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.
Why You Should Care About SaaS Churn Analysis
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.
What is SaaS Churn Analysis?
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.
How Will SaaS Churn Analysis Help My Business?
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…
- Support customers at key moments in their journey. If you see customers dropping out after a particular number of months, you can analyze why that may be the case and connect with them before they cancel.
- Refine your products and services. Analyzing the different kinds of churn your business is facing can give you insight on ways to improve your services so that they meet customer needs more effectively. Capitalize on what customers love and eliminate the things that frustrate them.
- Develop more effective customer acquisition strategies. If churn rates are higher among those who discovered your business via a particular avenue, you may want to spend fewer advertising dollars there. Likewise, you may discover that certain acquisition strategies lead to a higher stickiness for customers. If that’s the case, you can focus your marketing efforts in that direction.
The Different Types of Churn
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:
- Customer Churn: The percentage of your customer base you lose during a given time period. This gives you a big-picture understanding of the churn your business is facing. Unfortunately, it’s not always the most helpful number since it can include people in a wide variety of situations. Some of the churn in this number may not even be all negative (we’ll get to why that may be shortly).
- Revenue Churn: The percentage of revenue you lose during a given time period.
- Involuntary Churn: The percentage of customers whose payment methods fail, resulting in a cancelled subscription. This could be for a variety of reasons, including a declined credit or debit card or an expired card.
- Voluntary Churn: The percentage of customers who cancel by choice. By segmenting your customer base into cohorts and analyzing this number based on them, you may discover that voluntary churn happens for any number of reasons. Poor customer service, a lack of engaging onboarding, disappointment in the service or product, or any number of things may lead to voluntary churn.
These are the four main types of churn. However, you’ll sometimes hear people talk about other kinds of churn that are worth considering.
- Downgrade Churn: The percentage of customers who downgrade their subscription to a lower priced tier.
- Good Churn: While it may not seem like any churn would be good, there actually is such a thing. Good churn happens when customers who aren’t a good fit for your business voluntarily leave.
(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.)
Tracking the Right Metrics to Understand Churn
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.
- Service engagement. One of the best ways to predict churn is by examining engagement. If your customer is using your service less from month to month, there’s a much higher possibility that they’ll cancel the next time they see that charge on their credit card. But if you can identify those customers who are less engaged, you may be able to target them before they hit the cancel button. It’s also worth noting that customer engagement may reveal different things depending on how long they’re subscribed before their engagement begins dropping.
- Customer service engagement. Any company worth its salt has to have a commitment to quality customer service if it’s going to retain its current user base. But what does it mean when customer service engagement begins to drop? It can mean that you’ve got your business so streamlined and easy to use that customers never need to contact your help department. But it can also mean that they’ve become so frustrated that they no longer view that help as worth it. In that case, cancellations are likely around the corner.
- Competitor pricing. Keeping an eye on the competition is absolutely necessary if your business is going to reduce churn. After all, one of the big reasons behind churn is customers discovering similar services at more affordable prices.
Actionable Methods to Analyze Your Churn Rates
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:
- Subscription plans
- Billing intervals
Churn Rate by Cohorts
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:
Demographic Cohort 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.
Behavioral Cohort Analysis
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.
Acquisition Cohort Analysis
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:
- How seasonality affects churn rates
- When high churn rates are most common
Churn Rate by Subscription Plan
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:
- When a user stops getting value from your product
- Which plans churn the most
- What effect price changes have on churn rate
- What effect product changes have on the churn rate
(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.)
Churn Rate by Billing Interval (i.e. Monthly vs. Annually)
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:
- Technical (involuntary churn): expired credit cards or unsuccessful payment processing leading to subscription suspension
- Behavioral (voluntary churn): end of free trial, forgotten subscription, customers leave because they feel trapped in their subscription
Why analyze churn rates by subscription plan? Gather insights on:
- Customer attitudes towards price changes
- Recurring technical issues
- Whether annual or monthly plans are being cancelled at a higher rate
- Whether customers need more engagement when approaching renewal
Churn Rate by Payment Method
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 to approach multiple payment attempts
- Which payment methods to offer
- How to connect with customers lost through involuntary churn
How Does Your Churn Rate Stack Up to Your Competition?
How do you know if your churn rate is good or not? Industry benchmarks that you can refer to are:
- The industry average for B2B company churn rates = 5%
- The industry average for B2C company churn rates = 7.05%.
An acceptable churn rate for your SaaS solution will vary, partly based on your:
- Number of impulsive subscribers
- Subscription plan prices
- Volumes of subscriptions
The free Churnkey Churn Audit provides these qualitative benchmarks for your B2C, B2B and prosumer SaaS products.
Churn Reports That Analyze Growth
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:
- Involuntary churn report
- Voluntary churn report
- Growth ceiling calculation report
Involuntary Churn Report
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:
- Failed payment transaction: technical failure to charge the credit card due to expiration, inaccurate information, or insufficient card balance — it's important to make sure you have a dunning solution to mitigate this
- Failed tax validation check: the customer’s information was not updated to meet the validation check criteria
Voluntary Churn Report
This report shows you how many customers choose to churn. It gives you the reason for the cancellation:
- They do not renew their subscription
- They cancel their subscription
The report will also shed light on why they chose to opt out of your SaaS solution. There are several possibilities:
- The product doesn't meet expectations: you either attracted the wrong type of user or your product doesn't provide the features they expected or needed
- Lack of customer support: a poor onboarding experience or a lack of relevant content for ongoing product training
- Competitors: customers believe your competitors offer a better product
- Pricing: your product price is not optimized for value
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.
Growth Ceiling Calculation Report
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.
Putting Churn Analysis to Work for You
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:
- Strengthen your communication plan. If you want to keep your customers engaged, you need to have a solid communication plan in place. E-mail tips that will help them get more value out of your service. Keep tabs on how they’re using your service and send out reminders or case studies to encourage them to get reengaged. Offer webinars, conference calls, or other resources that add value and remind your customers of why they subscribe to your service over a competitor. Don’t think of yourself as a mere service provider. Instead, view yourself as a business partner who’s invested in your customers’ success. Then communicate with them as if that’s true.
- Guide customers to their goals. Your SaaS business should offer customers a clear path to goals they need to achieve. Make those goals definite and understandable to them, so they have a clear picture of why they’re subscribed to your service. It’s even better if you can create visuals that track their progress right on their customer dashboard. By showing them how close they are to reaching their next goal, they’ll be less likely to churn.
- Put a customizable cancellation flow into place. Cancel flows are one of the single most reliable ways to minimize churn. By offering customers on the verge of cancellation the opportunity to explain why they’re leaving and an offer tailored for them, churn can be drastically reduced. And Churnkey is designed to do just that.
Effectively Calculate and Analyze Churn to Grow Your Business
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.