on making app navigation as easy and intuitive as possible. You can achieve this by beta testing and conducting user experience studies.
- Gamify the experience: Allow new users to earn points and conquer challenges as they progress through the onboarding process. This positive reinforcement makes the learning process more enjoyable.
- Unlock features gradually: Rather than unleashing the full force of the application all at once, gradually unlock more advanced features as the user builds fluency. This will help them feel less overwhelmed by the sheer number of options.
Summary
In this article, we discussed SaaS customer churn and how to calculate it. By exploring the different types of churn rates, you can get a broader idea of customer satisfaction and retention rates.
One of the most important techniques for churn reduction rate is clear and effective onboarding.
Overall, regular monitoring and evaluation of churn rates can help you to address the root causes of issues and make strategic decisions.
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