Your clients are everything to you, aren’t they? As long as they stick with you, you are good. But what if your SaaS product experiences a high churn rate? If people are leaving, their needs and expectations are not met. This article explains churn rate is, how to track it, and why it goes up. This information is essential for modifying your SaaS and remaining competitive. 

Defining Churn Rate in the SaaS Context

In the SaaS world, churn is the rate at which clients cancel their current subscriptions, fail to renew the plans, or change service place to cheaper ones. Churn is calculated as a percentage. For instance, if your SaaS has a churn rate of six percent, it means that six percent of your clients will cancel their subscriptions in a set period (e.g., a month). However, it’s not as simple as that.

It is important to differentiate between customer and revenue churn, which may have different effects on the business. Customer churn is the most popular way to measure the rate of attrition. For example, if a SaaS company has 200 clients on the 1st of January, and seven cancel their subscriptions by January 31st, the churn rate is 3.5%. 

In comparison, revenue churn is the percentage of revenue a company loses in a given time period (most often, a month or a year). Here, the situation is more complex. If the company loses a few large clients who bring huge revenues, it may suffer greater consequences than if it loses a significant number of smaller clients. In other words, it is the size of the company and the money it brings that matters in the long run. 

In any case, high churn has a dramatic effect on the SaaS business, especially in the first few months. If the business hemorrhaging money and clients, it simply cannot survive the competition. 

Account for the Contract Length and Off-Cycle Churn 

Calculating accurate churn rates requires attention to other important factors, contract length being one of them. SaaS companies usually choose monthly subscriptions rather than annual contracts. They attract more people and allow them to try the product before extending their subscriptions. If your SaaS uses this model, you should calculate your churn rate excluding annual contracts from the formula.

If SaaS mainly relies on annual contracts, churn rate assessment should account for the length of contracts. However, annual churn is not a very popular success measurement for SaaS because the measurement intervals are too far between to inform any timely interventions.

Nevertheless, you can still benefit from an annual churn calculation, as it shows long-term customer retention. Things get worse when you lose clients before their annual subscription expires. This phenomenon is called off-cycle churn, and it signifies some serious problems with your SaaS. If people decide to leave earlier than they were supposed to, it means they are not satisfied with your product. Plus, there is a high risk that high monthly churn rates will translate into the high annual churn. Therefore, if you have both types of contracts, track churn for both to be more aware of how your SaaS performs. In this way, you won’t be surprised when your churn will suddenly increase at the end of the year. 

What Churn Rate Is Ok?  

What churn rate is tolerable, and when should you worry? There is no unanimity among the experts as to these questions. Many sources claim that a churn rate of five percent is tolerable, but SaaS businesses should aim at three percent. It is believed that this rate allows the company to compensate the loss with new clients easily. 

However, churn rate benchmarks often overlook the impact of the company’s size and monthly/annual calculation differences. For instance, an annual churn rate of up to seven percent is normal for larger SaaS companies. However, smaller companies and startups tend to focus on monthly churn, which can be much higher. Newbies in the SaaS market may survive even 10-15% churn if they modify their products quickly to meet clients’ expectations. 

Moreover, as your SaaS product develops, your churn rate should decrease. It happens because you get better at attracting and retaining customers. If your churn rate remains the same, it may point to the lack of progress and growth. 

Causes of High Churn Rates

Churn measurement cannot explain why you lose customers; it only shows that it happens. So why do people leave? Depending on the SaaS company, there can be dozens of causes of low customer satisfaction. These include but are not limited to the following:

  • Poor customer service
  • Ineffective marketing
  • Limited features/functionality
  • Pricing model
  • Scalability issues 
  • Product lacks value

Some clients may leave because payment methods do not work. Big deal, you may say. Credit cards may expire, or there may be some technical glitches in the payment method. Sometimes, clients lack sufficient sums on their accounts to renew their subscriptions. These issues have nothing to do with the quality of service, right? Well, it’s not that simple. 

In some cases, sending a dunning email indeed helps address the problem. Clients update their payment details, and the work is done. However, the majority of clients never respond to these emails. Unfortunately, you may never know why they did not get back to you. It may be due to low satisfaction or the lack of interest in your product. If you save on SaaS UI/UX services early in the product development, it may also translate into high churn rates. Maybe your clients decided to use your competitors’ products.

It’s crucial to reach every churned customer and ask them why they left. You can do it through automated surveys or interviews. Even anecdotal feedback from customers may give you a better idea of churn reasons, which is important for improving your SaaS product and enhancing services.

Conclusion 

Now that you know a bit more about churn, you can track it regularly to monitor SaaS performance. The churn indicator is not easy to calculate and interpret, but the efforts are worth it. If you utilize the collected data effectively, you will modify your services and products to retain most, if not all, of your clients.