Quick (and truthful) Guide to SaaS Customer Churn in 2022

I wrote two guides about Customer Churn and Revenue Churn for you to prevent falling into a trap. This article will focus on Customer Churn in general.

August 2, 2022

Growth

MIN

One of a company's biggest enemies is churn. Both customer churn and revenue churn.

Most first-time founders have a hard time differentiating those two, and therefore, end up following the wrong metric and wasting most of their energy.

Therefore, I wrote two guides about Customer Churn and Revenue Churn for you to prevent falling into this trap.

This article will focus on Customer Churn in general. I will talk in detail about:

What exactly SaaS Customer Churn is,
Why SaaS customers churn in general,
Why having a high customer churn rate could be more damaging than it seems,
How to calculate the annually and monthly churn rate of customers,
And the best 10 methods to improve your churn analysis and prevention.

So, without further ado, let's begin with the definition:

What Is Customer Churn?

Customer Churn, or Customer Attrition, is when customers stop purchasing from you, or terminate their memberships. The percentage of customers that churn tells you about how good your product engagement is and how it reflects on users. You can calculate the Customer Churn rate by dividing the number of total customers in a period of time by the number of customers churned.

A good customer churn rate for SaaS is between 5-7%, and anything above that indicates that you should focus more on customer retention.

Here is a sad fact about customers: According to research by PWC, 32% of new and current customers that experience just one inconvenience with a company directly churn instead of complaining or waiting for the problem to be fixed.

And that is the very reason why you should always keep an eye on your customer churn rates, as well as track their churn reasons.

But what are those reasons?

How do you learn them?

How do you get rid of them?

I found some very interesting statistics about SaaS customer churn reasons. Just keep reading:

Why do SaaS customers churn?

The biggest majority of SaaS customers churn because they find the provided service unreliable, according to this statistic report. This means that those customers either face stability issues, find too many bugs, don't understand how to use the product from the get-go, or simply receive poor customer service. In fact, 46% of customers in this research reported that customer service was among their biggest reasons for churn.

So now, I would like to list what people have reported as the result of their voluntary churn, and what the product-related problems behind them are.

‍

Unreliable Service - Poor Onboarding:

People who state that they find the service unreliable usually don't fully understand how to use that product. In fact, 8 in 10 users say they’ve deleted an app because they didn’t know how to use it.

In order to convince people that your service fits their needs, you have to catch their attention from the get-go, and engage them throughout the whole customer journey.

Substantial Price Increase - Failure In Primary Pricing Model:

Pricing plays a great role in determining whether you will grow or run out of money after a few months. If you price too high, you won't get customers. If you price too low and don't get enough customers, you won't be able to pay for dinner.

Here is a guide to help you with setting up your pricing strategy so that you won't ever have to substantial price increases and lose half of your customers.

P.S. I'm not saying that you should refrain from changing prices at all, of course you will. But there is a correct time and way of doing it.

A Security Issue With The Vendor - Licensing Problems:

Getting security accreditation is a long and effort-taking process - but you can't just skip it. In my company, we had tens of closed-lost deals due to a certain security certification. We started the process too late, and it took us a while to get it.

For you to not fall into the same pitfall, here are the five most important security accreditations for SaaS businesses.

Ongoing Latency Issues - Product:

How fast is your product?

Does it load in a blink of an eye? Did you double-check each page?

People's time is precious, and the very reason they use your service instead of solving it in-house is that they want or need to solve that problem quickly. If your product can't keep up with the speed of their needs, they will switch to another product.

A Lack Of Technical Expertise From The Vendor - Poor Product Positioning:

There is not much to say about this reason, it's pretty self-explanatory.

If your team can't keep up with the customers' needs, you simply won't be able to keep customers for long.

This technical expertise in question isn't necessarily about your niche as well. If you can't help people integrate your product, if you can't solve their bugs, or if you don't know the answer to their questions about your IT process; they won't stay.

One Or More Poor Customer Support Experiences - Customer Support Team:

Forrester found that the most important thing a company can do to provide a quality customer service experience (according to 66% of people asked) is to value customer time.

When people have problems, that don't ask for help; they churn. The minority that doesn't increase your average churn rate, those people will seek support. And if you can't even provide support, there will be nothing left for the customer to keep paying you.

Too Many Sales/Marketing Calls/Emails - Poor Strategization:

Who likes spam mails? Do you like spam calls?

No one does. I don't even like the emails that fall into my promotions folder - which I never look at. I still don't like them. And spamming people with mails-calls isn't going to work for you either.

Don't email them more than once a week (unless it is absolutely important). Don't follow up on your calls-mails before than 7 days.

Here is another example: I once received a collab mail from a colleague to which I forgot to reply. They followed up the day after, and o that instant, I knew I couldn't work with them.

Moderate Price Increases - Failure In Primary Pricing Model:

As you see, moderate price increases drive 20% of the people away. If your price increase compensates for this customer churn, there is nothing wrong. Because as I said, renewing your prices when necessary is as normal as breathing air.

But, if you have lost more customers than you expected, you should re-evaluate your strategies. Here is a good read about how to do price increases without scaring customers away.

A Lack Of Innovation - Customer Feedback Action:

Times change faster now. What we used five years ago (only in 2017) doesn't work anymore. I mean, who uses an iPhone 7 anymore?

The same goes for your product. You have to evolve along with your customers' needs, or else, you will lose them to a competitor that does.

To stay up-to-date according to where your customers point you, here is how you should collect and utilize customer feedback.

Peer Recommendation For A New Provider - Poor Engagement:

Social proof is what keeps the businesses going. People trust social proof more than they do anything else. And if your customer has a problem, they won't share it with you, they will share it with their peers.

In order to prevent losing customers, you just have to engage them so well that they won't listen to recommendations.

This happened to me with ClickUp. It's a collaborative work and time management tool, just like Asana, Notion, or Trello. Even though I was asked to try those alternatives as well, I couldn't give up ClickUp, because the colors were just perfect and it was so easy to use...

I hope your customers say the same thing about you as well.

Why Customer Churn is Bad

Yes, churn causes you to lose money. Yes, churn also causes you to lose your valuable customers, and results in unhappy customers talking about their bad experiences, thus, decreasing your social proof.

But...

There is a lot more than churn signs to. For instance:

Churn can tell you which types of customers you can't get along with

I hope you already have your customer personas ready, because if you do, you will know the customer type you don't get along with.

You can group customers with similar needs or similar patterns, and ease the detection of risky customers.

Here is how you find your customer personas in five steps.

It means that you could spend a little more on customer retention strategies.

If your customer acquisition rate is high, but your customer retention rate is low, you will lose money.

That is because customer acquisition costs are 7 times higher than retention costs. So, companies try to increase customer lifetime rather than their conversion rates to see an actual profit.

And if your churn rate is too high, you could adopt a similar strategy.

A sudden high attrition rate signs you have become outdated due to target market changes

Detecting this cause should be easier if you collect feedback about your churning customers.

If more than one or two customers churn because they will go with a "more modern" solution, or anything similar to this, you should check your product-market fit again and detect what has changed.

There could be a new solution to the problem you solve.
There could be a new trend or feature that you haven't heard of yet.
There could be a trending product that makes everyone want to try - such as Slack.

Calculating Customer Churn for SaaS

It's all good to know the reasons of customer churn, but how do you know whether your churn rate is all good or alarming?

Well, I got you covered.

Here is the churn calculation formula for a specific time period:

The ideal monthly customer churn rate for a SaaS company is below 1%. Of course, this rate can rise up to 3% for startups and small businesses.

10 Ways to Reduce Customer Churn Right This Month

1- Have An Engaging Onboarding Sequence

All the indicators I mentioned above had one thing in common: If you can't engage the user from the very start, you will be highly likely to lose them.

That's why an engaging onboarding sequence could save you lots of customers.

You could:

Prepare a written manual, but I don't recommend this one since it's outdated.
Create a video, which could end up being very expensive unless you record it yourself.
Create a step-by-step interactive onboarding, but it can be very time-taking unless you use a third-party digital adoption platform.

Here is what a good onboarding looks like:

2- Provide A Roadmap That Guarantees End-User Success

Let's say that you go to a concert of a group that you don't know. You don't know how long it is going to take, you like but don't love the first song, and it takes ages for them to start a new song once the first ends.

How long would you stay in the concert area?

I would probably leave very early. But what if the later stages are better?

If you want your users to have patience with your product, you have to tell them every single detail about how their customer journey is going to be.

You should tell them how long it will going to take to see results, you should have them complete certain things for them to get the best out of your product...

And there is an easy way to do this: Checklists.

Let me show you rather than tell you:

3- Segmentate Your Customers And Create User Personas

As I mentioned above, segmenting your customers and creating user personas will make it easier to trach recurring patterns and work on them.

You could segmentate your customers according to:

Unactive duration,
Certain features last used,
Signup time,
Duration of the sales process,
The last time reached out

And so on.

For example, if people who don't log in for a month churn a lot, you can start reaching out to people after inactive days of 20 and keep them within your loop.

4- Collect Valuable Feedback And Learn Your Key Drivers

It is as important to know why people retain as to know why they churn. Ask your customers:

What features do they like most?

What is the main reason they preferred you?

What would be a dealbreaker for them?

These questions, along with your satisfaction score, will help you improve your strengths as well as your weaknesses.

5- Keep An Eye On The Positive And Negative Customer Attributes

This step is actually a combination of step 3 and step 4.

Looking at your strengths and weaknesses simultaneously could reveal some patterns as well. For instance, is there something that keeps some customers loyal, but at the same time makes some run away?

If there is, then you should reevaluate your product market fit, and talk to more customers about their thoughts.

6- Analyze Churn Along With Retention

As you may guess by far, analyzing churn alone won't get you far.

Instead, see retention reasons, retention rates, and retention-related tactics as well to figure out how you can reduce churn.

7- Provide Excellent Customer Service Rather Than Bugging Mails And Calls

Even grocery stores don't have employees anymore. Because humans find human interaction and feeling watched annoying.

The same goes for SaaS products. Let the customers explore the product on their own. Drive them to the product, guide them with automated bots, and let them be - unless they ask for support.

8- Provide RewardsTo Your Loyal Customer Base

Loyalty programs aren't a must, but they definitely help in building a loyal customer base.

Why would you need it, though?

Because statistics indicate that a 5% increase in customer retention increases profits by 25% – 95%.

Having a loyalty program, such as a recurring purchase reward, rewards after achievement, discounts, or little presents like a cupcake could be the growth hack you are looking for.

9- Ask, Collect, And Provide

Growing is a must, but what are you going to grow according to?

Feedback.

But you won't give the customers what they ask for. You will listen to them, determine their needs, and come up with your solution to their needs.

Or else, everyone is just going to bombard you with specific requests.

This way, you will have a single solution to many problems, and will be able to reduce churn on a bigger scale.

10- Don't Deny Or Hide Your Weaknesses

One reason why people stop using your product is they come across things they didn't expect.

If you overpromise and underdeliver, you will be blamed.

If you underpromise, you won't be chosen.

That's why being out and open about both your strengths along with your weaknesses will prepare users about what to expect, and keep them with you for longer.

‍