Imagine you put a lot of effort into building your product. All those nights of working hard, fine-tuning every aspect of the product, ensuring that nothing is left to chance, and still seeing that your product is not getting the attention it deserves and users leaving it in droves is, indeed, heartbreaking.
But why has it come to this? Well, the answer to this question lies in the scariest metric in SaaS: churn rate.
The churn rate has been the most intimidating metric that SaaS marketers encounter. But it also provides a clear picture of why users leave your product for others.
Sometimes, it is because of issues with your product, and sometimes the user just misses a payment and is never heard from again.
Hence, the churn rate is multi-faceted, and calculating and interpreting it can provide critical insights for your business.
In this blog post, we will discuss churn rate, how it affects user conversions, how to calculate it, and tips to help reduce it.
Churn rate, better known as the attrition rate, is the rate at which users leave a product over a given period. A churn rate is needed to understand a product's financial health, for a high churn rate can cause high revenue churn and hurt your business over time.
Moreover, the churn rate also signifies the glaring issues plaguing your product. For example, your user onboarding experience might be the issue causing users to churn, or frequent glitches in the app are ruining the user experience and, therefore, causing them to churn.
Whatever the reason, SaaS companies need to calculate the churn rate to understand users' pain points better and resolve the issues before they hurt them badly.
Churn is a part of the SaaS business model. Therefore, try as you might, you can never be rid of churn. But you can keep it within a “healthy” range where it doesn’t overwhelm your business and makes increasing MRR almost impossible.
Within the healthy range, your business will eventually lose customers but not enough where it becomes nearly impossible to acquire new customers.
But first, you have to realize that your business has a churn problem, and there are telltale signs:
One obvious sign that your churn rate has increased is that your business is losing more customers than it’s acquiring. Also, the increase in the cost-of-acquisition (CAC) indicates that your churn rate is spiraling out of control gradually.
The average churn rate is between 5%-7%. But, if it goes into the double digits, it can indicate that something in your business isn’t working. The problem can be with your customer acquisition process, onboarding, or other parts of your business. But if your churn rate remains consistently at or above 10%, it can hamper your business’s long-term growth.
An obvious sign of revenue churn is an increase in downgrades. As SaaS companies depend upon different price plans with additional add-ons, a decrease in the number of upgrades can negatively impact MRR.
Even if you don’t have a high churn rate, it’s prudent to take measures that keep it under control so that your business can grow at a good pace.
The churn rate formula is pretty straightforward. Let’s illustrate it with an example. Let’s say that you had 500 users at the start of January for your product. Out of the 500 users, 100 users churned in April and never returned. So, the formula to calculate the churn rate will come out as follows:
So, your churn rate will come out to be 20% at the end of the period.
Thus, the churn rate is higher than what is considered an “ideal” churn rate and will translate into substantial monthly recurring revenue (MRR) losses.
But user churn rate is inevitable, and you cannot eliminate it and retain all of your users who sign up to use your product. But you can control it and bring it down to manageable levels.
Revenue churn rate is the percentage of revenue you lose over a period of time. Usually, the revenue churn rate is calculated monthly, so a better explanation is how much MRR you are losing due to churn.
For example: Let’s say that you lost 10% of your MRR due to churn as it stood 30 days ago in the last 30 days. So, your revenue churn rate will be 10%.
Hence, the revenue churn rate formula comes out to be as follows:
It’s no point obsessing over the churn rate daily or week-to-week. However, if you measure other product metrics monthly, the churn rate should be among them.
Moreover, a quarterly analysis of your churn rate can provide clear insights into customer trends, and an annual churn rate calculation will help you ascertain your YOY performance.
Also, quarterly and annual churn rate calculations can help you gauge the effectiveness of your customer retention strategies and whether or not they need to be tweaked to align with your goals.
According to Hubspot, for B2C SaaS companies, the acceptable churn rate is between 2% and 8%. And, for B2B companies, the churn rate should be less than 2%. These are all idealized numbers and can vary depending on many factors.
Monthly churn rate is the number of users you lose over one month. An excellent monthly churn rate is around 0.42% to 0.58%. To calculate the monthly churn rate, divide the number of users at the end of the month by the number of users you had at the beginning of the month and multiply that number by 100.
Annual churn rate refers to the percentage of users lost during a year. An ideal annual churn rate should be between 5% to 7%. To calculate it, look at the number of users at the start and end of the year. Subtract the two numbers and divide the resultant number by the total number of users at the start of the year. After that, multiply the resulting number by 100.
Churn rate can adversely affect revenue-related metrics, such as monthly recurring revenue (MRR.) The severity of the churn rate depends on which users you are losing, whether they are free-trial users or paid users, and how much these users were spending. Moreover, an increased churn rate makes acquiring new users even more costly and reduces the customer lifetime value (CLTV) of these users.
Now you know how to calculate your churn rate. Therefore, it’s time to learn the steps to help you bring it down to ideal levels.
The first step in reducing churn is to revamp your entire onboarding process. Onboarding is the first step after a user signs up to use your product. If the onboarding process isn’t smooth, the user will likely churn and never return.
Welcome the new users with a welcome email and offer them unique discounts. Create educational content on your blogs and social media. Make video tutorials to help your users use your product more effectively and get the most out of it.
You can take inspiration from this example from Todoist, a task management software. In the onboarding email, the recipient is told how they can use Todist to list and track their projects.
Your customer service is the backbone of your entire enterprise. They are the ones who sell the true value of your product to the users. Therefore, they should be well-trained to handle all kinds of user issues.
Ensure you train your customer service personnel and equip them with all the resources necessary to provide adequate customer service. By doing so, you can see a drastic decrease in the churn rate.
Throughout the entire user journey, ensure you keep in touch with your users and ask them for their feedback. Identify users who are most likely to churn and ask them for feedback. Make them provide the specifics, like what issues are causing them to engage less or not with your product. Provide them with precise solutions that can help them overcome all the issues and see the inherent value in your product.
Don’t allow the users to come to you only when they have an issue they cannot resolve. Proactively communicate with your users and provide them with content to help them make their product journey easier.
Provide them with product tips and tricks, feature tutorials, and any content that can make their product experience better. Also, in case of issues with your product, reach out to the users first to know they can depend on you.
In this email from Sumo Logic, you can understand the point we are trying to make above. The recipient is told how they can easily share their dashboard with their teammates in Sumo Logic and collaborate effectively with them. The email ends with CTA the “Start Sharing.”
Your existing user base makes your business tick. Initiate a loyalty program that offers exclusive perks to loyal users. Make them feel you appreciate them and want them to use your product for a long time.
Segment your loyal users and use email automation to offer them discounts and other perks from time to time.
Stitcher does a great job of offering perks to its users. In this email, it’s offering users 35% off if they switch from a basic to a premium subscription. To further entice the recipient into taking action, they also offer some benefits of subscribing to a premium subscription, just below the CTA “Get Premium Now.”
A churn happens when a user, who has purchased a subscription, leaves you, and you lose revenue as a result. But, technically, when a free-trial user leaves, it’s also considered a churn. Therefore, leverage the feedback of the churned free-trial users. Send them survey links after they leave and ask them about their experience with your product, what they expected from it, and what issues they faced while using it.
By asking all these questions, you can better understand the reasons for user churn and devise strategies to resolve all user pain points.
You should learn how to use surveys to collect feedback from users from Zapier. In this feedback email, they ask a recent free-trial user to rate their experience with their product by taking a short survey. With a short email copy and a simple CTA, they drive the point home of sending a survey email.
The inevitability of churn makes it even more critical for SaaS companies to measure, monitor, and better understand their business's health. Moreover, a high churn rate doesn’t spell the end for your product, nor it means that it’s alright to keep ignoring it. Instead, it provides you with the opportunity to fix all the plaguing issues and come out even stronger than before.
By revamping the onboarding process, improving customer service, offering perks, and leveraging critical feedback, SaaS companies struggling to control their churn rate can bring it under control.
Content writer by day and a book nerd by night, Ammar Mazhar has been writing for 3 years for B2B and B2C businesses. As a wordsmith, Ammar knows how to write SEO-optimized content that your users will find insightful, igniting results for your business.