How to Reduce Customer Churn in SaaS Businesses

In the SaaS world, acquiring a customer is just the beginning. Holding onto them is often the bigger challenge for most companies.

When customers cancel their subscription with your company, you lose money, and you have to spend more money to attract more customers. High customer churn can erode revenue and stall growth.

Let’s look at how SaaS companies like yours can understand churn and implement strategies to reduce it.

What is Customer Churn?

Customer churn (also known as customer attrition) is the percentage of customers who cancel or do not renew their subscriptions for your software during a given period.

Software as a service (SaaS) companies that use the subscription-based model know that every renewal is critical. There are low costs for customers to switch to other providers in competitive markets, which means you have to work extra hard to give them a reason to stay.

There are two types of customer churn:

Voluntary Churn

In this case, customers actively cancel their subscriptions. This might happen because the customer doesn’t see enough value in your software to continue subscribing, or they may not fully understand how to use your product. Customers who voluntarily leave may not feel your company offered adequate support, or they may simply have found a better alternative.

Involuntary Churn

In this case, customers may have their subscriptions canceled due to payment failure or technical issues, not because they don’t want to continue using your services. This might be caused by an expired or declined credit card, technical glitches in your payment system, or the customer forgetting to renew a subscription, particularly for annual plans.

How to Calculate Customer Churn

Before we get into how you can reduce customer churn, let’s first look at how to calculate it so you can understand what your churn rate is. You can calculate your customer churn rate formula like this: 

(Customers lost during period/total customers at the beginning of the period) × 100

Let’s calculate an example. Let’s say at the start of last month, you had 1,000 customers. Then you lost 20 customers last month. So:

(20/1,000) x 100

Your churn rate would be 2%. A good monthly churn rate generally falls between 1-3% for B2B SaaS companies and 3-7% for B2C companies. So, in this example, your churn rate isn’t anything to sweat over.

Speaking of monthly churn rate…you can also calculate annual churn rate. But when should you use each?

If your business operates on monthly billing cycles or you need to identify changes in customer behavior and act quickly, calculate your monthly churn rate. Monthly churn can be helpful if your customers are small businesses or individual users who tend to churn more frequently.

If your customers are on annual contracts, you want to analyze customer lifetime value, or you’re reporting to investors, annual churn may be more useful.

Why Churn Matters to SaaS Businesses

With so many other things to worry about in your business, why should you care about customer churn?

You’ve likely heard the statistic that it costs five times more to attract a new customer than to retain an existing one. When customers leave, you have to spend more money to attract new ones. By paying attention to your customer churn and getting to the bottom of why they’re leaving, you can fix the issues and retain customers longer, thus reducing your marketing costs.

High churn lowers customer lifetime value (CLV) and revenue predictability. If your churn is high, you can’t anticipate how much you’ll make in the future, which can make it challenging to plan for future growth and investments.

If you have investors, they tend to look for low churn rates because they indicate a healthy SaaS business. High churn may throw red flags for investors who won’t want to invest in a company that can’t retain customers long-term.

Strategies to Reduce SaaS Customer Churn

Okay, we’ve established that understanding customer churn is critical for your SaaS. Now, let’s look at how to reduce it, starting with ways to reduce involuntary churn. 

Incorporate Dunning Management

Since failed payments are one of the most common causes of involuntary churn, you must set up measures to ensure they don’t happen. Dunning management involves sending automated emails to notify customers that their payment didn’t go through. The emails prompt them to update payment information so that their subscription can be billed properly. 

Set Reminders For Soon-to-Expire Credit Cards

If you set up pre-expiry reminders that send notifications before a customer’s credit card expires, they will be more likely to update the information. That way, when it comes time to automatically renew their subscription, they’ve already done the work, and you don’t have to chase payments.

Use Payment Processing Services

You may not want to set up your billing system to be so complex. In that case, use a tool like Stripe, Recurly, or Chargebee to handle payments for you. They have built-in tools to handle failed payments intelligently.

Let’s look at strategies to reduce voluntary customer churn.

Improve Onboarding

It’s imperative that your customers understand how to use your software from the start.

Use tutorials, videos, checklists, webinars, and follow-ups to ensure that not only do your customers understand the value of your software quickly, but also they can easily become adept at using it.

Provide Above-and-Beyond Customer Support

Make sure your customer support is easily accessible through a variety of channels, including chat, phone, and email. Consider using a chatbot to help customers with common issues like lost passwords. 

Also, build a knowledge base filled with commonly asked questions and processes customers can perform on their own.

Monitor Usage and Engagement

If you can identify signs of disengagement early, you can take measures to reengage customers so they stay with you. Set up triggers or alerts when activity drops and seek to understand the cause. Is it because there’s a glitch in the software? Is a certain process difficult to figure out?  If you’re not sure, reach out to those customers who aren’t using the software like they once did and ask if they ran into roadblocks that you can help with.

Offer Flexible Plans

Sometimes, customers leave because they need more or less than your plan offers. If you give them the opportunity to scale up or down, they can choose the plan that best fits their needs and budget.

Sometimes, they need a break. Introduce pause plans so they can pause payments and use them until they’re ready to come back, rather than cancelling.

Ask for Feedback (and Act on It)

Your customers are your best learning tool. Send surveys both to existing customers and those who have cancelled to understand where there are issues or difficulties.

But don’t just ask for feedback. Use it! Take what you learn to heart and improve your product so that customers are more likely to stick around.

Build a Community

Some customers find value in participating in a community built around your product. You can create user forums or Slack groups to give them a place to ask questions and share ideas with other users. Assign someone from your company to monitor conversations and provide answers and support when needed.

You can also host webinars, events, or user groups to deepen engagement. The more value you provide customers, the easier it is to turn customers into brand advocates.

Final Thought: Retention Is Key

For your SaaS company, the real growth engine is retention. When you address issues that keep customers from renewing their subscriptions, you extend their customer lifetime value and reduce customer churn. The more you focus on making your customers ecstatically happy, the more likely they are to remain loyal for years.