A lot of things can affect growth for young SaaS companies — the utility and functionality of your product, the performance and productivity of your team, shifts and trends in the market, new features and offerings from competitors, and more. Some of these influencers are internal and are things you can control. Others are external and are things you can’t control.
But there’s one influencer on your growth that’s seemingly a combination of both. Why? Because both internal and external factors influence it. It’s called SaaS churn, and it can quickly undo all the growth you’ve earned since you launched your company and product. More importantly, it can undo that growth rapidly — sometimes in a matter of months.
What is SaaS Churn?
One of the strongest growth strategies is reducing churn — a term for subscribers who cancel their subscription during a specific time and the resulting financial impact of those cancellations. You can express churn as a simple number, a rate, or a percentage of your overall subscriber base. Let’s look at an example of churn.
If your SaaS business has 100 customers and you lose ten customers over the course of one month, you have ten percent churn. It’s important to note that churn is usually measured in revenue, against your monthly recurring revenue — so let’s talk dollars. If those 100 subscriptions are, say, $1,000 per month, and you lose ten percent that’s $10,000 you’ve lost from your MRR that month.
That’s a huge loss — and if this weren’t just an example, you’d probably have more pressing issues to deal with!
The counter to SaaS churn is growth rate, which is the number of new subscribers to your customer base and how the revenue from those customers helps grow your business. To keep growing a SaaS company, your growth rate must exceed your churn rate.
If you’re adding 15 new subscribers per month at $1,000 per customer, you’d be growing. A churn of ten subscribers per month at $1,000 each over a year is $120,000 (ouch). A growth rate of 15 new subscribers per month is $180,000. Over the course of a year, you’d have a net growth rate of $60,000 or 6 percent. But if your growth rate matches or dips below your churn, you won’t be growing — you’ll be losing money. At that point, new challenges would emerge.
You can see how important it is to pay attention to — and to reduce — your churn rate as part of your SaaS growth strategy. Ideally, there would be no churn. But sadly, that’s simply not the way that business works. You will lose customers. Subscribers will leave, try a competitor, lose the need for your product, or even develop a new solution in-house. It happens.
While you should always focus on getting new subscribers, there are a number of ways to focus on reducing your SaaS churn as well. Remember, your existing subscriber base is a source of revenue you already have. It’s a foundation that you can always be building on. And while you can focus on building up, you should never forget the foundation. It needs just as much attention and support as everything else.
Tips for Reducing SaaS Churn
First, remember what churn is: the loss of current subscribers. Not future subscribers — current subscribers. If you want less churn, you need to retain more of the subscribers you already have (we’ll be discussing retention tips in a separate post soon). Again, retention isn’t something you can fully control, but it is something you can influence. Here are some tips for reducing SaaS churn and increasing subscriber retention:
Keep Your Subscribers Sticky
One of the biggest churn factors is subscribers not using your product anymore (also called “activity churn”). So, look for ways to reinforce your benefits. Add bullets in transaction emails. Put value-add messaging into your customer service emails. Create pop-ups or notifications with tips and benefits in your SaaS product. Remind them as often as you can why they should stay with you.
Think About Your Billing Methods
You’ve probably already seen this in your own subscriptions: savings opportunities for annual billing instead of monthly billing. Who doesn’t like saving? Consider a few added perks or benefits for an annual subscription (e.g., Squarespace provides a custom domain for its users’ websites who pay annually, but not for users billed monthly). And give your subscribers opportunities and incentives to expand their subscription (a.k.a., upselling) to get more revenue from the customers you already have.
Communicate from the Beginning and Forever Forward
Nothing says you care more than staying in touch. Customer success plays a major role in this aspect of retaining subscribers. Keeping in contact with them, evaluating the relationship, identifying areas for improvement and opportunity, and more all factor into successful subscriber retention. This all starts with onboarding because first impressions always matter. A positive, streamlined experience from the start lets subscribers know you care. And staying in touch with them, whether through periodic calls or even finely crafted automated emails, can help sustain that positive impression.
You might be wondering what a “good” SaaS churn rate is. Easy: zero! Realistically, a 0% churn is not something you’re likely to get. A churn rate of 4–5 percent per month is good to shoot for. It’ll mean that you’ve invested in retaining your valuable customers while establishing new relationships and subscribers.
Don’t forget about the customers that have already left, either. While they’ve already moved on, reaching out and asking plainly and politely if they’d be willing to tell you why they left can help you address the areas that influenced their decision to leave. It even gives you an opportunity to potentially bring them back. If a customer left because of an issue you’ve recently fixed or missing feature that you’ve just added, your dialogue is an opportunity to inform them and even make an offer for them to return. Ultimately, thank them for their response and reinforce that their feedback can and will make a difference.
How Churn Affects Venture Debt Financing
At some point, your SaaS business might be considering funding solutions. Non-dilutive capital is a great way to support sales and marketing efforts, invest in product development, recruit top talent, and extend your cash runway between VC rounds. There are a variety of reasons to consider debt financing in your overall financial strategy.
SaaS churn can make an impact here, too. Debt lenders will want to know what your churn is, and while current profitability isn’t always required, lenders will want to see that you have a sticky subscriber base that’s doing just that — sticking around. The impact churn has on your MRR will affect your ability to repay the loan and qualify for re-borrowing against principal paid. Investors also won’t invest money in you if your retention rates mean your business might be in trouble.
Reducing SaaS churn isn’t a function limited to owners and leaders — it’s something every employee at your company can and should focus on. Each team member makes an impact for your subscribers in some form, whether direct or indirect, so fine-tuning, adding value, and polishing your product, processes, and communication are all worthwhile efforts to reduce churn and invest in the growth of your SaaS business.
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