Churn in the software as a service (SaaS) context refers to the percentage of customers who will cancel their subscription and stop using your tool. A high churn rate can devastate revenue, customer lifetime value (CLV), and business growth.
Churn is very much like a leaky bucket; no matter how hard you work to fill the bucket with new customers, it won’t be sustainable if so many existing customers are leaving it. So, reducing churn for a SaaS company is a long-term, sustainable strategy to grow their business. This is because retaining an existing customer is much cheaper than acquiring a new one.
Understanding the Types of Churn
Before we discuss the tactics and actions you can take to reduce churn, we will need to understand the types of churn. This will also help us to calculate the potential impact when we run the numbers.
Voluntary Churn
When customers unsubscribe of their own accord, it’s called “voluntary churn.” The most common reasons for this are that the customers are unhappy with the product, they don’t find it valuable, or they’ve found something better elsewhere. These are the big three. Here are some specific reasons that fall under them:
1. Poor customer support.
2. Product doesn’t do what it should, or what’s been promised.
3. Pricing that’s too high, too low (you don’t want to look cheap), or poorly structured.
This can be mitigated with a well-trained support team, transparent and easy-to-understand pricing, and solid lifecycle marketing tactics. On top of that, you will have to make sure that you are not over-selling or overestimating the impact the client will see. It is always better to underpromise and overdeliver.
Involuntary Churn
Involuntary churn occurs when customers can no longer use a service because of external, uncontrollable factors – like expired payment methods, technical issues, or failed transactions.
When these problems arise, there’s typically nothing the customer can do to remedy the situation, making involuntary churn seem like a problem with no real solution. Yet, with the proper systems in place, these customer losses can be prevented.
The best way for SaaS companies to combat involuntary churn is to remind customers on a recurring basis to update their account information – especially payment information. And for the rest of the cases, they can just use an automated payment recovery tool.
Ways to Reduce Churn
Moving on, we will discuss ways of reducing voluntary churn, as this represents around 75% of the lost accounts. Moreover, this is also the part of churn that can help you diagnose the issues your tool might have.
The best ways to reduce churn for your SaaS business will depend on your current activities and the tactics that you use along the bowtie model. Without a having good look at your business and trying to understand it, no one can tell you what’s the best course of action.
But here are some ideas to consider when thinking about reducing your business’s churn rate.
Product-Market Fit
Achieving and keeping a solid product-market fit is absolutely critical for controlling churn. SaaS companies need to move fast and keep their product in line with the changing dimensions of their target market.
Making continuous changes to the software will play a major role in maintaining product-market fit. But the ideas for these changes will have to come from your customers. You can collect all the feature requests from your customers through customer support inquiries. Or you can actively reach out and ask your customers what else would they like to be able to do with your tool.
Just remember that not all customers’ ideas are worth working on. Some of them will be edge cases that will not be used by the majority of your clients. So, be picky with your resource allocation and make sure that the features actually make sense.
Personalized Onboarding
One way of reducing churn in SaaS is to prevent it with an excellent onboarding. This will give the users the right expectations and they will know exactly what the capabilities of the software are.
To personalize the experience, start-ups can have one-on-one sessions as there won’t be as many inquiries. But as the business grows, this approach can become really expensive, so you will need a more automated way.
You can offer onboarding at scale, through video walk-throughs, in-app tutorials, or step-by-step guides, depending on the complexity of your software. If you want to maintain the level of personalization with the added benefit of automation, you can opt for tailored onboarding.
You can have an onboarding quiz where you find out what exactly your customers need. Based on their answers, you can pick the video materials and create a custom set of videos for them. You can always include other sections to mention other parts or features of your tool to present the full potential of the software.
Cancellation Surveys and Offers
A highly successful strategy for minimizing churn is to understand the reasons driving customers to cancel their subscriptions. Given this knowledge, you can then offer a last-minute incentive to convince some of them to stay.
For SaaS companies in particular, the cancellation survey is an important vehicle for finding out the “why” of customer loss and, at times, even for partially reversing the loss.
For the cancellation surveys try to think about the most common churn reasons. Also, offer an open-ended response option, so they can tell you the specific reason for their case.
For better results, keep the survey short – no more than 3-5 questions. You want the data but don’t want to discourage people from filling it in. Also, ask them what they missed or disliked about the tool. For example, you could ask: ‘If you could change one thing about [tool name], what would it be?’. Reading some of the answers will hurt, but it will give you data on the user’s biggest pain point.
After they fill in the cancellation survey, you can follow up with a personalized offer to convince them to re-activate their account. You can use the data they provide to send them an email with a last-minute incentive.
Depending on the reason they mention or select you can offer them a temporary discount, such as 10-20% off for the next 3 months. If the customer mentions missing features, you can offer a temporary free upgrade or add-ons to allow them to experience the impact of the tool. Also, for customers who did not have enough time to experience the full value of the tool, you can offer to extend the free trial period.
Pricing and Value
Whether you like to admit it or not, reducing churn for SaaS businesses relies heavily on your pricing. When customers feel that they are not getting enough value for the price they are paying, they are prone to leaving.
One way businesses can keep their customers around for the long haul is by offering pricing that allows a bit more “play” than most companies tend to give their pricing models these days. That is, businesses can cater their pricing to different customer segments and, with more persuasion, price their product in such a way that it feels like a good deal to a wide range of customers.
You can do this by offering modular pricing where you have a basic package with multiple add-ons. Also, consider offering a ‘bundle discount’ to users who use multiple add-ons. This will make them perceive it as a better deal.
Another interesting way of pricing your software is by using a loyalty-based model (step-down pricing). This model will lower the monthly subscription depending on how long your customers stay with you.
For example, let’s assume your subscription starts at $70/month and the price stays the same for the first 3 months. From the fourth month onward, you start charging less each month, until you reach 50% of the initial price or $35/month. Then, you will keep the price at that point indefinitely.
This type of pricing not only incentivizes users to stay longer with you but also makes it a little bit harder to switch to another tool. If that tool is not delivering what it promises and they will need to switch back to you, they will start with the higher price again.
Conclusion
Even though this article just scratches the surface when it comes to reducing churn for SaaS businesses, it is a good starting point. The most important thing to take away from this is that churn is a misalignment between your offer and what the client needs.
And the better you listen to your churned customers, the more actions you can take to prevent users from canceling their accounts.
