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SaaS Churn: myths and Benchmarks, and Strategies to Increase Revenue

Apr 26, 2022

This week, I cancelled the year-long SaaS subscription (I had three weeks left until renewal).

Incredibly, even though I purchased a subscription for the whole year, the company didn't let me keep the last 3 weeks' worth of its premium capabilities.

As soon as I started canceling, a popup warned me that I'd immediately be denied access to the paid features.

"This action will immediately downgrade your account. Are you sure you want to continue?"

I decided to cancel, even though that I would not need the tool going forward. In the language of SaaS I turned on the engine. And the experience got me thinking:

  • Was the immediate elimination of features that cost money the most effective way to stop me from turning?
  • When did I officially count to be "churned"? Did they count me as churned on the day I decided to cancel? What if my subscription was due to renew? What if I had downgraded, upgraded, or changed my subscription?
  • What could they have done differently to stop me from cancelling?

In this post, we take our best shot at answering this and other queries concerning churn.

In part one the first part, we discuss benchmarks and common churn formulas.

In Part Two we'll go over five churn prevention methods that have proven successful in different SaaS business.

In the third part in part three, we'll wrap up with some definitions that you can use when talking about churn with your colleagues -- and some additional sources.

If you'd like, you can use this table of contents to jump between the various sections in this article.

Table of Contents

Part I: SaaS Churn Benchmarks

If people in SaaS talk about churn, we're often not doing well in making sure we're all on the same page.

If someone claims they have a 5% churn rate, is it talking about monthly, quarterly, or an annual Churn?

Are they excluding those who have never made it through a trial?

Do you know the rate of churn for the SaaS company targeting enterprise customers against one that is selling to the general public?

In setting churn benchmarks for SaaS businesses, there's much to take into consideration. And in this section, we break it all apart in order to let you perform a comprehensive churn analysis for your company to be able to better understand what you're up to.

What is the ideal Churn Rate for SaaS?

I often hear the 5%- 7% churn rate is optimal for SaaS firms. However, is it just anecdote? How common is it for SaaS companies to meet the requirements?

Also 5 to 7% is the ideal, but what's the average?

To find out, Ryan Law, former CMO and cofounder of Cobloom, performed an examination of six recent churn report or studies and found that there is no agreement on the typical number of customers churned for SaaS companies. The majority of the reports that he examined showed the average annual churn of 10 percent. The three other reports revealed more and a wider spectrum of 32% to 61 percent annual rate of churn.

What's the reason for such a broad range? Ryan theorizes that there's not enough data out there to provide a better view of SaaS turnover because it's not something that companies would like to share in a transparent manner.

He also observes some other aspects that impact churn: the company's size and the sector it is in.

Churn Can Vary by Industry

Industries can have very different values for churn.

"Look at your personal technology stack and you'll probably find tools you think are vital, while others you consider 'nice-to-have,'" Ryan writes. "It's probable that financial or sales tool are more resistant to being discarded as compared to a marketing tool since it's believed to be more accountable for revenues."

He also says that niche products with fewer competitors will also have lower number of customers.

Corporate Size Influences Common Churn Rates

Ryan states that many of the largest SaaS businesses target customers of enterprise who have contracts with longer lengths and therefore their churn rates will be less. This means that SaaS firms that focus on customers who are small or individuals with more customers with shorter contract durations tend to be more churn-prone.

When Ryan analyzes the typical rate of churn for large and small SaaS firms What he's actually saying is that your churn rates is dependent upon how big your customer and your average contract value. The lower the ACV, the easier it is to churn.

What's the Acceptable Level of Churn?

Hotjar founder David Darmanin understands that a churn rate doesn't mean much on its own. "Ultimately the churn rate and volume of it matters as much as the size of your market and the speed at which you're attracted potential customers" Darmanin said on an episode on the ChurnFM podcast.

If your market is small in size, then churn will impact your business greater. But if your target market is large and you employ a low-friction sales approach and you are able to withstand the higher rate of churn, without it dramatically impacting the business.

The realization caused David to divide the churn process into two groups that are acceptable and alarming. Certain types of churn are acceptable, perhaps even necessary -- especially when you're using a traditional B2C sales model.

"Worrying churn is where you've identified an ideal customer, and they're coming to the party, but after which they cease using your product], or they stop paying for it," David said.

That's why the amount of churn you receive will be an issue in the event that you're losing a substantial proportion of the ideal clients.

In fact, it could be a good thing to let go of users who don't fit your ideal customer profile (ICP). These aren't the customers whom you'd prefer to spend your time asking for feedback or support from.

But there's another distinction that matters to David: How do users feel about the product when they quit?

"Ultimately, I think what is more significant on this kind of flywheel you're creating (in the case of Hotjar) is that if individuals are leaving or stopping in a state of anger this can have more impact than the fact that they have stopped payment to the company. Because word-of-mouth for us is actually much bigger source of revenue than any money we're collecting or churning or dropping."

This is where collecting feedback from churning customers comes in (a issue we'll discuss farther below).

What's the most efficient Churn Rate Method to use?

To determine churn to determine churn, the simplest churn percentage calculation is the number of churns that occur during a specific period divided by the total number of customers at the beginning of a period.

Number of churns during a period
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Number of customers at the beginning of a period

For instance, if you're calculating monthly churn, and you start with 1,000 clients and then only lose 27 of them the churn percentage for that month would be 2.7 percent.

But this formula misses the mark on many crucial specifics.

For instance, it doesn't include the number of new users you gained over the course of time, and the number of they were churned out, as compared to the number of existing customers that churned.

The weighting is not based on expansion. If you're losing the exact quantity of users every month, yet you manage to attract more customers than you lose, your churn percentage will drop yet there is little change in how customers behave.

If you apply this easy formula to calculate monthly churn, you might not even realize the rate of churn can vary depending on how many days in the month!

This is why the most basic formula for calculating churn rates does not give you an accurate account of how theyou're increasing or losing. It's just too simple.

When deciding how you're going to calculate churn, Outlier AI offers two suggestions:

  1. The churn formula you choose should be in line to your main business goals. Determine what aspects are the essential for you to keep track of and tweak the formula in line with that.
  2. Don't make the formula excessively complicated. "The more complex it becomes and more complicated, the higher the chance that someone will make a mistake calculating it at some point or else you'll get an incorrect metric."

Business analysts have released their own formulas for churn. Steven Noble's post on how Shopify measures churn is an essential read. It also contains a Baremetrics article examines churn for diverse types of customers like users who upgrade or annual plan subscribers leaving.

Another thing to note: when we talk about churn it's typically about the number of customers lost. But there are other types of churn you can measure, such as revenue and transactions-related churn. Check out Outlier AI's post for more on these.

Monthly vs. annual Churn: What to Keep Track of?

There's a significant distinction between annual and monthly churn. If you lose 7% of your customers to churn in a calendar year it's a distinct number from losing 7percent of your clients every month.

It's not necessarily an ideal idea to be measuring both your monthly churn percentage ought to be much, much less than your annual churn rate.

What exactly is negative churn?

When attempting to get the big picture about churn, you shouldn't just look at the amount of customers are you losing. This includes the behavior of your regular customers, as well.

And that's where negative churn is a factor.

People have asked me if negative churn is an untruth. It's not actually, but it might not be the way you imagine it to be.

Negative churn occurs when the revenue gained from upsells and cross-sells is greater than the loss of revenue due to the customers who have been churned over a certain duration of.

Once you're at this point, you could continue losing customers with no any new customers and increase your revenue (at least for a while).

According to the VC Tomasz Tunguz that achieving negative churn must be a goal.

"Combined together with prepay annual contract negative churn has the potential to be an effective growth strategy," Tomasz writes. "When you are pondering your pricing structure and customers' success strategies is worth trying to integrate negative churn in your startup."

The Next Level Churn Rate Analyze: Who and What is the reason

In a broader sense an analysis of churn is simply looking at the speed that you're losing customers.

However, don't stop there. Your churn percentage only gives you an idea of what's happening is happening, but not the reasons or the whom. If you want to really comprehend and do something about churn the first step is to find out the reasonspeople are leaving and the customers you're losing.

SaaS growth specialist Fred Linfjard suggests a combination of quantitative and qualitative analysis to determine who's churning and why and also how to take action.

Quantitative Data Collection Information from Product and Website Data

Try out some sample questions and then answer

  • Which of the user groups is more likely to churn?
  • Are there patterns that can be seen in their product usage?
  • What supporting documentation did they view before turning?

Qualitative Data Gathering such as exit interviews and surveys

To try to answer questions:

  • What made them leave?
  • What could make them reconsider?

I hope this helps you gain a better knowledge of how churn effecting your company. Next, let's look at ways to come up with a churn-reduction strategy.

Part Two: Five Tested Methods to Reducing SaaS Churn

Ideally, your churn prevention plan is based on your quantitative and qualitative research that you've conducted as soon as you have a clear picture of who's turning and why, it becomes easy to determine what strategies are going to have the greatest influence. It's also useful to find out what other companies have done which has been successful.

1. Make sure you update your Dunning Management System

It is commonplace for between 20 and 40 percent of customer churn to be voluntary: due to expired cards, technological issues approving transactions, etc. Fred Linfjard provides a reason to make sure that you've got a sophisticated dunning system is the top priority in fighting churn.

2. Demonstrate Value as soon as is possibile

Preventing churn starts in the initial stages of the customer's journey and an especially critical time is when the customer's onboarding process begins.

You're undoubtedly aware of the importance of being able to facilitate SaaS customers to get started. If the user experience isn't smooth at the start and they're frustrated, they won't use it for long.

But there's also more and discussions about the importance of providing "quick results." In the words of Lincoln Murphy explains, " Customers who realize value quickly are the ones who stay with the company for the longest time."

There are plenty of ways to organize quick wins inside the program it self. It's also something that you can do more directly through emails.

When Christoph Engelhardt worked for Moz He was able to decrease its monthly churn rate of new users by 40% through sending an email that showed the importance Moz was providing to its customers in the initial three days. He explains the process the company employed in an extensive blog post.

3. Look for Red Flag Metrics

Examine the behavior of customers who were churned out to discover patterns. This behavior could be indicators that your customer may be in danger of churning.

Groove, a shared inbox specifically for companies, reduced churn by 71 percent through this data analysis. The Groove team compared utilization between the new users who churned before thirty days and users who continued to use the service. They found that the users who churned had much shorter initial sessions, and had fewer frequent log-ins than users who were on for the initial 30 days.

4. Customize Your Cancellation Offers

An effective strategy to reduce churn is to send an automatic offer to users who decide to terminate their subscription be it a coupon or the option to stop the subscription, or something else.

Wavve, a social media tool for podcasters, was able to recapture over 30% of the users who hit the cancel button. This was done by adding an incentive at the conclusion of a brief cancel survey.

This strategy worked so well due to the fact that attaching the offer the cancellation survey allowed Wavve's team to customize the deal based on the reason users were cancelling.

5. Automate What Works, Including the ability to collect feedback

Once you've reduced churn, how do you keep the churn rate at a consistent low rate?

The feedback you collect is always using an automated method.

This survey lets you to keep collecting valuable feedback to stay on top of what is making customers churn. "You could automate or streamline your qualitative feedback collection and for this instance, find out why they decide to leave your company. In most cases, an exit survey would be sent to someone who decides to cancel, through an email, or even when they hit the cancel button. If you can automate that collecting, you'll continually provide feedback to you which means you do not have think about it," Fred explained in our conversation.

When your customers and your product change, so will the reasons they churn. Continuously evaluating feedback is an important part of maintaining a low churn rate.

And by automating the process of collecting feedback, it frees up your time to work on other projects.

Part III: Churn Definitions and additional resources

What is Churn?

Customer churn, also known as customer attrition, is the losing of customers to a product or service. It's the opposite of customer retention.

What is the average SaaS Churn Ratio?

There isn't a uniform average churn rate for SaaS. Based on multiple studies The churn rates can vary from 10 up to 60% based upon the scale of a business as well as its marketplace.

Churn and Retention KPIs to Monitor

Besides monthly or annual customer turnover rate, some other SaaS measures that will give you a fuller view of customer churn as well as retention are:

  • Dollar-based net retention rate (NDR)
  • Customer lifetime value (CLV)
  • Monthly Recurring revenue churn (MRR churn) and annually the recurring revenue churn (ARR churn)

What Can Help