Churn is part of your life as a SaaS business. You get used to it just like you’re used to the sun rising in the morning.
If you’re not actively trying to reduce it, you’ll eventually find yourself in the dark.
You shouldn’t just accept churn. You should try to understand it.
This entails looking at areas where churn rates are the highest and most prominent, as well as trying to detect areas where they might not be so clear.
In this article, we’ll cover the most common reasons why churn happens so you can take action in trying to combat it.
Table of contents:
Why Does Churn Happen?
What Is a Good SaaS Churn Rate?
Eight Reasons for SaaS Churn
Why Does Churn Happen?
There are many reasons why churn happens.
The general product/market fit may not be right, or there could be more specific reasons connected to your brand, product, or marketing.
Whatever individual problems cause churn, they all stem from two root reasons.
The first one is your customer going out of business.
It’s disheartening when that happens, not just because of lost revenue but also because it reminds us that entrepreneurial failure can happen to anyone.
This factor is beyond your control, and the only way you can act on it is to replace that customer or wait for when their business picks up again.
The second reason is something you can fix: when customers don’t achieve their goals. This is within your realm of responsibility.
Many SaaS CEOs have grown so accustomed to churn that they stopped worrying about it. That can spell disaster for their business.
Churn might be the industry norm, but the rate at which that happens is not the same for every company.
We’ll cover acceptable churn rates for SaaS in the following subsection, but for now, let’s focus on how to make sure your customers don’t leave you for preventable reasons.
Replacing customers is costly, and knowing you could have done something to keep them is frustrating.
That’s why it is vital to do your research and, if you discover your customers are unhappy, find out what makes them feel that way.
You’ll be surprised how many quick fixes can help reduce your churn and increase revenue.
Focus on aspects of your business and product that you can improve to reduce churn.
What Is a Good SaaS Churn Rate?
Simply put, you want to keep your churn rates as low as you can.
The most common answer you get when asked about acceptable churn rates in SaaS is ‘’it depends’’. It’s frustrating that most analysts avoid giving you a straight answer.
The truth is that ideal churn rates depend on a number of different factors:
- Company size
- Target market
- Type of subscription plans (monthly vs. annual)
- Cash Flow volatility
In general, it’s expected that companies targeting enterprise customers will have lower churn rates, whereas in smaller companies churn will be higher.
This is because annual billing makes it harder for customers to churn, and enterprises are less sensitive to prices than startups and SMBs.
In addition, smaller companies can easily switch products, unlike larger enterprises.
All of this massively contributes to differences in churn rates, so, naturally, it is almost impossible to determine the exact numbers.
We’re still going to look over some figures and make necessary conclusions about acceptable churn rates.
An often-quoted statistic that originated from this blog says that the annual churn rates in most companies amount to 5-7%.
However, things change rapidly in the SaaS market, so benchmarks from just a few years ago don’t hold up anymore.
There’s more competition and more customers, so as businesses grow, so will churn rates.
The latest data shows that the annual churn rate in 2020 was 13%, much of which can be attributed to the COVID-19 pandemic.
The same survey reports that churn rates in 2019 were 12%. That is almost double what was acceptable in 2013.
Still, most SaaS companies offer monthly plans, so let’s look at some of those numbers.
The best way to find your ideal monthly churn rate is to look at some industry benchmarks.
For example, Baremetrics is very transparent about its analytics and offers data about their and their customers’ business trajectory on their website.
Their latest data shows that the average monthly churn among 800 startups was 6.3%.
Breaking that down according to the size of the company, their larger customers like Convertkit and Hubstaff (over $1 million MRR) had a 5% monthly churn rate, while their smaller customers like Convertlabs and Super (less than $50 000 MRR) had a churn rate between 7-10%.
What can we conclude about churn rates from these numbers?
To get a good churn rate, you should look at your target market’s benchmarks. The ideal churn rate of 5-7% is possible but for the relatively few with high acquisition and retention rates.
When it comes to churn, the only ideal benchmark is ‘’as low as possible’’.
Eight Reasons for SaaS Churn
Understanding churn starts at looking at some of the top reasons SaaS companies encounter at different stages of their growth cycle.
Your Customers Are a Bad Fit
Stop marketing your product to the wrong customers.
If acquiring new customers is costly, then marketing to bad-fit customers is even more expensive.
SaaS funds are precious, so you can’t afford to waste them on people who will test out your product and then leave because it wasn’t the right solution for them. It will not end well.
The main problem with attracting customers who aren’t the right fit is that, while the acquisition numbers might look great in the short term, after some time, they will inevitably drop.
You’ll create a segment of unhappy people who will not upgrade and might even ruin your reputation.
Your solution for this problem is to get to know your ideal customers.
When you first start searching the market, look for prospects with the potential to become your longtime customers.
Identify the characteristics that match your product fit, and you will create loyal advocates.
When you push your product out, it’s not unusual to attract people who don’t understand your product’s value. And that’s alright.
Your product might be the next big thing, which will attract many curious users, but your focus shouldn’t be on them.
Allocate your resources to customers who matter—those who can extract long-term value from your product.
Another good solution is to implement better strategies for finding leads and improve communication with your marketing and sales team.
Time and money are often wasted on the wrong customers, which in turn stalls your growth.
Your Product/Service Is Incomplete
Defective products make users leave your product.
SaaS products can be a blessing and a curse.
The positives of having a SaaS product are numerous, like low costs, fast business growth, and efficiency. However, you can’t just create a product and leave it at that.
You need updates, general maintenance, and bug fixes.
It’s not news that software is riddled with bugs. You’ve surely had your share of issues with some kind of software or app.
From large system shutdowns to buttons not working, there are thousands of minor problems that frequently pop up and irritate your users.
And once they encounter too many of them, users will leave.
Focusing on new features and not fixing recurring problems can ruin the relationship with your customers.
You’ve promised them great benefits, but your bug-ridden product is now another problem they need to get rid of.
Customers will have no problem running to your competition when they’re dissatisfied, since switching costs are so minimal these days.
Having bugs in products is normal, but when you’re not addressing them or actively trying to fix them, your customers will mind.
They rely on your product for their everyday lives, and if you hinder their progress, you’re not a good teammate.
Actually, the biggest reason customers churn isn’t that the software has deficiencies. Instead, it’s the speed with which these problems are addressed.
Customers even expect that their technology might fail them at some point, but what they don’t tolerate is slowness in fixing problems.
To reduce the amount of friction that comes with buggy software, you must have transparent communication with your customers. They’ll be more forgiving if they’re forewarned about problems.
Create a better customer experience by fixing your software on time.
You Are Not Providing a Good Experience for Your Customers
Customers value a good experience over anything else.
According to the latest research, 53% of customers report that the main reason they want to stick to a company is their experience with them.
If your customers don’t feel successful using your product, they are probably halfway out the door.
Many SaaS companies think that customer experience is only tied to their product, but they are wrong.
Customer experience is a long process that doesn’t have a specific start but encompasses different stages, from onboarding to customer support, the buying process, etc.
Every little thing contributes to the machine that is Customer Experience.
Many successful products fail because they don’t provide a seamless experience for their users.
However, if you combine the desired result with a good user experience, you might have the perfect formula for reducing churn.
Many SaaS companies with diverse customer bases provide a very hands-on experience for their biggest customers but neglect their smaller customers or even freemium users.
They justify this with the idea that because they don’t pay as much, they don’t have to give them as much attention. That’s a big mistake.
Even if your small customers don’t pay a lot, chances are they take up a higher percentage of your customer base. They also have the potential to grow and upgrade their subscription plans.
If you don’t treat all your customers with care, you’ll lose far more than just a few low-paying users.
SaaS is (or should be) very user-oriented, and user’s expectations are getting higher. Because of the growing competition, you simply can’t afford to lose any of your customers.
Success is about all of your customers, whether they are freemium users or enterprises.
Besides, when you invest in your customer experience, you can see improvements in brand value, customer LTV and collecting end-user data.
Treat all of your customers with the attention they deserve to provide a great customer experience.
Users Don’t See the Value in Your Product Anymore
Continuously remind your users of your product’s value.
Every relationship with your customers starts great. They’re excited about your product, use it for a while, and then they suddenly leave.
Why?
They simply stopped seeing the value that attracted them to your product in the first place.
The problem could be that you’re all talk and no game.
Customers can get excited about the promises you made, but feel betrayed if they don’t immediately experience those benefits.
Once you get your customers to sign up for your service, you have to show them value.
Whatever it means for your specific product, your customers have to reach smaller milestones quickly.
Ultimately, users only care about one thing—themselves.
This means that no amount of great branding, fantastic marketing, and customer service will compensate for the lack of need for your product in their lives.
You have to understand what your customers are trying to accomplish with your product and adjust your strategies to accommodate customer success.
The more intuitive your product is, the better it will work.
Continuously providing value means securing excellent customer experience and nurturing long-term relationships.
Customers are always on the hunt for that one product that will be the essential investment, so they don’t have to divide their attention between numerous SaaS solutions.
When you solve that need, you can bet on getting great results in retention, loyalty, and churn rates.
Create a great product that will always provide the desired value to your customers.
Your Customer Support Is Inadequate
Poor customer support is the biggest source of churn.
Has this happened to you? You’re using a SaaS product, when you come across a small problem that’s bothering you, and turn to customer support.
Then you find yourself in an endless loop of waiting, and agents not knowing how to fix your problem. So, now you get frustrated.
Small problems can turn into big ones if you have inadequate customer support. That applies both to your customer support agents and to your knowledge bases.
A poorly structured knowledge base can be confusing for customers who are looking for specific answers. Knowledge bases are the second most popular self-service channel that users want.
Also, if you don’t properly train your employees, you will have to deal with many frustrated customers and high churn rates.
Customers prefer a customer support agent who understands their needs.
To add to that, only 8% of customers believe that customer support is only somewhat effective when it comes to speed.
It’s not okay to make customers wait a week to get their problems solved.
For a technology-driven and cloud-based company, speed and efficiency should be at the core of your business.
If you let your customer wait for hours to reach your customer support agent, you’re probably not going to hear from them again.
Even though you can’t fix all of their problems, even showing that you’re willing to listen and do what it takes to help makes all the difference.
Offer fast and efficient customer support for your customers to reduce your churn rates.
Users Trust Your Competitors More
Users have no problem switching to your competition if they want.
Competition in SaaS is huge, and it’s only grown in the past ten years. Some estimate that the market will reach $140 billion by 2022 with a growth rate of 34%.
With so many businesses popping up every day, products are getting better, and prices are low.
As a result, customers have plenty of choices to pay for what suits them. Building customer loyalty is great for business, but it’s becoming challenging to maintain.
Users do what’s best for them, and they can change their minds in a heartbeat if they find you missing a step.
When you lose a customer, you lose more than revenue. Failures deeply impact employee morale, your market share, and sometimes the company’s branding.
Instead of driving your customers to your competition, think about prevention. What can you do to stand out and position your product as an essential investment?
You can start with pricing (more on that in the next subsection) for a competitive edge. But think about how to sell the uniqueness of your product.
There are hundreds of kinds of email marketing, user onboarding, and accounting software out there with similar features and workflow. You have to distinguish yourself from them.
The key is to find what makes you special.
Do you have better customer support? Is your mobile app more intuitive? What core values does your company believe in? Emphasize these features in your marketing to sell ideas but support them with a great product.
Stand out from your competitors by finding a unique angle to sell your product.
Users Think There Is a Mismatch Between Price and Value
Pricing your product should be a strategic and continuous process.
When you try to set a price for your product, it’s important to put yourself in your customer’s shoes.
They will try to decide whether the price matches the perceived value of your product.
Therefore, you can’t leave anything to chance.
You might want to lower your prices to be more competitive, but that will only make your customers think you don’t believe your product is good enough.
On the other hand, if you raise your prices to appeal to customers with bigger budgets, they might choose someone more affordable.
The best approach to price-sensitive customers is to adopt value-based pricing.
First, you need to understand the benefits of your product and price it accordingly.
Trust that your product has enough value to justify the price, but adjust it according to the target customer’s expectations.
Dig around to see what your customers are willing to pay. Then, as you grow your customer base and improve your product, you can adjust your pricing strategy.
Software reviews allow the public to easily compare similar products and their value for the price they charge.
So, you need to make a deep analysis of your competitors to better understand your perceived value.
Most customers leave because pricing doesn’t match the value they receive.
Your Customer’s Credit Card Has Expired
Expired credit cards often cause unintentional churn.
Payment errors can happen to anyone, but most SaaS companies don’t pay them enough attention because they aren’t the biggest causes of churn. If they’re so manageable, then why aren’t you fixing them?
When you have bigger things to deal with (like improving onboarding, fixing software bugs, etc.), this kind of unintentional churn might not seem worth your trouble.
However, any kind of churn is bad churn.
If you don’t deal with it, it can snowball into a huge problem—which can damage your business.
Even if you took great care to nurture your leads, a mishap with their payment process will put you back to the start and you’ll lose potential loyal customers.
Reducing churn rate should happen in every aspect of your business, no matter how low, because your livelihood depends on keeping users doing business with you.
There are several things you can do to fix your payment processing issues.
The first is to invest in good billing software that will automate your dunning emails and messages.
Effective billing software can inform your customers about upcoming invoices and expiration dates on their credit cards.
Regpack’s offer also includes a number of payment solutions.
It also helps to track those with a greater chance of repeat failures.
Some customers are worse at managing their spending, so create a list of those that need to be reminded about their obligations.
Collections might not be the most exciting area of your business, but having the necessary processes in place will help reduce your churn.
It’s best to avoid any kind of failures during payment, but be professional and compromise if they happen.
Conclusion
Churn can appear in unexpected places. It can happen at any stage of your company’s growth, so it’s best to tackle it from the beginning.
Keep an eye on the most evident sources of churn like bad customer support, inadequate pricing model, or software bugs.
Then you can solve churn related to more significant issues like lousy customer experience, losing value, and rising competition.
You might still experience some churn, but managing it is the first step in taking control of your revenue and future business growth.
