SaaS Customer Churn Rate: 5 Ways to Reduce Your Churn

Imagine this: You invest a lot of money in marketing and get new customers for your SaaS product. But a few months later, those same customers cancel their subscriptions. But why? Was it a pricing issue? Confusing features? Poor onboarding? Lack of support?

Customer churn eats away at your revenue and puts your business at risk. In short, if you don't understand why people churn and reduce your churn rate as quickly as possible, you won't be in business for long.

In this article, I'll show you why customers churn, the damage churn does to your business, and most importantly, how you can reduce your churn rate and keep your customers happy and paying.

Customer churn is also known as customer attrition and means the percentage of customers who stop doing business with you. It's the rate at which your customers cancel their subscriptions and stop being paying customers. The opposite of churn is customer retention, which is all about keeping those customers happy and using your product so they don't cancel.

Customer churn is the nightmare of every SaaS business, and for good reason: SaaS companies rely on recurring revenue. It's their lifeblood. People pay for a service on a monthly or annual basis. Think of Netflix or Spotify for example. So, if people cancel their subscriptions, it can have a dramatic impact on their growth.

That's why it's important to combat churn as early as possible. You will learn more about these strategies in a second.

Customer churn is detrimental to SaaS companies for many reasons. And it's more than just the immediate loss of a customer. Here are some key reasons why churn is bad for SaaS companies:

The most immediate consequence is the loss of recurring revenue from the churned customer. Unlike one-off purchases, churn in this case represents a continuous stream of revenue that you no longer receive. This obviously affects your overall cash flow and hinders your growth potential. For SaaS businesses, this is particularly damaging as recurring revenue is their lifeblood.

Acquiring new customers is more expensive than retaining existing ones. High churn forces you to constantly invest heavily in marketing and sales efforts just to maintain your customer base, diverting resources from other areas such as product development or customer success.

Churn means a shorter relationship with the customer, meaning you miss out on potential up-sell and cross-sell opportunities, all of which contribute significantly to CLTV. Losing a customer early means missing out on their long-term value proposition. And your goal as a SaaS company should always be to increase the lifetime value of your customers.

High churn indicates that your product is not meeting customer expectations, giving your competitors an advantage. Potential customers researching your company may be put off by reports of churn problems & bad reviews, which you should avoid at all costs.

Knowing your customer churn rate is the first step to improving it. So, I recommend that you measure this key metric regularly to see if your strategies are working. The formula for calculating customer churn is:

• Churn Rate = (Number of churned customers / Total customers at the start of the period) x 100

Here's the breakdown:

Number of churned customers:
This is the total number of customers who cancelled their subscriptions or stopped using your service within the chosen period (e.g., month, quarter, year).

Total customers at the start of the period:
This is to the total number of active customers you had at the start of the chosen period. Let's say you started a month with 1000 active customers (to keep it simple) and by the end of the month, 25 customers canceled their subscriptions.

Now, using the formula:
• Churn Rate = (25/ 1.000) x 100 = 2,5%

Your monthly churn rate is 2.5%. This means that in one month, 2.5% of your customer base churned.

This formula is a basic churn rate and can be further refined depending on your specific needs. For example, you might want to calculate the churn rate for different customer segments, subscription tiers, or regions. But this would make things more complicated. However, the more detailed you can analyze your churn rate, the more insight you gain and the more refined your strategies can be to improve this metric.

I'd also add that you need to analyze churn rate alongside other SaaS metrics like customer acquisition cost (CAC) and customer lifetime value (CLTV) to get a complete picture of your customer health and business performance.

I'll give you another example of customer churn (for different customer segments), but be prepared, this one is a bit more complex. Free vs. paying customers:

Your churn rate may be higher among free users who haven't experienced the full value of the service than among paying customers who have made a financial investment. Now, imagine you run a music streaming service with both free ad-supported and paid subscription tiers. You're interested in comparing the churn rates between these two customer segments. You have the following data for a particular month:

Total customers at start of month:
Free tier: 100,000
Paid tier: 20,000

Number of churned customers:
Free tier: 10,000
Paid tier: 1,000

So, your free tier churn rate is 10%, your paid tier churn rate is 5%.

What's the catch, you might ask?

Free tier customers churn at a higher rate (10%) than paid subscribers (5%). This suggests that free tier users may be less engaged and potentially easier to lose.

But we cannot stop there. I think this is an excellent example of how numbers alone don't help us much. The most important thing is to understand the reasons behind the numbers. For example, a high churn rate in the free segment could be due to limited features and frequent advertising, leading users to seek alternatives or even a lack of engagement with the platform. In the long run, this could lead them to forget about the service.

However, I have to be honest that identifying churn isn't always as easy as it seems, especially for companies that don't rely on subscriptions, like Airbnb. These business models work a little differently than subscription-based businesses, and that means measuring churn becomes more difficult.

For platforms like Airbnb, you have to look at the bigger picture. Things like host and guest activity, how often people book and how engaged they are with the platform can all tell a story about churn.

Imagine that Airbnb arbitrarily sets a churn threshold of 30 days of inactivity. This means that any host or guest who hasn't used the platform in 30 days is considered churned. Using a generic churn threshold such as 30 days of inactivity can be extremely misleading for businesses, especially when dealing with seasonal properties. So always ensure that your churn figures make sense in your business context.

So, what can non-subscription businesses do? Here's the truth: They need to ditch the generic stuff and find their own ways of measuring churn. This means:

• Taking a closer look at their specific business model
• Understanding their customer segments
• Identifying which metrics tell the best story about customer retention

Customer churn happens everywhere. There is nothing you can do about it. So, you have to accept it and try to reduce it as much as possible. That's all you can do. The reason you cannot stop churn completely is simple: Customers churn for many reasons. Here are the most common:

This happens when customers no longer see the value that your product provides. Perhaps their needs have changed, they've found a better solution, or your product hasn't kept pace with their evolving needs. I often see customers who are initially excited about the features and functionality, but eventually lose interest if the product doesn't adapt to their changing needs and workflows.

To avoid this, an excellent framework you can use is the Kano Model, which helps you rank feature ideas based on their expected business impact and their expected impact on customer satisfaction.

Sometimes the product just doesn't meet the customer's needs from the start. This can be due to misaligned marketing messages, poor sales qualification, or a product that isn't targeted at the right audience.

In my experience, you can significantly reduce this type of churn by investing in robust customer segmentation and ensuring that your marketing and sales efforts communicate the true value of your product to the right audience. Never promise your prospects something just to make a quick sale!

If you remember just one thing from this article, make sure it's this. Poor customer onboarding is one of the most common reasons why customers leave your service. Onboarding sets the tone for the entire customer journey, and a poor onboarding experience can lead to early churn. Time and time again, I've seen companies improve retention rates by investing in easy-to-use onboarding experiences that guide new customers through the product's value proposition and core functionality.

And onboarding does not have to be difficult. So, here's the key takeaway:

You need to get people to your product's AHA Moment as quickly as possible. The AHA Moment is the moment when a user realizes the full value or potential of your product. It's the point where users realize how your product can solve a particular pain point, meet a need or perhaps improve their experience. It's the point where they say, "Oh wow, this is exactly what I've been looking for.  

If you can do that, people will stay. If people cannot immediately see the value in your service, they will leave.

Customers expect continuous improvement and new features to enhance their experience. If your product stagnates and fails to evolve, it can quickly become outdated and lose its appeal to customers who are constantly looking for innovative solutions. I've seen companies prioritize short-term profits over long-term product development, leading to a decline in customer satisfaction and increased churn.

Again, the Kano Model can help you find out what features you will need in the long term to retain customers.

Here are five key steps to tackle churn and turn happy trial users into loyal, long-term subscribers:

The best way to understand why customers leave is to simply ask them! Regularly collect customer feedback through surveys, interviews, and even in-app prompts. This will allow you to identify pain points early and address them before they lead to churn. Also, make sure to do an exit interview. The customer may reveal that they felt the software lacked certain advanced features that they needed.

You should now prioritize the development of these features. Months later, when you reintroduce these features, you will not only win back that customer, but also attract new customers looking for the same functionality. When you reach out to churned users, let's not lie - most won't respond. But the ones you do reach may reveal something you never thought of before.

A complex onboarding process can leave new users feeling overwhelmed and lost. Make sure you understand why customers came to your service in the first place and streamline the process by focusing on the core functionality they need to achieve quick wins.

Always be sure to lead them to the magical AHA Moment. You can do this with creative tools such as interactive tutorials, personalized walkthroughs, and even gamification to make learning your platform engaging.

While point 2 focused on streamlining the onboarding journey, this point emphasizes the overall user experience. Your platform should be easy to navigate. Prioritize clear design elements, and readily available help resources, and minimize unnecessary features that clutter the user interface. Believe me, a user who can't find what they need is more likely to drop out.

Don't wait for customers to contact you when they are struggling. Use data and analytics to identify users at risk of churn and proactively reach out to them with personalized support or targeted resources.

This demonstrates your commitment to their success. Some early signs of customer churn could be infrequent log-ins, customers taking much longer to complete tasks than average users or shorter visit times.

Social proof is a powerful tool. Highlight success stories of existing customers who have achieved significant results using your platform. This can be done through case studies, testimonials, or even by showcasing user-generated content within your platform. Seeing how others benefit can inspire existing users and demonstrate the value of your product.

While a low churn rate is universally desirable, there's no magic one-size-fits-all number. For example, the benchmark often quoted is an average churn rate of around 4-5% annually. But this can be misleading. Let me explain why.

First of all, 4-5% is a broad benchmark that doesn't take into account industry specifics, company size or business model. A high-growth Startup with a freemium model might have a higher churn rate than a well-established enterprise SaaS company, and that's perfectly normal.

Second, different industries have inherent churn tendencies. Competitive industries with readily available alternatives may have a higher churn rate than niche markets with limited competition.

We also need to think about the stage of the company. Early-stage companies are still figuring out the product-market fit and may initially experience a higher churn rate. As they refine their offering and build a loyal customer base, their churn rate should ideally decline.

But that's not all. Companies with annual contracts naturally have lower churn rates than those with monthly subscriptions. Annual contracts lock users in for a longer period, but they also require a stronger value proposition to justify the upfront commitment.

So, here's my suggestion:

Especially when you're just starting out, it's not easy to know what churn numbers are reasonable. It makes little sense to set arbitrary targets without further research. Instead, measure your own numbers and compare them to your company's results. For example, track your key metrics for February and compare them to January's results to see what churn rate is realistic for your company and whether you have managed to improve it.

Negative churn is the holy grail of SaaS. On the face of it, it sounds - well, negative - but it's not. In fact, it's exactly what you want. Negative churn happens when your up-sells and cross-sells exceed the revenue you lose to churn. For example, people using a free model of your service upgrade to a premium model or buy another service on top of their current model. These purchases result in increased revenue, even if some customers churn.

Here are some tips on how to improve negative churn:

• Raise your prices
• Reward people to upgrade
• Make upgrading to higher plans easy
• Provide value regularly
• Improve and expand your service

Put simply, the NPS tells us how likely customers are to stay with us and whether they would recommend our service to their friends and family. It tells us whether customers are satisfied. So, if your NPS is high, you have a healthy relationship with your customers, they will recommend your service and ultimately reduce your customer acquisition costs.

NPS is a scale from 1-10 and it is super simple. You basically just ask your customers:

Dear customer, “On a scale of 0 to 10, how likely are you to recommend us?”

Then, you group the respondents into 3 categories.

• Promoters 9-10
These are the happy customers, who are likely to recommend your service.

• Passives 7-8
These people will not recommend your service, but will not use negative word-of-mouth against you. Passives have a high potential to become promoters. So, it makes sense to find out how you can improve their experience to make them more satisfied.

• Detractors 0-6
These are the unhappy customers who will not recommend your service, plan to stop doing business with you, or worse, advise against using your service.

You simply calculate the Net Promoter Score like this:

NPS = % Promoters - % Detractors.

NPS is expressed as a number between -100 and 100. If you have more detractors than promoters, your score will be negative.

For example, if 80% of respondents were promoters and 10% were detractors, your NPS would be 70.

Here is a pro tip:

It is useful to follow up with open-ended "why" questions. For example, "What was the reason for your score? What would have changed your score? This will give you additional insight into how to increase the likelihood of referrals.

So, the key lesson here is this: Try to keep your NPS as high as possible with value. If you see that you have a lot of passives, find out what they are missing and help them to be successful. If you see that you have a lot of detractors, you are either targeting the wrong people, or you have the wrong features that customers would expect.

This depends on various factors such as your industry, business model and company size. A churn rate that is acceptable for one company may be concerning for another. I would always recommend creating your own benchmark and comparing your progress as you implement new strategies to reduce churn.

Absolutely. If people are unhappy with your offering, they will churn. It is that simple. At the same time, satisfied customers are more likely to continue using your service and less likely to churn. That's why monitoring metrics such as Net Promoter Score (NPS) is so important - it can provide insight into customer satisfaction and help predict churn.

Start by collecting relevant data, such as customer demographics, usage metrics and reasons for churn. Look for patterns or trends in customer behaviour that lead to churn, such as declining usage or dissatisfaction with certain features. By understanding why customers are churning, you can take action to build a better product and increase customer satisfaction.

Customer churn is the nightmare of every SaaS company. Who wants to lose customers anyway? But it's inevitable. So, the goal is to reduce it as much as possible. Get regular customer feedback, learn how to improve your service, get people to the AHA Moment as quickly as possible, and proactively talk to customers who are on the verge of churning. Your goal is to continually try to reduce churn as much as possible.

But reducing churn is only one element of building a successful business. Here are some powerful resources to help you build the business of your dreams.