SaaS churn rate explained: a quick guide on reducing your product churn

You’ve spent countless hours thinking up, designing, and building your SaaS product. Once it was ready, you proudly brought it to the public. People started getting on board, you seemed to have caught some traction and were happy about it. But then you noticed something. A significant portion of the user base wasn’t staying with you for long. What does it mean? Well, the reasons may be many, but it’s likely that they’ve found your product wasn’t worth it after all. That’s a real wing-clipper, an ambition buster. But hey, despair not because you can do something about this user drainage. Today we’ll focus on proper understanding of what product churn is and then turn to ways you can nip it, so that your startup can live long and prosper. 🖖

Introduction to product churn in SaaS

Startups are perhaps more prone to experiencing churn because they simply haven’t been battle-tested in the market yet and didn’t have the opportunity to adjust., However, the issue may afflict a business at any stage, so stay with us to get a better sense of the matter and be ready to act if it ever occurs.

Those of you still early in their digital business journey may also find this guide to proper SaaS development process useful, especially in trying to avoid any potential future churn via the means of doing everything right from the get-go. Now, let’s move on to the main topic of today’s post.

Let’s begin tackling the issue of SaaS churn by defining its different types and establishing why keeping track of these metrics is crucial to sustaining growth.

What is product churn in SaaS?

Product churn in the Software as a Service industry refers to the rate at which customers discontinue their subscription to a SaaS product. In other words, it's the percentage of customers who decide not to renew their subscription and stop using the software.

What is the customer churn rate?

Customer churn is another fundamental SaaS metric, quantifying the percentage of users who terminate their subscription within a specific time frame. This marker signifies how well a SaaS company is able to retain its customer base over a given period. A higher churn rate indicates that more customers are leaving, while a lower rate suggests a healthier retention rate, and thus growth.

What is the revenue churn rate?

Revenue churn is used to illustrate the percentage of revenue lost due to customer cancellations, downgrades, or reductions in usage within a specific timeframe. Unlike customer churn rate, which focuses solely on the number of customers lost, revenue churn rate provides a more comprehensive picture by factoring in the monetary impact of departing users.

Why are these three metrics critical for SaaS startups?

The trifecta of product, customer, and revenue churn rates is of utmost importance when trying to keep your startup healthy.

1. Product churn rate sheds light on product-market fit, urging you to align with actual user needs.
2. Customer churn rate underscores the value perception, emphasizing the importance of a seamless customer experience to enhance retention.
3. Meanwhile, revenue churn rate quantifies financial stability, prompting you to optimize pricing, support, and upselling strategies. 

Put together, these metrics constitute a toolkit for startups to fine-tune their approaches, foster customer loyalty, and ensure sustained growth in the competitive SaaS landscape.

_{It doesn’t end with churn, though. We’ve compiled a comprehensive list of other critical software metrics you should stay on top of in the highlighted link.}

How to calculate churn rate?

In understanding how to calculate churn rate, SaaS leaders can gauge the health of their customer base and make informed decisions to bolster retention efforts.

Churn rate formula

The most basic formula for calculating churn looks like this:

Churn rate = (number of customers lost during a period of time / number of customers at the start of the period) × 100

What is a good churn rate?

What is considered a good churn rate varies across industries, but of course, the lower it is, the better. For SaaS startups, a single-digit percentage is often considered healthy. Still, keep in mind that what's “good” depends on factors like market norms, competition, and business models.

Annual vs. monthly churn rate

Annual churn rate is calculated over a year, while the monthly churn rate provides insights on a monthly basis. The latter tends to be higher due to the shorter time frame. Comparing the two helps assess trends and the effectiveness of retention strategies.

Understanding the causes of product churn

A deeper dive into the issue at hand reveals an array of factors that contribute to customer churn. Identifying the reasons for why people abandon your product is essential for SaaS startups striving to stay afloat. By understanding the triggers and recognizing the nuances between voluntary and involuntary churn, companies can craft targeted solutions to reduce churn rates and cultivate lasting customer relationships.

Common reasons for product churn

High churn rate may stem from various sources, and it doesn’t have to be a single one at any given time either. You need to conduct a thorough investigation of what exactly is leading users to part with your product in order to react efficiently. Some of the reasons for churn include:

• poor onboarding experience
• dissatisfaction with product functionality
• lack of perceived value
• changing business needs
• pricing concerns
• tech issues
• lack of product updates
• integration challenges
• unresponsiveness to feedback
• inadequate customer support

The difference between voluntary and involuntary churn

Churn can be further categorized into two distinct types: voluntary and involuntary. The former occurs when customers willingly choose to cancel their subscription due to reasons like changing needs or competitive offerings. The latter results from factors beyond customers' control, such as failed payment processing, for example. Distinguishing between the two helps startups tailor retention strategies accordingly.

Strategies to reduce product churn

Combating product churn calls for a multi-pronged approach, mainly centered around enhancing customer satisfaction and delivering sustained value. We've compiled 10 actionable strategies addressing various pain points that you need to make sure are in place at your SaaS business in order to keep up the growth.

1. Proactive onboarding

Facilitate the onboarding process by providing tutorials and guides. Offer interactive walkthroughs to familiarize users with key features of the product, ensuring they experience value from the start.

2. Regular communication

Maintain an open line of communication through personalized emails, newsletters, and in-app messages. Keep customers informed about updates, enhancements, and best practices to maximize their usage.

3. Data-driven insights

Leverage customer data to identify usage patterns and potential pain points. Analyze user behavior to proactively address concerns before they escalate into churn triggers.

4. Customer support enhancement

Provide responsive and efficient customer support. Consider implementing a live chat, ticketing systems, and providing self-service resources to address queries promptly.

5. Feature relevance

Continuously align product features with customer needs. Regularly collect feedback and implement the most requested features to maintain product relevance. It is highly recommended to create and regularly update a proper product roadmap.

6. Flexible pricing models

Offer transparent and flexible pricing plans that cater to diverse customer requirements. Allow users to upgrade or downgrade plans according to their evolving needs.

7. Value-added training

Organize webinars, workshops, or tutorials that showcase advanced product usage. Help customers uncover the full potential of the solution.

8. Engagement initiatives

Develop engagement campaigns, such as gamification or referral programs, to incentivize usage and foster a sense of community.

9. Optimized user experience

Continuously refine the user interface and experience. Conduct usability testing to ensure a smooth and intuitive product interaction.

10. Retention discounts

Implement loyalty discounts or exclusive offers for long-standing customers, encouraging them to remain committed to your product. Some startups offer high-value discounts upon subscription cancellation, because providing access to your software for free for the next 3 months can be much cheaper than acquiring a new customer.

_{If you’ve thoroughly applied the churn reduction strategies above for a sufficiently long time and can thus honestly say they still haven’t stopped the bleeding, maybe it’s time to consider a business pivot?}

Measuring and monitoring churn

Effective churn rate calculation, in a broad sense, lays the groundwork for eventually keeping the users on board. In order to better understand how to make them stay with you, start using relevant tools and metrics. This will refine your view of the grander picture and deliver decision-making data insights to help you stop the seepage.

Tools and metrics to track product churn rate

Despite being a hard number in itself, churn rate can be affected by a variety of factors stemming from different areas of business operations, which makes the category of tools for its measurement rather broad. Have a look at the list below to see which of them could prove useful in your situation and give them a try.

• Ambassador: Create referral programs for customer advocacy and then reward them to measure ROI.
• Appcues: Optimize user onboarding with customized experiences. Measure outcomes and enhance engagement without developer intervention.
• Churn Buster: Combat payment issues through automated processes. Features include white-label emails, auto-renewals, and real-time reports.
• Crazy Egg: Utilize heatmaps to decipher user actions. Optimize features, analyze scrolling, and tailor experiences.
• FirstOfficer: Monitor comprehensive metrics, including monthly recurring revenue and churn, as well as run insightful cohort analyses.
• Intercom: Elevate engagement with targeted emails and custom segments. Seamlessly integrate with YesInsights for effective survey implementation.
• LessChurn: Replace a one-step “Delete Account”process with exit surveys for data collection. Identify deletion reasons, optimize trials, and streamline churn analysis.
• Planhat: Elevate customer success with churn prediction and upsell identification. Manage renewals and leverage analytics for growth.
• Stunning: Prevent churn due to billing problems with dunning emails and SMS notifications. The tool offers easy setup with no coding knowledge required.
• YesInsights: Gather actionable feedback through surveys. Boost engagement, optimize funnels, and enhance conversion rates to trim down churn.

On top of that, basic metrics like Customer Lifetime Value (CLV), Customer Acquisition Cost (CAC), and Net Promoter Score (NPS) offer a comprehensive view of customer loyalty and satisfaction.

Importance of cohort analysis in churn reduction efforts

Cohort analysis emerges as a crucial methodology for assessing the outcomes of diverse experiments aimed at amplifying engagement, enhancing conversions, and curbing customer churn, thus fostering consistent revenue inflow and enduring expansion.

This practice, embraced by product managers and marketers, serves as a litmus test for hypotheses concerning customer interaction with products. The gleaned insights are then wielded to propel revenue generation, bolster retention, elevate conversions, and support other pivotal business metrics.

A steadfast ally in refining customer retention, cohort analysis casts light on distinct user groups or segments, forming the foundation for a comprehensive retention strategy encompassing goal setting, data exploration, hypothesis formulation, brainstorming, testing, analysis, and systematization.

Examples of churn rate reduction

In an environment where the loss of customers is a constant threat, the following examples of businesses showcase how diverse strategies can successfully reduce churn. From proactive engagement and intuitive onboarding, to personalized interactions and trigger-based emails – with enough creativity and insight, it's possible to navigate the churn challenge and thrive in the world of SaaS.

Groove: Defining “why” customers quit

Struggling with a 4.5% churn rate, Groove knew they needed clarity on why customers were leaving. They identified “Red Flag” Metrics (RFMs) through systematic research, signaling user behaviors linked to churn. Armed with insights like session length, logins, and task completion times, Groove crafted data-driven interventions. Customized emails targeting specific user actions resulted in a remarkable 71% reduction in churn, highlighting the power of proactive engagement.

Patrick McKenzie: User onboarding as a churn buster

Patrick McKenzie recognized that users often abandon free trials due to a lack of engagement and understanding. By optimizing the onboarding experience for his Bingo Card Creator software, he decreased drop-offs at critical stages. An interactive progress indicator and simplified default settings led to an almost 90% completion rate in the customize step. The lesson? A streamlined, user-centric onboarding process can substantially reduce churn.

Zendesk: Embracing the human touch

In a high-volume SaaS sales environment, Zendesk realized that the absence of personal touch contributed to higher churn. They introduced a Customer Account Management (CAM) team, fostering ongoing relationships and preemptively addressing issues. Scheduled check-ins, calls, and emails established a rapport that curbed potential churn triggers. The human element forged trust, resulting in below-industry churn rates and increased referrals.

Buffer: The power of trigger-based emails

Buffer harnessed trigger-based emails to guide users toward valuable actions. By identifying actions indicative of customer value, such as scheduling tweets, Buffer used these cues to personalize outreach. These emails not only increased user engagement but also prompted users to recognize the value of the service. Buffer's innovative approach showcases how targeted, action-driven emails can foster retention.

RST’s SaaS development savvy at your service

The realm of SaaS is an ever-wriggling entity. Mastering the complexities of product churn reduction becomes essential for startups aiming to sustain their growth. While there’s a variety of diverse tools available to aid in this quest, the journey from churn analysis to its effective reduction can be rather intricate. It extends beyond surface-level numbers, delving into the very core of your business model and operational strategy.

RST Software, with its proven expertise and a knack for SaaS development services, can steer your startup towards a robust product roadmap. All the insights, honed over years of industry experience, illuminate the path to not just understanding how it works, but devising holistic strategies to reduce churn.

Get in touch with us to discuss the ways we can plug the holes preventing your business from reaching its full potential. It deserves to do better.