The SaaS Churn Handbook!

Everything you need to know for understanding and preventing customer churn

Everything you need to know for understanding and preventing customer churn

The Software as a Service (SaaS) industry is one of the fastest growing industries in the world. Just until three years ago, the emerging SaaS industry, which is a subset of the overall cloud services market, was generating total revenue of $46 billion annually. And by the end of 2020, it is expected to grow to $76 billion.

The SaaS companies are no doubt getting well equipped with all the growth parameters they need. They are getting specialized on each vertical that contribute to the overall growth of their businesses. But with such an immense growth comes equally challenging hurdles as well that companies need to overcome.

And one such major challenge which is a common plight for almost every SaaS business is Customer Churn. So far the industry is still in its infancy and there is no standardized approach in dealing with this topic. All organizations are exploring, learning and growing in their own ways.

Most probably that is the reason that has brought you here to explore about Customer Churn. This topic is of such a great value that we decided to create this micro-site that will cover everything you need to know about it. So let’s get started!

What is customer churn?

Customer churn, or customer attrition as it is sometimes referred to, is an event when a customer stops using your product resulting in their non-renewal of the subscription. In other words, it is the end of the relationship between you and your customer.

There could be multiple reasons for them to stop buying your service. They can vary from the dissatisfaction from your service to their inability to derive value out of it or any other reason. Instead of digging more into why the customers leave your company, let us spend some time on understanding the impact customer churn has on your business.
Customer Churn

Impact of customer churn on business

If you are wondering what impact customer churn creates on your business then you have to take into account the customer retention as well. Retention rate is the exact inverse of the customer churn. It is the rate at which you are able to retain your customers for renewal of subscriptions and further expansion of your business.

Compounded effect

According to a study by Bain & Co., just a 5% increase in customer retention rates could potentially boost profit up to 95%!
Customer Retention

If you will look closely into this graph, the difference between the revenue earned from just a 5% increase in retention rate is massive in 60 months. So, the insight you can glean from this graph with respect to churn is that if those 5% (between 5% and 10%) customers had got churned then the compounded effect of revenue loss over the term of 5 years would have been exceptionally huge. 


This is the extent to which customer churn can impact your business. In the initial period (between 10 and 20 months) it is negligible but you can clearly see how the benefit of its prevention compounds over time (in the 5th year).
And this brings us to another very important topic in the area of customer churn – customer lifetime value (LTV).

Customer Lifetime Value

Customer Lifetime Value is the total worth of your customer to your business over the entire tenure of their relationship. The cost of acquiring a new customer is always greater than keeping the existing ones. Hence, to drive growth you will always have to focus on increasing the LTV of your customers. The revenue generated during the initial period usually pays off to break even the cost of new customers’ acquisition. And the longer they stay, the more they start adding to the profit margin of the business.

A common mistake new SaaS players make is that they give more focus on acquiring new customers than retaining the existing ones. This means they need to keep acquiring as many new customers as the number of customers they are losing to at least maintain the equilibrium.

But since the cost of new acquisition is always higher than retaining the existing ones, they don’t realize that they are actually losing out in this game. They not only end up creating more pressure on sales but allocate more budgets on advertising, marketing, giving special offers and so on for attracting new customers.

Hence, increasing the LTV by reducing churn should be one of the primary goals of SaaS companies. The simple formulae to calculate LTV is:

LTV = (Customer Revenue per year) x (No. of years of customer relationship) – (Total cost of acquiring and serving the customer)

So, the longer they stay, the more their LTV gets multiplied over time.
Customer Lifetime Value

Impact on Valuation

Churn rate is one of the important parameters that decide how investors perceive your business. Venture Capitalist firms consider customer churn to determine your company’s performance in the market and retention rate is essential in a SaaS company’s public valuations.

Investors use LTV to predict how much profit your company would generate in the future. It is a clear indicator of the health of your business. High churn rate reduces the LTV and that can make your investors doubt the strength of your company and put on hold further investments flowing into your business.

Net Negative Churn

Net negative churn is like a dream come true for any SaaS company. It is achieved when the total additional revenue generated by your existing customers surpasses the revenue lost from cancellations and downgrades.

It is the situation where your current customers are spending so much additional money on your business that the revenue lost by churned customers is offset by it.

The main factors that help achieve net negative churn are through:

• Customer’s renewal of subscriptions
• Customers switching from basic to advanced plan
• Companies upselling higher version products to existing customers
• Companies cross-selling other relevant products to existing customers

So, if you have a net negative churn then it means you could still have an unfair advantage of growth in your business even without acquiring new customers.

Revenue Churn

Revenue churn is the direct measure of lost revenue as a result of customer churn and downgraded subscriptions. It can be measured in terms of lost monthly recurring revenue (MRR) or annual recurring revenue (ARR). It is often expressed as a whole number rather than in ratio.

The causes of revenue churn can be one of the following:

• Lost contract or cancellations
• Downgrades to a cheaper plan
• Customer acquisition by a competitor
• Customer going bankrupt

Except for the last point, all the above three causes are in your control and largely depend on the quality of service you provide to your customers.

Customer Churn vs Revenue Churn

In order to evaluate the strength of your business you have to take into account both customer churn and revenue churn. Customer churn would tell you how good you are at retaining customers. Whereas Revenue churn would show how good you are at retaining your revenues. 

They sound similar but are not the same. There are chances that your customer churn goes high for a period but the additional revenue spent by the existing customers would offset the revenue lost from the churned customers. In this case the revenue churn may remain the same or sometimes even negative if the additional revenue generated by the existing customers surpasses the lost revenue.

At the end of the day, your goal is to generate profits. So based on both customer churn and revenue churn, you can identify the area you need to prioritize to curb churn. For example, if there are 10 customers who are on a monthly subscription plan of $10 each and there is another customer on $200/month plan then your priority should be on serving that one customer who is generating the revenue worth more than the total revenue of other 10 customers.

Customer churn is more relevant in the beginning when every customer starts with an initial purchase of your product. But with time, each customer starts generating different revenues and hence the Revenue churn calculation becomes more relevant for each case.

Customer Churn Rate

So far we have discussed about customer churn in numbers. Now we are going to discuss the Customer churn rate. It is simply Customer churn expressed in percentage. In other words, Customer Churn Rate is the percentage of customers who cancel their subscription during a given time.

To calculate the Customer churn rate you need three values:

• The period within which you are going to calculate customer churn
• Total number of customers acquired during that period
• Total number of customers churned during that period.

And the calculation of customer churn rate goes like this:

Customer churn rate = (Total number of churned customers) / (Total number of acquired customers) x 100

So, let’s say you want to calculate the Customer churn rate for a year. If you acquired a total of 1000 customers in that year and lost 80 customers in the same tenure then customer churn rate would be:

CRR = (80 / 1000) x 100 = 8%

The CRR can be calculated for a month, quarter or a year based on the frequency of the acquisitions and churn you have in your business. If you have a B2C product then your frequency of acquisitions as well us churn would be much higher. So in that case it makes more sense to calculate your CRR on a monthly or a quarterly basis. Whereas for a B2B company an annual CRR makes more sense.

Customer Churn Rate

Customer Churn Prediction

The whole field of Customer Success within which the topic of Customer Churn falls is based on the approach of proactiveness. It is vital to the customer success managers (CSMs) to predict which customer is most likely to stop buying their service in the future. The very reason companies appoint CSMs is to make sure that the news of customers leaving the company should not come as a surprise. They need to know that in advance so that they can take preventive measures proactively.

Churn Analysis

To prevent churn from happening in your company you need to analyze the behavioural, transactions, demographics and usage patterns of your churned customers. You will have to leverage the business intelligence tools to help you analyze the data in a more meaningful way. Doing a root cause analysis of churn would help you identify the right key performance indicators (KPIs) that are causing this event. Then taking a deeper look on those KPIs would help you identify a pattern which is common in all the churned customers. Some of those KPIs which help you analyze customer churn can be:

Customer engagement

Checking upon the usage data of your churned customers would give you information about how engaged they were with your product. How their usage declined over a certain period and how did it impact the customer in making the final decision of leaving your service.

Support tickets

The frequency of a customer who is seeking technical support from your team can reveal two outcomes. Firstly if it is low then it means your product is working seamlessly at the customer’s end and they are able to handle it quite comfortably. But it can also mean your customer has given up on your product and is not engaging in any way that requires them to raise support tickets. Hence, this parameter is most useful when combined with the engagement metric.

Competitors pricing

Another reason for your customers to leave you could be getting the same product at a cheaper price from your competitors. You can not remain static with your pricing strategy if your competitors are hovering around your customers with better deals. You need to be constantly vigilant about your competitors pricings or other offers they are giving to their customers so that they don’t lure your clients.

Likewise there can be many other KPIs specific to your business that can help you draw meaningful insights about the causes of churn. Then taking preventive measures to address those issues proactively would help you reduce churn in the longer run.
Customer Churn Prediction

Churn Prediction Model

Having analyzed the causes of churn, it makes more sense if that can be used to predict more churn in the future. There are many prediction services based on Machine learning like BigML that you can use to make a churn prediction model for your own business.

All it needs is an extensive amount of data that can be uploaded on it so that it can create a predictive model. Then you can use that model on your existing customers to know their likelihood of churn.

Creating Datasets

The ML tool needs data that can be used as an example for developing the intelligence it needs to predict future events, which is churn in our case. What it does is that it extrapolates on the patterns given to it as input and creates a predictive model for your existing customers.

There are basically four types of data that you need to give as an input: 

• Basic information like age, gender, location, education, income etc.
• Support calls nature like the characteristics of all the queries customers raised while interacting with your company, their CSAT score, frequency etc.
• Usage patterns of your product by the customer
• Contextual information which is specific to your business or niche.

Churn Prediction Model

Extracting Data

Once you have identified the different datasets through which you can represent your customers, your next step is to pull data of your existing or churned customers from CRM or Customer Success platforms or directly from your Database. You can make a search query on your database to extract the data in a CSV format where each row represents a customer.

Upload Data and Create Predictive model

After you have prepared the data, you need to upload the CSV file on a prediction service tool like BigML or Google Cloud ML Engine. Based on this input the service will create a churn predictive model which will include a new column at the end of each row that will show you the churn predictability of each customer.

Of course creating a churn predictive model is a much more laborious task than what has been briefly defined over here. But once you get a hang of it, it can be used for an indefinitely longer period.

Churn Reduction

Having understood all the intricacies of churn above, let us now look at how churn can be reduced. Just to reiterate the impact of churn, it is the leakage in your revenue stream or your customer base while your company is on the path of progress.

Naturally, for a tight growth you need to make sure that all holes are sealed so that you don’t lose any customer. Your customers have to become your long-term partners in your success journey and for that you need to take every step that is called for.

In your attempts to reduce churn, your highest goal should be to have a zero churn rate. This ambitious goal means you are able to retain all your customers and each of them becomes a success story for you. But that is not easy. To achieve it you will need a robust framework in your organization to consistently keep the customers engaged and help them derive value out of your product.

Below are the ways you must implement to reduce churn.

#1 Proactive communication

The best way to engage your customers is by being proactive in your communication. Keep a check on your customer’s usage of your product and send them useful tips from time to time.

You must hone your skills to anticipate what customers might need in their journey of product adoption. Adding them value through emails, calls or meetings would help them integrate your service with their day-to-day work.

This is important from a customer success point of view. Because one of the important shifts in customer success philosophy from traditional servicing approach is that they should perceive you as their business partner rather than just a vendor. And if you are waiting to communicate only when a customer needs you then you are no different than traditional servicing staff.

#2 Create goals for your customers

One of the most effective strategies to keep customers engaged for their lifetime is to tie them to their business goals that they can achieve through your product. You must hold strategic discussions with them during onboarding where you make their business use cases and demonstrate how your product will help them derive value.

These goals should be measurable, time-bound and realistic. And as you move along and achieve each milestone, you will carve out a deeper relationship with your customers.

#3 Prioritize your customers

All customers have a different lifetime value for your organization. More so, they are on different phases of their customer journey too. Hence, you must be able to prioritize your engagement efforts based on their generated revenue and stages.

Your premium customers should obviously have more personal touchpoints with you. Whereas a large chunk of low revenue customers can be managed through a tech touch engagement model. This will make sure you are not just focusing on reducing customer churn but also revenue churn of your organization.
Customer Churn

#4 Be vigilant of your competitors

The world of SaaS products is in constant flux. Everyday there is innovation happening in one or the other areas. Hence, you need to always stay updated of what new innovations are taking place in your niche.

You may have released your product and sold it to your customers but that’s not the end of the story. You must occasionally visit your competitors’ products and identify what cool features they have added which you might have missed. Your product management team should always be working towards improving your product.

Likewise, you can also check upon the different pricing or deals your competitors are offering which might attract your customer’s attention. Be active on social media and see what kind of response they are able to fetch on their marketing efforts.

Apart from the above mentioned ways, the quality of Customer Experience you give to your buyers matters too. Reducing churn needs a systematic approach along with thorough understanding of this topic, your customers and the dynamics that is at play between the two parties.

Resources

We hope you are able to get valuable information on the concept of Churn through this guide. Understanding this concept in detail will make you adept in taking your growth journey to a whole new level. There are many ways you can mould this guide to find solutions for your specific context. But having a 360 degree view and making sure you haven’t left any stone unturned on customer churn would help you build and implement a foolproof strategy for your business.

Even though we have covered all aspects of churn in this guide, there is a lot more knowledge available online that can help you take even deeper into this topic. Hence, we would like to conclude this guide by directing you to the right resources that will always help you upgrade your knowledge in this field.

Before you go, make sure you bookmark this page for regular reference. And if you want to talk to our experts on this topic then do not hesitate to contact us. You can also book a demo of our Customer Success Platform to understand how we can help you reduce churn.

Understanding Customer Churn

Churn Prediction

Churn tools

Customer Churn Resources

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