What is the SaaS churn rate?
In the broadest sense, the SaaS churn rate is the percentage rate at which customers stop subscribing to a company’s service.
Software companies can predict future sales, determine customer lifetime value (CLV), plan marketing campaigns, and improve their goods by knowing how fast customers leave.
Customers leave for a number of reasons, and most businesses deal with more than one:
Getting happy customers
- How well the product meet the wants of the customer?
- Price and good value for money
- Other services that offer the same thing
- How good is the customer service?
- Good product-market fit
- Be able to sell extra services.
Every SaaS business knows that some customers will cancel their subscriptions over time. This is called “churn.” However, a high turnover rate could hurt the business in the long run.
SaaS businesses lose an average of between 3% and 8% of their customers every month. If you look at that number over a year, it’s much higher (32% to 50%).
Like words
Average churn rate: The average number of users who cancel their service over a set amount of time, usually once a month or once a year.
The average number of customers who quit their monthly plans over several months is called monthly churn.
Annual churn is the number of customers who quit their subscriptions. It can be found as a percentage at the end of the year or as an average over several years.
MRR churn is the monthly recurring income (MRR) lost because a customer went elsewhere.
Customer loss is when a company’s customers slowly leave, either on their own or because of things outside the company’s control.
An annual customer churn rate is a way to count how many customers cancel their service contracts in a year.
Getting the SaaS Churn Rate
As with other subscription-based businesses, SaaS companies figure out their churn rates by dividing the number of customers who canceled their subscriptions in a specific time frame by the total number of customers at the beginning of that period.
Here’s how to figure out how many SaaS customers are leaving:
To find the churn rate (%), divide the number of closed accounts by the total number of accounts at the beginning of the period.
The loss rate for January through February would be 20% if a company had ten customers in January and 2 canceled their subscriptions in February.
It’s essential to remember that this estimate only looks at customers who canceled, not new ones who signed up during that time.
Signs of a High SaaS Churn Rate
The five main parts of the SaaS churn rate that need to be broken down to measure a company’s success correctly are voluntary churn, involuntary churn, retention rate, average revenue per user (ARPU), and average revenue per churned subscription (ARPCS).
Choosing to Churn
Customers who willingly churn choose not to use the service anymore.
There are several reasons a person might leave on their own:
- Not happy with the business or its items
- Customer service problems that haven’t been fixed
- High costs to subscribe
- Not being transparent about how to pay for things
- Getting a better product from a peer
- Not being able to use the tool correctly
- Are they having trouble adding the tool to their tech stack or workflow?
Companies often learn after the fact that they could have kept customers from leaving on their own if they had dealt with customer problems earlier in the process.
Unwilling Churn
When customers can’t use a product or service anymore because their lives have changed, this is called “involuntary churn.”
Usually, one of these things causes this to happen:
Not made payments
- Accounts can be closed for scams or lousy use of services
- People forget to renew their membership.
- Changes or restructuring in the organization
- How customer need to change (or don’t change)
About 20% to 40% of all customers who leave are lost because they didn’t want to. For businesses to avoid this, they need to streamline their contract management processes so that customers don’t forget to pay or renew their subscriptions.
Rate of Retention
Customer retention is the ability of a business to keep people using a product or service for a more extended period.
The customer retention rate is the rate at which current customers continue to pay for a service.
Here’s how to figure out the retention rate:
% = (Number of Accounts at the End of the Period / Number of Accounts at the Beginning of the Period) x 100
Let’s say a business had ten users in January, and eight were still using their service at the end of February. That’s an 80% monthly retention rate.
As long as the number of new customers stays the same, a business’s churn rate decreases when it improves its retention rate.
The average amount of money made per user
The average amount of money a business makes from each user is called the average revenue per user (ARPU).
The formula for figuring out the ARPU is simple:
ARPU = Total Sales / Number of Active Users Each Month
For instance, if a business makes $1,000 monthly and has 100 regular users, its ARPU is $10.
A company can set a reasonable loss rate with the help of ARPU. It will hurt more when a customer leaves if the company expects more money from each user. It should put more effort into keeping customers.
This is the average revenue per canceled subscription (ARPCS).
The amount of money a business loses when a customer cancels their service is called average revenue per churned contract (ARPCS).
Here’s how to figure out the ARPCS:
ARPCS = Lost Sales / Number of Drops
An example of an ARPCS would be $100 if a company lost ten users and made $1,000 in sales.
Companies use ARPCS to determine how much it costs to lose a customer and then make more intelligent choices about keeping that customer.
ARPCS and ARPU work together to help businesses figure out the best price to keep people signing up.
Reasons for a High SaaS Rate of Dropout
Several things could cause a high SaaS churn rate. Here are some of the most popular reasons:
Customer Service and Experience That Aren’t Good
Direct-to-consumer brands have a very different customer experience than business-to-business companies.
When a customer buys a membership service for software, the software is used throughout the company. This means that technology decisions affect hundreds or thousands of workers.
Some specific parts of the customer experience that affect rates of engagement and churn are:
- Response times that are too slow
- Long wait times for hold
- UIs that are hard to understand
- Poor or nonexistent methods for onboarding
- Not enough product education tools
The customer experience is worse when hundreds or thousands of employees don’t know how to use a product properly.
They will ultimately cancel if they can’t get quick, personalized service.
Failures to make payments and forced turnover
A business won’t get any money if it doesn’t take payment from a customer. And if it can’t charge people for services, it makes less money.
Two of the most common reasons for the SaaS churn rate are failed payments and changes that were not the user’s choice.
They hurt the economy by about $120 billion a year.
Sometimes, you can’t stop them. For example, a customer’s credit card may not work anymore, or the payment method may have technical issues.
Still, there are many times when companies can avoid these issues by being cautious.
Model of pricing, agreements, and plans
It’s harder for businesses to keep customers when their pricing plans are complicated. Potential buyers get confused when the customer experience is jumbled badly.
The same goes for businesses that have too many deals and prices to choose from. For long-term success with all of their customers, SaaS companies with large product catalogs (like those built on microservices for corporate customers) must tailor their buyers’ subscriptions.
Higher churn rates are also familiar with shorter contracts. Keeping customers for more extended periods ensures more steady revenue streams.
Low-value thought
It doesn’t matter how much customers pay for the tools they need; they need to feel like they’re getting good value for their monthly money.
Christoph Engelhardt, an experienced email marketer, cut Moz’s monthly customer turnover rate by 40% by writing an email about how valuable Moz was to customers in their first thirty days.
This success shows an essential truth about keeping SaaS customers: people don’t always understand how valuable a product or service is.
They are not interacting with customers enough.
Any plan to keep SaaS customers should include follow-up marketing messages and ways to get them involved.
If customers don’t feel linked to a service, they might not see why they should renew or upgrade their plans. Personalization efforts, such as discounts on specific customers or special deals when their contracts are up, can also help. Email marketing campaigns can also be helpful.
What a High SaaS Churn Rate Means
High SaaS loss rates make it hard to stay in business over the long term. When companies have a high loss rate, they can’t keep customers, which makes it hard for them to grow.
Loss of opportunities to make money and grow
Every business’s final goal is to serve as many of its ideal customers (ICP) as possible.
If a company loses customers faster than it makes recurring income, it can’t grow.
If a business has to spend all of its extra money and time on getting new customers, it won’t have the money to enter new markets, make goods for new types of customers, or hire more staff.
Investors often lose interest when revenue growth slows down or stops. Most of the time, founders with this problem take bad (i.e., dilutive) bets to get more time to raise money.
Effects that are bad on strategies for keeping customers
In addition to lowering revenue, high churn rates make it harder to keep existing customers.
Research from Salesforce shows that 62% of customers tell others about bad situations.
When customers leave, the buzz they create through online reviews and word of mouth can hurt the existing customers and the business in the long run.
Customer loyalty programs stop working if the people who already bought the goods don’t think they’re worth as much.
Surveys and reviews asking for customer feedback don’t give you accurate information if customers leave.
If more customers plan to switch when their contracts are up, annual plans will only make things take longer.
Getting new customers is getting more expensive, which makes it harder for the business to keep the ones it already has.
There are still some ways to keep customers coming back, though. Poor customer retention rates can be fixed by personalizing the customer journey and giving current customers helpful product information and lessons.
Ways for SaaS companies to lower the number of customers who leave
Companies usually don’t have to do much to keep SaaS customers from leaving. Most businesses can make much progress with process automation and a few changes to their current plans.
Use data analytics to look at patterns in how customers act.
The king is data. In a poll from 2023 by APMdigest, 70% of people who answered said they used a centralized data platform, and 83% said it saved them a lot of money.
Product development teams look at customer data to see how the product is used and how it can be improved to meet customers’ needs better.
The marketing and sales teams need it to let potential customers know how valuable the product is.
It helps customer success teams quickly answer questions, make the process consistent, and let sales, marketing, and product development know about similar things.
CEOs look at the bigger picture to see how healthy the business is, make predictions, and show investors how things are going.
Data can come from any or all of the following places, depending on how a company is set up:
What the product?
- Customer relationship management (CRM)
- Tools for social listening and sentiment analysis
- Help desk tools and customer service calls
- Tools for marketing automation and email segmentation
- Software for billing
The information from these sources isn’t all about customer loss, but it can be used to get a general idea of how customers act in ways that lead to churn.
Make the pricing model work better by offering discounts and competitive prices.
Price management is not an easy problem to solve.
For businesses to make money, they have to charge enough. But charging too much turns people away.
Different businesses need different pricing methods, but there are a few general rules that work most of the time.
Use customer information to set competitive prices.
An excellent place to start is by looking at related products on the market and comparing the features and prices of each one.
But they won’t have a complete picture of the market until they find out how much their customers think the product is worth.
By doing polls, talking to people, and A/B testing, they can figure out the best way to package different kinds of goods and services at different prices.
Discounts should be given for long-term agreements.
Revenue that comes in every year (ARR) is the holy grail for SaaS businesses.
With monthly contracts, there is a risk because the customer can leave anytime, but the business gets cash immediately.
Giving discounts to customers who sign a yearly deal and stick with it is often a good idea.
Longer-term contracts make customers happier, keep them as customers longer, and help a business make better financial predictions for the coming year.
The price of a product should be based on how much it’s worth to each customer.
Customers get different amounts of value from a product when they have different-sized teams.
Tiered pricing is a simple way to fix price models that are hard to understand.
It lets businesses divide their customers into groups and set prices that fit the wants of each group.
The tiered method is suitable for both customers and businesses. Customers get more value from the product, and businesses make more money.
Prices should be scaled based on people or seats.
Customers usually feel better about paying for only the software they use since licenses can cover whole businesses.
As businesses grow, this method helps them reach out to old customers again with offers to add new users or goods.
Improve the quality of your customer service.
Many people (76%) say they would stop doing business with a company after just one bad experience.
In business-to-business (B2B), one unresolved support problem won’t cause the whole company to rethink its relationship with a vendor.
But one bad experience can still hurt relationships; if you don’t fix them, they will change over time.
Proactive customer service is the best way to avoid that. Companies can connect with customers better, keep track of their satisfaction over time, and quickly solve problems by investing in tech-enabled customer service solutions like help desk software and chatbot automation.
When self-service options are offered, customers usually choose them. Plus, they save time because people don’t have to wait for someone to help them. Self-service sites give customers access to product documentation, tutorial videos, and FAQs without waiting for a rep.
Set up solutions for managing subscriptions and billing
Automatic billing and subscription management keep SaaS companies from dealing with many problems that cause users to leave, either voluntarily or not.
The most essential benefits of tools for managing and billing subscriptions are:
Automating the payment process to keep customer records up-to-date
Setting up flexible payment plans, such as pay-as-you-go contracts, monthly payments, and more
Making it easy for customers to change or improve their subscriptions
Taking more than one payment method so that failed deals don’t cause customers to leave
Setting up automatic payment alerts will save time and money on management tasks that need to be repeated.
Dynamic discounting to give people unique rewards
Getting payment information from customers will help businesses figure out which ones are the most useful
Each of these benefits leads to lower monthly and yearly churn rates, which is especially important when you consider that mistakes in billing and payment processes cause a big chunk of those rates.
