Getting new customers is exciting, but for many SaaS businesses, that excitement is undercut by the time it takes to break even on acquisition costs. According to For Entrepreneurs’ 2020 SaaS survey, the average time it takes for new customers to become profitable is 2.4 years.
For example, say you spend $240 — which would be on the low side — to acquire a new customer who pays $40 per month: it will take six months for that customer to become a positive investment.
This time-to-profitability problem is especially troubling when you consider customer churn. Customers often churn or cancel their subscriptions before they pay back the cost it took to acquire them and become profitable.
All of this is why customer churn rate is just as important to track as your rate of growth; your churn rate must stay lower than your growth rate in order for your SaaS company to stay profitable. Additionally, understanding your churn rate gives you clear indicators on when you need to invest more in customer success and customer retention (rather than just acquiring new customers).
In this article, we’ll talk about what customer churn rate is, how to calculate it, and steps you can take to reduce it.
What is Customer Churn Rate?
Customer churn rate measures the percentage of customers who stop paying for your service over a defined period. It’s calculated using the formula (Lost Customers ÷ Total Customers at start of period) x 100.
For example, if you start the month of August with 2,000 customers and 50 of those leave by the end of the month, your Customer Churn Rate for August is 2.5%.
Customer churn rate, also known as the rate of customer attrition, is not to be confused with revenue churn rate, which is a measure of lost revenue.
What is a Good Churn Rate for SaaS Companies?
In a 2019 survey of nearly 2,000 businesses, Recurly found the average SaaS churn rate to be 4.55%: 4.67% for B2B: and 4.71% for B2C.
Source: Recurly Annual Subscription Billing Metrics Report
That said, you should expect your SaaS churn rate to vary based on a number of factors:
- Pricing: Recurly found higher-priced services experience less churn than lower-priced services where subscribers cancel more readily.
- Age in business: A ProfitWell study found businesses older than ten years have lower churn rates (2 – 4%), whereas younger companies have higher rates in the range of 4% – 24%.
Still, SaaS companies have some of the lowest churn rates across different industries.
How to Calculate Churn Rate?
Above, we mentioned the formula to calculate churn rate is (Lost Customers ÷ Total Customers at start of period) x 100. Let’s walk through how to use the formula:
- Decide a time period to calculate for – that could be a month, a quarter, or a year.
- Determine the number of active customers at the beginning of the period.
- Track the number of customers who canceled by the end of the period.
- Divide the number of canceled customers by the number of active customers at the start of the period.
- Multiply that number by 100.
While this method doesn’t account for new sign-ups within the period, that’s a good thing. The goal of calculating your churn rate should be to understand how well you retain existing customers, which is separate from acquiring new ones.
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5 Simple Tips to Reduce Your Churn Rate in 2021
If you want to reduce your churn rate, you need a solid customer retention strategy in place. Here are five steps to help you retain more customers and reduce churn.
1. Improve Your Customer Onboarding Experience
According to a ProfitWell study, customers who say they have a good customer onboarding experience are 5% less likely to churn than customers who don’t. Here are some tips to improve your customer onboarding experience:
- Minimize friction: Take care of the basics like bugs, broken features, integration options, and product navigation issues so customers don’t have a painful user experience. Then incorporate self-service support options so customers can get immediate solutions to problems they encounter while using your product.
- Reduce the time to value: Guide customers to results so they can see the value in your service faster. Create knowledge databases, video tutorials, email sequences, and in-product prompts that tell them exactly what to do and how to use your product to get results.
- Personalize the experience: Your service likely has more than one ideal user persona, so customize your service to match the needs of each persona. Use the data you collected at the time of sign-up to guide specific personas to the specific results they need.
2. Monitor User Adoption and Continuously Improve User Proficiency
User adoption stats provide insight into when users completely invest in your service. They indicate when people stop shopping for alternative services and commit to your product: in other words when they decide not to churn.
The best way to track adoption is to use a user adoption solution like Whatfix to track metrics like product activation rate and feature adoption rates.
Low adoption rates typically stem from poor user understanding and proficiency; people won’t use a tool if they can’t figure it out. Digital Adoption Platforms (DAPs) like Whatfix lets you create walkthroughs, tutorials, and other in-product support features to help your users make the most of your software from within the software itself.
Whatfix Interactive Guidance on Salesforce
3. Create Open Communication Channels with Your Customers
Open communication channels encourage customers to reach out with issues or feedback and allow you to resolve customer issues before they escalate to churn.
At the very least, set up a chat button in your product so customers can get answers to questions without waiting.
But don’t stop with in-app chat support alone. Some customers take their grievances to social media — 35% according to an American Express report — so you need to be available on the different platforms where users hang out e.g. Twitter or Facebook. For example, when Buffer was hacked in 2013, people immediately started tweeting about it. If Buffer wasn’t available to respond to tweets almost immediately, the situation would have escalated and caused heavy churn. Instead, Buffer was able to quickly manage the situation and even win users’ trust while they resolved the issue
4. Track and monitor NPS and CES scores
Customer-success metrics like Net Promoter Score (NPS) and Customer Effort Score (CES) are indicators of how well your customers are satisfied with your service.
NPS scores indicate how likely users are to recommend your service to others. Generally speaking, the higher your NPS score, the lower the risk for churn. CES scores measure how easy or hard it is for customers to use your product. Undoubtedly, if customers find your product difficult, they are more likely to churn.
Customer experience tools like Hotjar help you track and monitor both your NPS and CES scores with surveys.
5. Use Customer Feedback in Your Product Roadmap
Customer feedback gives you clear signals about how to make a product that provides user value and, in turn, keeps customers around. If a dozen customers express frustration your product lacks an integration with another widely used app, which gives your product team a pretty clear signal that an integration will likely satisfy your customers and, in turn, decrease churn.
Prioritize issues to solve based on impact level. For example, a bug that makes it impossible for API calls or integrations to work is certainly a more pressing issue than a slower app load time.
Finally, consider solutions your customers suggest in feedback; they could lead to better outcomes.
Monitor Your Churn Rate for Business Growth
A high customer acquisition rate means little for business if the churn rate is just as high. But your goal shouldn’t be a 0% churn rate; customer churn is inevitable and certainly not a mark of failure. Instead, consider it a learning opportunity that helps you create a better product to meet customers’ needs. That way, you’ll retain more of the customers you’ve worked so hard to acquire and experience a sustainable growth rate.
Need to optimize for customer retention? Start with optimizing your customer’s first contact with your business: onboarding. Check out our guide to SaaS customer onboarding (including a free checklist).