Ideally, your SaaS business will execute the perfect product launch and attract your target customer. They will fall in love with your software and remain loyal as raving fans. This core group will advertise via word of mouth and use your product for life in the best-case scenario.
The bad news is that customers leave in the real business world. Churn can be devastating for subscription-based companies that rely on consistent users that stick with their software. Your business runs off keeping customers rather than losing them.
Successful CEOs and CFOs measure churn in SaaS as an essential metric for troubleshooting areas of improvement. They can reevaluate their product, customer service, and other areas of the software experience. Ultimately, you should consider churn to accelerate your business growth and perform at a higher level than you are now.
That being said, churn is not always as straightforward as it would seem, as many factors can affect why churn occurs and what you should do to decrease your churn rate and increase customer retention rates.
What is Churn?
Understanding churn and what you can do about it's significant for SaaS businesses. Churn is the percentage of customers who cancel subscriptions or stop doing business with a company.
This figure directly affects recurring revenue and your entire business in turn. When customers leave or cancel subscriptions, it can hinder ARR predictions, your reputation, and your position in the SaaS market.
You’ve already learned that retaining existing customers is far less expensive in the long term. Obtaining new leads means more advertising dollars, free subscriptions, and time learning onboarding practices.
Therefore, your team should focus its efforts on monthly churn rates and funnel your vision into customer success. You can’t thrive as a SaaS powerhouse with a flawed product and customer service model due to churn.
How to Calculate Churn Rate
Using the churn rate formula is relatively straightforward: it’s what you do with the information that is complicated.
To calculate the Customer Churn rate, take the number of customers that leave or cancel during a specified period of time and divide it by the number of customers you began that specified period with.
For example, say you begin the month of January with 100 customers and 5 customers cancel during that month. You would divide 5 by 100, giving you .05, which means your churn rate calculation for January is 5%.
What is Acceptable Churn Rate?
You may be wondering what is a “good” or “acceptable” rate of churn to expect. Many blogs and influencers will bait you into thinking in terms of a specific percentage. However, we believe the correct answer is 0% since successful businesses never set goals to lose customers.
Churn is a realistic part of every SaaS business, but you shouldn’t lead your company’s future success and growth with a poverty mindset. Continuously monitor and change your business practices to get your churn rate as close to 0 as possible.
John Maxwell advises to make the most of your mistakes and see them as assets rather than liabilities. You will discover incredible insights about your product and customer service that you’d otherwise be blind to without churn.
Pursuing an acceptable churn rate discredits your ideal customer’s needs and can be counter-productive to business acceleration if you view it from the wrong perspective.
Types of Churn
There are many different reasons that a customer may cancel a subscription or cease using your product or service. Our team categorizes these rationales under four different types of churn: voluntary, involuntary, subscription-level, and seasonal.
Voluntary Churn
Voluntary churn occurs when customers cancel their business with you voluntarily.
For instance, they may need to make a budget cut, your service may no longer be effective, they could have had a negative customer service experience, or the competitor looked better. No matter the reason, voluntary churn is never good for your company.
You should spend extended efforts trying to reduce voluntary churn.
Involuntary Churn
Involuntary churn occurs when a customer doesn’t cancel a subscription on, but it happens automatically. The most common reasons for involuntary churn are the end of an annual contract, expired credit cards, declined payments, insufficient funds, incorrect payment information, or poorly performing payment systems.
Customers may not have wanted to cancel their business in these cases and may not even be aware of the cancellation. You must have a well-planned workflow and system to handle situations, so you don’t lose precious business.
Subscription Level Churn
Subscription level churn doesn’t mean that you've lost a customer altogether. This level of churn says you've lost a portion of their business because they have downgraded to a lower-paying subscription level than they were using before.
You cannot always entice customers to stay at a higher subscription level if they do not need the services offered at those levels. On the other hand, it's a good idea to keep an eye on how often this is happening.
It’s possible your subscription levels may need adjustments if it occurs often.
Seasonal Churn
You may discover churn trends as you watch revenue churn rates fluctuate over time. There could be seasons where churn is higher versus other months. The time of year for customer sign-ups and market fluctuations are crucial factors that affect your number of raving fans.
Accountants may need particular services during tax season that they do not need throughout the rest of the year. These trends may be harder to spot, but if you do see them, it's wise to troubleshoot what you may be able to do about it.
How Churn Rate in SaaS Affects Business
Keeping a close eye on your customer base and your churn rate is not only significant so that you know the number of users you've. But it's essential because it affects many other metrics of the business.
Customer cancellations impact your MRR. You can find out exactly how much by adding up how much MRR was lost in a specific period and dividing it by overall MRR. In addition, churn rates affect your customer LTV and CAC because the more people you lose, the more you need to acquire again.
You may be spending too much money on acquisition costs per customer. If churn is high, you aren’t getting your money’s worth out of each customer because they are leaving too quickly.
Funding Churn Analysis
To develop an effective churn analysis strategy, you need time, a team, and funds. Winning strategies do not happen overnight.
You must have a plan in place for how to calculate your metrics and then time to watch it work. To develop that strategy, you must have a well-equipped team, and you need funds to support that team and the system they design.
Our team specializes in providing funding to thriving businesses that need assistance boosting to the next level. We’re successful entrepreneurs ourselves and have been in your shoes. That’s why we’re passionate about seeing you accelerate your business growth and peak with extra capital.
If you need funds to adjust your metrics and make changes in your business to reduce churn, we can help. Contact us today at (602).730.4558.
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