Customer churn can have a devastating effect across your entire SaaS company.
From the negative impact on your company valuation because your SaaS churn rate is too high, to the drag on growth you feel when you have to replace lost customers or revenue before you can make forward progress… churn is bad news.
Over the next several posts I’ll outline five methods for churn reduction and customer retention that fully embrace the power of the SaaS business model…. let’s get started.
If you think you’re doing a good job acquiring customers, but know you’re not doing a good job keeping them, revisit that first assumption.
— Lincoln Murphy (@lincolnmurphy) March 3, 2014
The Fallout from a High SaaS Churn Rate
When most people write about reducing churn in a SaaS company, it seems they’ve never actually had to deal with customer retention issues.
It seems they’ve never been frustrated by increasing customer acquisition spend, but finding year-over-year revenue stagnating because too many customers are leaving out the back door.
Or they’ve never been in a board meeting with investors
ripping them a new one encouraging them to fix their freakin’ churn problem.
Or they’ve never tried to raise a series B round only to find valuations are a bit less than they (and their original investors) would like because their churn is too high.
Oh, and they certainly haven’t been there when the executive team returns from those meetings!
That’s why I get tired of reading the same old churn reduction stuff… talk to your customers, create good FAQs and content, do better demos, blah blah blah.
And while the actual number of SaaS companies with a real churn “problem” varies depending upon the data source and how they determine “acceptable SaaS churn rate” new data is always coming out to help us get a clearer picture.
OPEXEngine just published some churn numbers on Sandhill.com that shows the average churn (from their 2011 survey) was 22% annual customer and 13% annual revenue churn (though some of the top companies did have negative revenue churn, which is cool).
I see the findings of OPEXEngine as further indication that the average SaaS churn rate among private companies is higher than the 5-7% annual churn Bessemer Venture Partners says is acceptable (investors understand the financial impact high churn can have on a company very well) and that churn is still very much a problem that needs to be addressed.
Which is why I put together several posts that contain…
Actual, from-the-trenches Methods to Reduce SaaS Churn
But before I get started, I need to set the tone.
First… churn is a customer lifecycle problem, not a problem to be addressed only at the end as the customer leaves.
Second… churn is your problem, not a customer problem. If you want to blame your customers because they don’t “get” your software or blame the universe for conspiring against you… stop reading right now because I can’t help you.
Moving on,… if you want to improve your SaaS business (and it’s valuation), then you need to…
Attract Better Customers to Reduce your SaaS Churn Rate
Customers rarely wake up one morning and decide to leave you… in fact, chances are the seeds of their churn were planted before they were even a customer.
In my experience, churn is often correlated to things that happen early in the sales process… and this starts with attracting the wrong customers.
SaaS CEOs that bring me in to help fix their churn problem are always surprised when we start going through the customer acquisition process… but that’s where many churn issues begin!
You hear this all the time, but you have to know who your ideal customer is so you know how to reach them, what they need or want, how to position your offering for them, etc.
But it goes deeper than just being able to write better sales copy to convince them to use your SaaS.
It means understanding what a successful Free Trial is for them, how they procure services, who all is involved in the sale, what functional on-boarding really means, and how to get them to start realizing value as quickly as possible.
Knowing your ideal customer isn’t marketing fluff… it’s at the core of building a successful SaaS company, and it actually starts with customer segmentation.
Customer segmentation allows you to not just know who your best customers are based on their profitability, (estimated) lifetime, characteristics, actions, demographics, etc. but allows you to perform further cohort analysis to determine factors at play when they signed-up, what channel they came in from, etc.
I frequently find that the ideal customer for a SaaS provider makes up a small portion of the overall customer base, but because we can look at customers at a cohort level through advanced segmentation, we can get a better idea of who they are, where they came from, etc. and ramp up the acquisition machine with them in mind.
Oh, and a great side-effect of knowing exactly who your ideal customer is, is that you also have some idea of who your less-than-ideal customer is (these are the ones that complain a lot, don’t pay much, feel entitled, and don’t generate any profit) and where they came from, so we can work to push them away rather than attract ’em.
So, get the good customers in – the ones who’ll be profitable and stick around a long time – and work to keep the bad customers out, and many of your churn problems will get resolved before they’re actually churn problems.
But, even if you attract the right customers in the first place, you still need to…
Manage Expectations to Improve Your SaaS Churn Rate
I can’t say every problem you’ll experience in your SaaS business is because of mis-managed customer expectations… but I’m confident 92.7% of them are!
When you incorrectly manage a new customer’s expectations during the sales process – like an email provider who promises “you send an email, you’ll make money!” and that doesn’t pan out – sure, you’ll sign-up new customers, but they’ll quickly find out you were straight-up lying and leave… probably telling their friends and colleagues on the way out.
But if you said “grow your business over time by nurturing your customer base through strategic email marketing,” you wouldn’t have customers expecting that each “email blast” will result in a bunch of immediate sales and being super disappointed when that doesn’t happen.
Over-selling and under-delivering is not a recipe for long-term success and is a huge reason for high churn rates among B2B SaaS providers even though it might not rear its ugly head for a few months after the initial sale; though when it does, there are some interesting ways to correlate that churn back to a promise… I’ll cover that in a future post.
Now, once you have the right customer with the correct expectations in your SaaS, you need to monitor and manage Customer Engagement…
… which I cover in this post called SaaS Churn Rate Improvement: Monitor and Drive Engagement.