Churn. The archenemy of any SaaS company. No metric causes more sleepless nights and receding hairlines. It’s the slow leak that regardless of how handy you are, you’ll never completely plug. It’s the bane of our business existence and we want it gone! Now! Ahhhhhhhh!
Thankfully, there are quite a few things you can do to reduce it. But first, let’s make sure we’re on the same page with what churn is, why it’s so important and the types of churn there are. Then we’ll tackle some specific things you can do to reduce it.
What exactly is churn?
Churn can most basically be defined as resources lost or the rate of those resources lost in a given period of time. Typically it’s referring to users or revenue lost and is usually represented with either a percentage or dollar amount.
For example, if you had a 5% user churn rate, that means each month 5% of your customer base is canceling.
Or if you said you had $2,000 in monthly revenue churn that means you lost $2,000 in monthly recurring revenue from either customer cancellations or downgrades.
The simple formula for it is: Lost Resource / # of resources at beginning of interval
I’m sorry I just used the word “formula.” More plainly put, say you’re calculating user churn for the month of May. You had 100 customers at the start of May and 5 cancelled during the month.
You’d say (5 customers / 100 customers) * 100 = 5% user churn
Important note: you ignore any new customers added during that time frame.
User Churn vs. Revenue Churn
Most people talking about churn are referring to “user churn”…but there’s another type as well.
User churn is the number of customers you’re losing in a given timeframe (typically per month or year).
But there’s also revenue churn, which is arguably even more important. Revenue churn is the amount of revenue you’re losing in a given timeframe due to downgrades or cancellations.
The reason why it’s such a vital metric is that it has a greater affect on your business. If you look at just user churn, you’re ignoring how much revenue you’re losing with those churned user.
A churned user on a $50/mo plan isn’t nearly as bad as a churned user on a $500/mo plan. Just looking at user churn would gloss over the fact that you lost a major customer. Revenue churn effectively weights your user churn to be a more accurate representation of how your business is doing.
Why it’s so important to measure
Okay, you get the “how” but what about the “why”? Why is it so important to track these types of churn? It comes down to growth and customer acquisition.
Churn is the antithesis of growth. It’s the undoing of all your hard work and money spent acquiring customers.
The more customers you acquire now, the fewer there are to acquire in the future, which means each new customer is incrementally harder and more expensive to acquire. So if you keep bleeding customers, you’re making it increasingly harder to grow down the road.
Churn also points to a problem with the product itself. You need to identify what those problems are because that points to the reason people are churning. Knowing those problems gives you a game plan for reducing the churn.
What are ways to reduce churn?
So, speaking of that…what are some common ways to reduce churn?
You need to make your product indispensable. Make it part of your users’ daily workflow. Provide frequent value that they can’t live without.
One way to do that is with something like a daily/weekly email report that shows the value you’re providing.
At Baremetrics, we do this with daily/weekly/monthly email reports that show key metrics.
Another way to make your product indispensable is with multi-user support. Adding this feature means your product becomes part of an entire company or departments workflow, making it much harder to part with.
What’s an acceptable churn rate?
So what’s acceptable? A typical “good” churn rate for SaaS companies that target small businesses is 3-5% monthly. The larger the businesses you target, the lower your churn rate has to be as the market is smaller.
For an enterprise-level product (talking $X,000-$XX,000 per month), churn should be < 1% monthly.
Most early-stage SaaS companies I’ve observed typically have churn around 10-15% for the first year as they work out exactly what their product needs to do, then they’re able to reduce it pretty quickly.