2020 has officially begun and for many businesses that means that the major changes are just around the corner. If in the past year you couldn’t get rid of the impression that your customers are thinking about switching to your competitor, then it’s time to step back and reevaluate some things.
According to this 2019 SaaS report, a significant number of SaaS companies keep their churn rate just below 10% annually. Is it good news?
Well, it’s not the worst, but who says that it couldn’t be better?
It could and it will if you only learn how to do it.
Read along because in this article, I’ll give you the best practices for calculating and reducing the churn rate in your SaaS business.
Let’s get started!
How to calculate your churn rate
Let’s put things in numbers to give you a better idea of what it means for your business.
First, it’s important to keep in mind that there are two ways to approach your churn rate. It can be calculated either on a monthly or annual basis with the latter being more commonly used.
Annual churn rate is measured over a period of 12 months, so if you have 1000 customers and 60 of them leave, your churn rate equals 6%.
60×100%/1000 = 6%
That’s quite easy, right?
Let’s look at the monthly churn rate now. It takes into account customers coming and going during each month of the year. So if your biz is selling mainly monthly subscriptions, that’s the metric you might want to use.
One way to do it is to simply divide your average annual churn rate (let’s say 6%) by 12 months.
So 6%/12 gives us 0.5% for our average monthly churn rate.
This metric won’t be too accurate though. Every month you will probably have a different number of people signing up and canceling their subscriptions (unless you managed to get them all on an annual plan, you smart cookie). And that’s when things get tricky.
In two months with similar user behavior but different initial customer headcount, you’ll get different churn rates.
Let’s say your existing customers churn is at a stable rate of 6%. New customers are usually faster to churn, so out of every 200 new customers, 15 will leave. Let’s take two months with an equal number of days in it and see how the final churn rate varies.
|Customers at the beginning of the month||1000||1125
(1000 + 200 – 75 = 1125)
|Existing customers who churned by the end of the month||60 (60×100%/1000 = 6%)||68 (68*100%/1125 = 6%)|
|New customers who churned||15||15|
|Total churns per month||60 + 15 = 75||68 + 15 = 83|
|Basic churn rate||75 / 1000 = 7,5%||83 / 1125 = 7,3%|
The basic churn rate has apparently decreased, however, the circumstances haven’t.
So, if the formula shows you different numbers in a similar situation, doesn’t it make it unreliable? And, more importantly, what can you do about it?
Another way to calculate churn rate
A convenient solution has been offered by Stephen Noble from Shopify, who uses a metric called a customer day.
A customer day is one day in which one customer had an active subscription. So, if you have a 1000 customers that all have a subscription for 31 days, that means you’ll have 1000 x 31 = 31000 customer days in that month.
So, it’s quite simple for the existing clients. With the new ones that come throughout the month, it gets a bit trickier.
The exact number of days that a client used your subscription can be taken from your CRM system. But if you don’t have access to it, it can be estimated.
If you assume that clients come evenly during the month, on average, each of them will only use the subscription for half of it. That means, their number of customer days can simply be multiplied by 0,5.
Now, let’s apply this approach to our previous example. For the sake of simplification, I’ll round every fractional number to the closest integer.
|Customers at the beginning of the month||1000||1125|
|Customers at the end of it||1125||1242
(1125 + 200 – 83 = 1242)
|Net gain||1125 – 1000 = 125||117|
|Days in a month||31||31|
|Customer days in a month||(1000×31) + (0,5x125x31) = 32978||(1125×31) + (0,5x117x31) = 36689|
|Total churns a month||60 + 15 = 75||68 + 15 = 83|
|Churns per customer day||75 / 32978 = 0,22%||83 / 36689 = 0,22%|
|Monthly churn rate||0,22%x31 = 6,82%||0,22%x31 = 6,82%|
As you can see, this formula is resistant to the limitations of the basic churn rate.
There are many ways to calculate churn rate, with each of them taking different factors into account. For example, sample size, time frame, customer segmentation, seasonality and more. So, the way you do it is strictly up to you.
Here’s why your customers leave
A famous saying goes “what you can’t measure, you can’t manage” and that rings true also when it comes to monitoring your churn rate.
Identifying why your customers decide to leave your ship is the key to understanding how to stop them from doing so.
There are numerous ways to check what makes your users click the “unsubscribe” button. For example, you can use surveys or feedback forms. In fact, a study published in the Harvard Business Review found that the act of just asking for customer feedback itself is enough to keep customers from churning.
There probably isn’t a single reason why your customers decide to part ways with you so acquiring as much information about their decision to quit your service will help you address those issues and fix them.
Some of the most common factors contributing to the high churn rate include:
- High price or, rather, unavailability of an appropriate pricing plan
- Limited product features and functionality
- Poor customer service
- Lack of onboarding
- Not delivering on a promise
And last but not least, let’s face it, it is an unworking product. So, while improving the customer experience of your clients, prioritize the quality of your product.
7 Ways to reduce customer churn rates
It might seem obvious that reducing customer churn means eliminating the reasons why customers churn in the first place. But when has it ever been simple in marketing?
If fact, users often have many reasons to leave, it’s just that one screams louder than others. So if you’re not chasing after fast metrics, you need to take the high road and apply a comprehensive approach to providing your customers with a great experience.
Digital marketing is a strictly practical matter, so to provide you with information that you can immediately act upon, we’ve gathered insights from the industry pros. So, take a look at how they reduce customer churn.
#1 Attract the right type of customers, to begin with.
The first and most important step is to identify who your true customer is. That’s what David Campbell, Marketing Strategist at Right Inbox, recommends starting with. In his opinion, churn often begins before a customer actually leaves and even before they become a customer. When companies push their products without understanding their clients’ true needs, they’re missing out on an opportunity to identify the pain points and showcase how their product can help.
“Your churn rate will decrease immediately if you start understanding how to attract the right type of customer.”
And speaking of people who happen to be already interested in what you have to offer…
You gotta make it irresistible for them to say “no”.
If they are the warm lead who is already looking for a solution, just like yours, it is your job to convince them to get it.
It sounds simple, but oh boy, it’s just so important. Trying to do the “catch-all” marketing is doomed to be a failure. Instead, give your website visitors’ (and later customers’) the experience they deserve and expect. Luckily, Proof Experiences was designed to do just that.
From recommending the features based on the customer plan they are on to adjusting your CTA button, Proof Experiences is what can make all the difference in how your customers interact with your product.
And don’t just take my word for it.
Here’s what Patrick Campbell from ProfitWell said about using personalization in his marketing efforts.
“Proof allowed our marketing team to personalize the blog by showing the most relevant eBook for each visitor. This drove a 162% increase in content downloads, so now personalization is integrated into our larger growth strategy for 2020.”
#2 Take your customer service to the next level
Increasing user retention also leads to reduced churn. Masha Maksimava, the head of Product and Marketing at Awario, a social listening & analytics tool, thinks that to do so, a company has to stay in touch with their clients.
According to her, oftentimes users are looking to cancel their subscription because they haven’t found necessary features in the tool. In this case, it’s important to talk to your customers and explain where all the features that they are looking for are located or at least provide a workaround that will help them achieve their goals. If the feature is not available yet but is in the works, Masha suggests getting back to the user with an ETA. And in some cases, she believes, it makes sense to make the user stay by offering them a discount, however, that’s not a common practice in her company. Word of caution: discounts aren’t always a good idea.
It’s also crucial to collect and analyze feedback that you receive from your users. Ideally, it should be done periodically and kept in a task tracking system or at least a spreadsheet.
“If a large number of customers have churned for the same reason, it’s definitely something you want to look into.”
Nick Dimitriou, Head of Growth at Moosend, points out the importance of a customer support service in general. For his company, reducing churn was their top priority, so they focused their activities on creating the best user experience for their customers, including providing an impeccable support service.
“By increasing our customer support hours and expanding our support team, we managed to provide better and more focused assistance to customers in different time zones.”
#3 Prepare attractive annual pricing
Masha Maksimava claims that introducing a yearly plan into the pricing model significantly improves retention. This measure showed great results in Awario, and she believes that it can make all the difference for a company that only has monthly plans.
“In our experience, ditching the monthly option altogether wouldn’t work. Instead, try adding in a yearly option at your pricing page and run an A/B test to see which works better as a default.”
Vlad Calus, the founder of Planable.io, also points out the importance of switching to a yearly plan as a means of reducing churn rate. When offering yearly discounts, his company also highly encourages users to upgrade to it. As an example, they added a “30 days free money-back guarantee” sign to help the customers with the decision.
#4 Offer quality incentives before they go
According to Vlad Calus, running regular engagement campaigns in to stay in touch with the customers helped his company reduce churn by 5%. It included sharing news about feature release, jumping on a call, helping clients with custom requests, or informing them on the features they haven’t previously used.
“We keep launching new features once every two or four weeks and we’re focusing on the most requested features that we know our users are looking forward to having.”
Moreover, doing regular feedback calls after the upgrade helped Planable establish trust with their clients.
#5 Involve customers in the product development
Irina Weber from SE Ranking, suggests using user feedback to collect ideas about the next features to develop. For example, that’s how SE Ranking got localized — many customers wanted to use the tool in their native language, so this helped the company maintain their satisfaction and loyalty.
Irina’s certain that SaaS companies should go even further than that and build their product roadmap based on user feedback.
“This way, our customers feel the ownership of change to future products. It’s like they make them more convenient for themselves.”
Andreea Sauciuc from CognitiveSEO shares similar insights.
“Another thing that we do to maintain our loyal clients is providing new features and improvements they need and ask for. And we’ve kept on delivering those improvements, big or small, to the tool since it first started.”
#6 Invest in educating your users
Irina Weber from SE Ranking promotes user education and believes that by telling customers about the industry as a whole, her company managed to reduce churn rates.
To help their users understand the platform, SE Ranking uses tutorials, personal calls, and webinars. But practical knowledge of the tool is not all. To keep their users engaged, they also share non-promotional articles and conduct interviews and webinars with SEO experts.
Tytus Golas, a founder of Tidio Live Chat, agrees with this point of view. According to him, by educating customers you can make sure that they know all the benefits of your product, and, thus, become more loyal to it.
“The more knowledgeable your customers are about your products or services, the more value they see in using it and are happy to stay.”
They achieved this by publishing how-to guides on the blog as well as video tutorials. This alone helped them generate more leads and decrease the churn rate from over 12% to 10% within just a few months from the Tidio blog’s launch. 2% might not seem too impressive, however, for a company with thousands of new users signing up each week it is quite a substantial number.
#7 Create a loyal community around your product
Andreea Sauciuc from CognitiveSEO has a comprehensive approach to nurturing customer loyalty. First of all, it includes great customer support service: omnichannel support and fast replies to any question or problem.
Moreover, to create a community of loyal customers a company can leverage the power of media. Sharing the latest news, explaining current trends and providing case studies can go a long way. Running a Facebook group where people can share their experience with the product or ask for guidance is another thing to do.
Irina Weber from SE Ranking also believes in the power of customer loyalty. To measure it, she suggests using the NPS metric (Net Promoter Score). Based on this indicator, they segment their users into groups and establish specific lines of communication with them.
“For example, if we think that some users want to leave, we send them triggered emails where we try to fix their problems or make special offers.”
Customers churn for a variety of reasons, from high price and insufficient product functions to bad user experience in general. To reduce churn, your goal is to identify the churn root cause and make your best to fix it.
It’s also important to choose the right metric, as customer churn can be calculated in many ways. Consider all the factors that you want to account for, and make sure they are all included in the final formula.