Key takeaways:
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.
Churn can be defined as resources lost or the rate of those resources lost in a given period of time. Typically, it refers to users or revenue lost and is represented by either a percentage or dollar amount.
For example, if your user churn rate was 5%, that means 5% of your customer base would cancel each month.
If you said you had $2,000 in monthly revenue churn, that means you lost $2,000 in monthly recurring revenue from customer cancellations or downgrades.
The simple formula for calculating churn rate:
Lost Resource / # of resources at the beginning of the interval
I’m sorry; I just used the word “formula.” More plainly, 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
When calculating churn, you’ll ignore any new customers acquired during that time.
Once you’ve got your churn data, see how to conduct a churn analysis for improved strategic decision-making.
You can calculate different types of churn. Involuntary churn happens when customers fail to retain due to accidental factors like expired credit cards and track both gross and net revenue churn metrics.
Finally, you can also calculate churn-based LTV metrics.
Most people talking about churn refer to “user churn", but there’s another type as well.
User churn (also sometimes called “customer churn”) is the number of customers you lose in a given timeframe (typically per month or year).
It’s important to understand the difference between user churn and revenue churn.
But there’s also revenue churn, which is arguably even more important. Revenue churn is the revenue you lose in a given timeframe due to downgrades or cancellations.
The reason why it’s such a vital metric is that it has a greater effect on your business. If you look at just user churn, you’re ignoring how much revenue you’re losing with those churned users.
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.
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 those problems because that points to why people are churning. Knowing those problems gives you a game plan for reducing the churn.
So, speaking of that…what are some common ways to reduce churn?
First, 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 a daily/weekly email report showing 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 department's workflow, making it much harder to part with.
Finally, you can have measures in place to identify customers at risk for churn— including involuntary churn. Baremetrics’ cancellation insights can help you identify churn risks so you can intervene before they disengage, and our Recover feature uses dunning management for churn to proactively prevent missed payments to reduce accidental churn.
If your churn rate is creeping up, find out why and then take immediate steps to resolve potential pain points or obstacles in the customer journey. Here are six proven strategies to reduce churn quickly.
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 experience churn of 10-15% for the first year as they work out exactly what their product needs to do, but they’re able to reduce it pretty quickly. Some even achieve a seemingly-elusive negative churn — and you can, too.
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