Understand the four types of SaaS churn, how to calculate each type, and what we believe are the best ways to increase your growth ceiling.
Building a bigger SaaS business requires a blend of maximizing growth while cutting churn. Without a firm understanding of the four types of churn, you won’t be able to improve customer retention.
Which really means that your business will crash into a growth ceiling sooner than later. In fact, some estimates say that a simple 5% reduction in customer churn could increase profits by anywhere from 25% to 125%. That’s why conducting regular SaaS churn analysis is essential for the long-term health of your business. By understanding when your customers unsubscribe to your services, you’ll be better equipped to predict and prevent churn, maximizing profits in the process.
But before we can get to the detailed analysis you need, it’s important to get a handle on what all churn analysis entails, including what it measures, how it benefits prediction efforts, and how it can be used to prevent churn.
Every business understands the importance of bringing in new customers. A steady stream of prospects is essential for long-term success. This is self-evident.
Unfortunately, many businesses spend so many resources on creating a bigger, more inviting front door that they forget about closing the back door. But SaaS businesses depend on keeping that back door locked up as tight as possible.
Think of it this way: If your business has 100 customers and you have a 5% monthly churn rate, you’ll lose around 45 customers over the course of a year. So, if you want to see annual growth, you’ll have to replace those 45 customers and find additional customers. Now, imagine if you could hold on to just half of those customers. That would make a huge impact on your bottom line.
And what’s more, studies have shown that existing customers are up to twelve times more likely to make a purchase when compared to a mere prospect. But that’s not all. They also offer a reliable stream of income as long as they’re subscribed. Holding on to more customers can lead to exponential growth.
Calculating and analyzing your company’s customer churn is the number one way to understand why your back door is standing open and the steps you need to take to close it.
SaaS businesses generally understand churn as the percentage of your customer base that no longer interacts with your business, services, or products after a certain amount of time.
It’s important to recognize that churn doesn’t just cost your business the lost revenue of an existing customer. When thinking about churn’s impact on your bottom line, you also need to calculate how many marketing dollars you’ll have to spend to replace that customer. And all things being equal, it’s less expensive to hold on to an existing customer than it is to find a new one.
Churn analysis examines the various kinds of churn your business may be experiencing and offers insight into how you can minimize it.
Whether you feel like you struggle with customer churn or not, churn analysis can empower you to make better decisions for the future of your business and refine your products and services. With a comprehensive churn analysis, you may discover opportunities to…
Let’s walk through the different types of SaaS churn, how to perform a SaaS churn calculation, and what we believe are the best ways to increase your growth ceiling.
There are four main types of churn. Here’s a quick recap:
These are the four main types of churn. However, you’ll sometimes hear people talk about other kinds of churn that are worth considering.
(PS — at Churnkey, we can conduct a free audit of your churn. We calculate it for you, break it down, and analyze it so you can take action and learn how it stacks up against your peers.)
If you’re going to take full advantage of a churn analysis, you need to do more than look at the hard number of subscribers or revenue. Robust churn analysis begins by identifying the key performance metrics influencing your churn rate.
Looking at your churn rate as an average across your entire user base does not help you diagnose the cause of churn.
Breaking down churn by segmenting your user base will give you better insight into why your users are leaving. We suggest analyzing your churn rate by:
A cohort is a group of customers with common experiences or characteristics.
Churn rate analysis by cohort allows you to gain targeted insights into how, when, and why someone is using your SaaS solution. There are several types of cohorts that can be used for churn rate analysis:
One of the most basic kinds of SaaS churn analysis you can perform is based on the demographics of your customers. This may include dividing them up by age, geography, gender, or some other demographic factor.
This kind of analysis isn’t always as beneficial as a behavioral or acquisition cohort analysis; however, under certain circumstances and depending on the services you’re offering, it could provide valuable insight into why certain customers are churning. For example, a demographic cohort analysis could reveal that customers in a certain part of the world are affected by regional tax or payment processing regulations.
Segment your customers into cohorts based on specific behaviors and interactions with your SaaS solution. Consider dividing your users into cohorts based on repeated behaviors, most frequently used features, reactions to price or product changes.
Why analyze churn by behavioral cohorts? Gain insights into how your customers interact with your products. Analyze what behaviors your most and least engaged customers have in common and identify trends.
Segment your customers into cohorts based on when they signed up to your SaaS product. You can divide customers into acquisition cohorts based on when they signed up, cancelled, or renewed their subscription.
Why analyze churn by acquisition cohort? Gather insights on when in the user lifecycle your customers tend to unsubscribe. You can focus on:
Churn rate analysis by subscription plan determines the number of customers who stop paying for your product within a given time period.
Why analyze churn rate by subscription plans? Do it, and you’ll get insights on:
(PS — with Churnkey, you can analyze churn by subscription plan right at the source. When you plug in your Stripe account, we will review your SaaS churn rate and identify opportunities for improvement. All for free and within three business days.)
Measuring churn rate by billing interval gives you insight into the number of churned subscribers during the corresponding billing cycles. If you have different payment plans, segment your user base by their billing intervals.
You should expect that your highest churn rate will be within the first subscription period. This is especially true if a subscription starts with a free trial period. Depending on your SaaS product, customer base, and pricing, your billing intervals will have a different effect on churn.
There are both technical and behavioral impacts on churn rates for billing intervals:
Why analyze churn rates by subscription plan? Gather insights on:
As we’ve already noted, much of involuntary churn is the result of payment issues. Whether the problem is an expired or declined card, understanding how much churn results from this can be helpful when looking at how you approach payment acceptance.
By analyzing this number, you’ll better understand:
How do you know if your churn rate is good or not? Industry benchmarks that you can refer to are:
An acceptable churn rate for your SaaS solution will vary, partly based on your:
The free Churnkey Churn Audit provides these qualitative benchmarks for your B2C, B2B and prosumer SaaS products.
Use the insights from calculating and benchmarking your churn to get to the bottom of why your users are churning.
The free Churnkey Churn Audit not only takes care of calculating churn for your SaaS business and breaking it down by cohorts, but also provides:
This report shows you how many customers churn due to inactivity. Involuntary Churn usually indicates a problem with user engagement. It's best to look at this metric through the lens of how high or low touch your product is.
The reasons for involuntary churn fall into one of two categories:
This report shows you how many customers choose to churn. It gives you the reason for the cancellation:
The report will also shed light on why they chose to opt out of your SaaS solution. There are several possibilities:
Asking your customers why they are turning away from your SaaS is one of the best ways to understand the root causes of their issues and concerns. Solutions like Churnkey will give you an overview of how many customers are getting into the unsubscribe flow, how many are being redirected and "rescued," and how many are ultimately unsubscribing.
With just one line of code, Churnkey takes care of your cancel flows and provides your customers with a simple dashboard for reporting and configuration. Find the reasons users are churning, take action, and improve your churn.
Many SaaS founders focus on growth, and while growth is an important metric, it has a ceiling. Churn needs to be in balance here while you are working on growth. If your churn rate is low, it may take a long time to reach your growth ceiling. Therefore, a good churn rate can increase your growth ceiling.
Your growth ceiling is the highest revenue your SaaS could reach in the current situation and at its current churn rate. Churn needs to be in balance here while you work on growth.
Simply analyzing your churn isn’t enough. You’ve got to use that information to develop a plan that can reduce churn. Your churn analysis should provide guidance on the specific steps you need to take in order to best accomplish that. But if you’re at a loss for what to do, consider beginning with these simple, yet effective actions:
Reducing customer churn is the best thing most SaaS companies can do right now. But knowing where to start is half the battle. Looking at your churn rate from different angles is essential so you can take action and learn how your churn rate compares to your competitors.
With our free churn audit, we'll take care of your churn calculation and analyze your churn so you can focus your resources on improving your product/service.
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