Churn rate is the rate of customers or revenues lost by a company in a given time period. It is a common belief in the SaaS industry that the acceptable SaaS churn rate benchmarks is around 5% annually. It means that out of every 1000 customers if 50 customers are leaving your business then it is still acceptable.
But this is a very generic statistic which may not hold true for every kind of business. There are many factors that decide what is an acceptable benchmark and what exceeds it. They are:
The size of your company
The size of the company is usually the deciding factor in knowing how much churn rate can be borne by it. If it is a small and medium enterprise then a 5% annual churn rate can fall heavily on its shoulders. While for a large business catering to a vast volume of crowd losing 5% customers annually is still manageable. The rate of new customer acquisition offsets the churn rate.
The kind of product
Your product decides your business niche. The volume of sales depends on if it is for B2B or B2C customers. The B2B products are more sensitive towards customer churn because of the incredibly lower volume than B2C. The journey of customer acquisition is longer in B2B because of all the considerations businesses make before buying a product. Hence, it becomes more costly due to a higher number of interactions in a longer customer acquisition journey.
The revenue model
If you design the revenue model of your product in such a way that you can recover the customer acquisition cost through initial purchase itself then a slightly higher churn rate would not result in a major loss of the business. Of course the end motive of every business is to maximize their profit. Yet, if the pricing is kept intentionally low to attract even impulsive buyers then the churn becomes a usual phenomenon.
Hence, you need to consider multiple factors to find SaaS churn rate benchmarks. And that varies for every business according to different parameters it runs upon.
Pacific Crest Securities which is an investment bank focused exclusively on the technology sector did another survey. They were later acquired by KeyBanc Capital Markets to whom this survey is referenced. They conducted this survey in 2016 on 336 SaaS companies out of which nearly half of them reported their churn rates.
As I mentioned above, while measuring a benchmark on churn rate you need to consider various factors. Likewise, Pacific Crest considered following statistics in the companies they surveyed. They had median:
- Yearly revenue of $5 million.
- 50 full-time employees
- Average Contract Value of $25000
What they found out was that the median annual churn rate for the entire sample was 10%. Or 0.87% per month. This is higher than the ideal 5% rate but that’s what the difference could usually be. Especially when measured across different sets of criteria of different businesses.
No matter what SaaS churn rate benchmark is valid for your business, the ultimate goal of every business is to minimize it. There are many proven churn reduction strategies out of which here are a few as listed below:
Improve onboarding process
The customer starts building their perception towards your brand right from the beginning. In fact, it starts right from the point when they hear about your product for the first time. Every stage they go through in the customer lifecycle leaves an impact on them that makes them decide to proceed. The marketing collaterals played their own part in generating leads. The sales team contributed in their own way to help them move forward.
The customer onboarding stage should continue with the same kind of experience that they had in the initial stages. You should have a proper product orientation program in place through which they can get familiar with your product. Depending upon the complexity of your product, an appropriate training module should be provided either in person or virtually. This is also the time when you communicate all the goals related to customer success while they use your product.
Be proactive rather than reactive
One of the aspects that separates customer success in SaaS companies from traditional servicing teams is proactiveness rather than reactiveness. Based on the customer’s usage pattern of your product you must evaluate how much value are they realizing. The earlier you know it, the more time you would get to act upon it to hit your SaaS churn rate benchmarks.
You must know what are the challenges they are facing. If they are using enough features of your product considered necessary for product adoption. Instead of waiting for them to reach out to you for any help, you must approach them with prior solutions.
For example, you can send them tips over email that shows the benefits of using unused features of the product. If there are shortcuts implemented on your product then you can tell them those too through emails. Having monthly or quarterly review meetings would help you keep them on track towards product adoption.
Appoint a dedicated Customer Success Manager
No matter how tech savvy we become, the weightage of having in-person interaction can never be undermined. It is understandable if you as a CSM are maintaining a large number of customers but it is equally important to personalize your interactions with them from time to time.
Oftentimes, they don’t need off-the-shelf solutions but someone from the provider side who can specifically look into their needs. The more specific you get in giving solutions to them the more dependent they would become on your service. For the kind of rapport that they have built with you over the months or years will become irreplaceable if they ever think of buying the same service from your competitors.
The SaaS industry is still there in its growing stage. Hence there are no industry-wide SaaS churn rate benchmarks yet that hold valid for all kinds of business. Nevertheless, whatever benchmark you set for your business, one thing is clear that you should always direct your efforts towards minimizing it.
Customer retention results from a long-term strategy for nurturing a positive relationship with your customer. And unlike traditional businesses approach, the modern SaaS company cannot grow until it accounts for the success of the customer while offering their service. This is in some ways empowering to realize that the business ecosystem has expanded way beyond the traditional limits. The customer is a part of your new ecosystem. And if you are able to help them realize true value out of your product then churn reduction becomes a natural outcome of your business.