The churn rate for subscription services is a big deal – everyone talks about it but unfortunately, they don’t really try to summarize it in an easy-to-understand way. This is why we give you a concise overview of it and also give you awesome hints on how to reduce it.
Why is SaaS churn rate a key metric for subscription services?
There are 2 main types of churn rates you can calculate:
- customer churn rate,
- net revenue churn rate (NRR)
While the first one shows you the percentage of users leaving you in a certain period of time, the second metric is the most important. “NRR is the “net” revenue left over from an existing cohort of customers, less any revenue churn (caused by customers leaving totally or staying, but paying less for the privilege), plus any expansion revenue from upsells, cross-sells, etc.” – says Lincoln Murphy, my idol of customer success.
So basically you can lose as many users as you want as far as your Monthly Recurring Revenue is growing.
But of course, customer churn is not a good thing: if you can keep your customers, you will probably have higher MRR too.
According to David Skok (check his short bio here, he’s not only famous but a very experienced entrepreneur and venture capitalist) the better you can handle churn rate for your product the faster you will grow. But real growth will come from negative revenue churn!
For early-stage SaaS companies, the percentage of churn is not that big problem. If you lose 5 clients it is possible to bring in 10 more (if your company sells a relatively low priced tool) so you will grow your MRR.
But for companies that have more clients, churn will be the number one problem. As you can see on the picture below, the more users you acquire the bigger the churn rate problem will be for you. And there will be a time when you won’t be able to grow your MRR – your company basically dies.
But if you can reduce the churn rate, or even create negative revenue churn using upsells and cross-sells, you will grow exponentially!
So as your business grow and get more and more clients, you will need to find ways to decrease your revenue churn rate as there is higher potential than in your new clients.
How to calculate churn rate for subscription services?
I know it’s boring but I will share only the easiest way of calculating your important metrics. As I mentioned, there are 2 main churn metric types that should and could be measured.
- So I will start with the Monthly Customer Churn Rate:
(The number of customers at the beginning of the month – The number of customers at the end of the month) / The number of customers at the beginning of the month
You can calculate the churn rate for other time frames too: annually, quarterly, etc.
- And here it is the calculation Monthly Recurring Revenue Rate:
[(Monthly Recurring Revenue at the beginning of the month – Monthly Recurring Revenue at the end of the month) – Monthly Recurring Revenue changes for up- or downgrades during the month]/Monthly Recurring Revenue at the beginning of the month
The same applies here too: you can change the time frames from monthly to quarterly or yearly intervals.
But all alone it helps you only to determine whether your business goes toward a better or worse direction. That’s nice but you have to explore your best fitting clients in order to know which segment you should target in your client acquisition process.
This is why you have to check your churn rate by engagement-based segments. The users who use your tool more frequently are possibly more valuable to you as they more likely to stick with you – so if you manage to reduce their churn rate by focusing on their needs it is possible that your MRR will grow much faster.
The same possibility arises if you segment your customers based on feature usage. If you see a set of users who tend to stick with you or/and upgrade, you should focus on them and on those features – for example building your onboarding process around it!
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What is a reasonable churn rate for subscription services?
The question is great although can’t be answered. Well, it can be. But not the way you would expect. Because there is no generally good answer to it. If someone tells you, this is the churn you need to achieve, please just ignore her or him.
Because the churn rate is different for B2B, B2C SaaS companies,. Also – among B2B businesses – there those who offer (if you don’t know about the following topics, read the 3 business models that work):
- self-service tools (that are cheap and easy to implement solutions)
- transactional tools (that are more expensive but still relatively easy to get started with)
- enterprise software (difficult to implement and highly priced)
A self-service tool (such as Slack) might have higher customer churn rate that is acceptable as it is easier to get started with it but also can be easier to quit. (But not necessarily!)
Exiting a transactional tool (e.g. Zenefits) might be more difficult because you invested a lot of money in it. Therefore the customer churn rate should be lower. (Again, not necessarily.)
And logically, if you implement a big software (for instance SAP) it is most likely you won’t leave it as it requires a very big, huge effort, time and investment even to get it work. So probably the churn rate will be very low.
But to mix things up and despite I told you there is no general good churn rate, I’m sharing a very simple goal or thumb rule: there is no acceptable churn rate!
And generally, even if your MRR grows, customer churn is not a good sign. Although there are different root causes (you bring in the wrong users, your onboarding is weak, you simply can’t help your users to be successful, etc.).
You should always reduce the churn rate to as low level as it is possible. Especially when we speak about Recurring Revenue Churn Rate.
“Shoot for the moon. Even if you miss, you’ll land among the stars.”
How to reduce SaaS churn rate?
So if you are not in the early stage, you should do everything you can in order to reduce the churn of your MRR and customers in the segment that is the best fit for your company (or overall if you have the resources).
There are 2 main things generally you need to do that comes from common sense:
- Find the good and amplify it
- Identify the bad and reduce it
How to find the good or bad?
You need to look at your loyal customers and understand the motivation of them: what makes them renew their subscription?
Implement NPS surveys
One of the best processes is using NPS surveys (Net Promoter Score) which measure customer experience and predicts business growth.
It just shows a pop-up with a survey every month to your users asking them to tell their opinion about your solution on a 10-point scale.
- From 0 to 6: those users who choose this part, they are called “detractors” who will damage your brand because they are unsatisfied.
- 7 to 8: These clients are the “passives”, who are satisfied but not really enthusiastic. They are opened to competitors’ quotes.
- 9-10: Your “promoters”, loyal customers who will stick with your solution and help your company grow.
You get your Net Promoter Score by extracting the percentage of your ”promoters“ from the percentage of the “detractors”. The result is a KPI of the overall perception of your brand among your clients.
Talk to your clients
If you managed to identify your most enthusiastic clients, analyze their activities. But not just their buyer journey and features they use. Not communicating with your current clients is not a good solution to find what you are really good at from their perspective.
Organize meetings (online or offline), help them more while asking them the questions you are want to be answered.
Usually, the clients’ perspective is surprisingly different than what we assume!
How to amplify the good?
If you identified your good, you have to amplify it to retain more clients and acquire more “promoter” clients! Here are few tips you can do to “scale your good side up”.
Improve what you are already good at
Communicating with your promoters is not only good for maintaining a good relationship but also a great opportunity to collect feedback and implement it into your product development road map. Developing features for the right segment of your users is one of the most important things you can do in order to get more of that specific user type and also to increase your growth.
Design a “good” client onboarding process
“Good” user onboarding doesn’t mean you have to always annoy your new users with your messages, info or educational contents. The best user onboarding process (well, at least in my opinion) is when you give the choice to your users whether they want to discover your tool or want help from you.
But it doesn’t matter whether I like an onboarding process or not, the truth lies in the KPI: how many users you could convert to customer and how many clients are churning. So you should test the onboarding process for yourself.
But generally, it is true that your customer churn will be lower if your onboarding messages are personalized, timely but not too pushy. And of course, you need to give your users the right solution, the appropriate way.
Implement marketing automation
Automate the good things as much as you can and take advantage of it! If you know that something works, why should you do it manually instead of automating it? The more you can automate the more scalable your growth will be and the higher the chance will be that your new clients take the same steps as your promoters took with a similar end result.
If you want to know more, in this article we share a deep-dive guide on how to decrease saas churn rate using automated emails.
Reward loyal customers
Customer loyalty programs are awesome things to do! Not only it will increase your customer retention rate, it will also give you a good word of mouth that can easily give a big head start when it comes to client acquisition.
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