Key definitions and industry benchmarks when it comes to churn, as well as the difference between B2B, B2C, and prosumer churn rates.
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As a leader of an online subscription business, you are probably already familiar with the concept of "customer churn" and its considerable impact on your company's profitability.
At Churnkey, we recognize the importance of keeping your churn rate as low as possible. It determines how big your business can grow at the end of the day - regardless of whether you run a B2B or B2C company.
With that said, a B2B’s expected churn rate isn’t identical to one of a B2C company. In addition, the way you address churn isn’t necessarily the same for B2B and B2C businesses. This is why it’s essential for you to understand the differences between B2C and B2B companies when it comes to churn.
Fortunately, there are effective ways to understand, analyze, and combat your business’s customer churn rate. And that’s what we’ll cover in this article. We will also cover key definitions and industry benchmarks, as well as the difference between B2B, B2C, and prosumer churn rates.
You can find software as a service (SaaS) businesses in a wide variety of industries, from word processors to accounting software and everything in between.
SaaS is a model of delivering software on a subscription basis, allowing customers to access the most advanced software at a reasonable monthly rate. In addition, users enjoy automatic updates without having to purchase a separate, new edition of the software.
Most SaaS businesses are B2B, providing other businesses with the tools they need to streamline their customer service, marketing, and sales. Generally, B2B SaaS solutions reduce human resource costs by automating important processes.
B2C SaaS businesses usually take the form of apps that help individuals accomplish a task such as learning a new language, editing a smartphone video, or listening to podcasts. The nature of these services makes them more prone to customers coming and going than with a B2B product.
While both B2B and B2C SaaS companies offer subscription-based software available to customers, B2B software tends to be more expensive. And as you’ll see, B2B SaaS churn rates tend to be lower than B2C SaaS church rates since they’re usually focused on solving perennial problems for businesses.
It’s also worth noting that there are SaaS products that cross the line between B2B and B2C. Normally, these are designed to accomplish something that businesses, as well as individuals, may need, such as tax or graphic editing software.
The term "churn" refers to the rate at which a subscription business loses its subscribers when the subscription expires or when it is canceled.
The loss of subscribers ultimately leads to revenue loss. But it’s not just about lost revenue in the short term. Lost subscribers need to be immediately replaced for a SaaS business to maintain itself. A churn rate that’s too high will quickly spell disaster for a business. So, a Saas business with a high churn rate will need to spend more on advertising and marketing in order to keep things going. Growth will require even more. This is why a company’s churn rate is an important indicator of its long-term success.
Thus, churn rates relate directly to the LTV (customer lifetime value) for your subscription business. Minimizing churn rates increases your LTV and leads to higher ROI in relation to your customer acquisition cost.
If you are looking to boost your subscription-based SaaS company's performance, reducing customer churn should be one of your main priorities.
There are two important types of churn: revenue churn and customer churn.
Customer churn rate can be further subdivided into voluntary and involuntary churn.
Many subscription businesses make the mistake of focusing solely on voluntary churn. However, according to ProfitWell, 20%-40% of overall churn can be attributed to the involuntary type.
Involuntary churn can happen for many reasons:
While it may not seem possible, there is such a thing as good churn. This can happen for two primary reasons.
First, you may have customers who use your product for a season, accomplish the task they needed it for, and unsubscribe once they’re finished. At the end of the day, they aren’t leaving because they were unhappy or have found a better product. They’re unsubscribing because they no longer need your service.
This is a good thing because, if they were pleased with your service, then there’s a good chance that they’ll return to your service once they need it again. As a result, you can continue to connect with them via e-mail or other marketing efforts so that you’ll be fresh on their mind when a need for your product arises.
In addition to customers who no longer need your service, good churn can happen when a customer who isn’t a good fit for your product unsubscribes. While it may hurt to lose a customer, you don’t want to spend time or other resources chasing after uninterest buyers.
This will also give you the ability to see if a particular marketing strategy is working poorly by bringing in the wrong customer. Once you’ve identified an issue like that through higher rates of churn, you can focus your marketing dollars on the strategies that work best.
There are numerous ways to calculate churn rate, but we recommend keeping things simple.
After you pick a time period to focus on (for example, monthly), you can calculate the churn rate as:
Churn = # of customers that churned in period / Total # of customers at the start of the period.
You can also calculate voluntary and involuntary churn separately and then find the total churn as:
Total Churn = Voluntary churn + Involuntary churn
Churnkey has an intuitive insights dashboard that lets you see why customers leave at a glance, which deals they take, and who's most at risk. These can help you identify why churn occurs and proceed with devising ways to reduce it.
You may be wondering, “What is a good churn rate for SaaS?”
You’ll sometimes hear it said that a good rate falls somewhere around 5%. That’s certainly true in some cases (as we’ll soon discuss), but it’s important to clarify whether we’re talking about a monthly 5% average churn rate or an annual one.
Here’s why that difference is critical and can be the difference between your business finding success and falling off a cliff.
If your annual churn rate is 5% and you have 1,000 customers, then you’ll lose 50 customers over the course of a year. That’s unfortunate, but an extremely low number in the SaaS industry, especially when juggernauts like Buffer reported having an annual churn rate of 46%!
Compare that to what it would look like if the same 1,000 customer base had a monthly average churn rate of 5%. In that case, you would lose 460 customers over the course of a year. That’s nearly half of all your customers – a significantly larger number.
This is why it’s important to keep these differences in mind as you think about the average churn rate for your SaaS business.
The most important factor determining if your churn rate is within a normal range is whether your SaaS business sells to other businesses, consumers, or audiences in between.
Churn Rates for B2B SaaS Companies
B2B stands for "business-to-business." B2B SaaS companies sell their services directly to other businesses or, more specifically, they sell to the decision-makers within these other businesses.
On average, churn rates within B2B settings are lower than their B2C counterparts: B2B churn averages at 5.00%, compared to 5.60% total churn rate for subscription businesses.
This lower churn can be attributed to the following factors:
With all that said, B2B businesses do face churn-related challenges that B2C customers don’t often deal with. Here are a few of the more common:
B2C stands for "business-to-consumer." This means that B2C companies sell their services or products directly to customers for personal use.
The average churn rate for B2C subscription companies is around 7.05% - considerably higher than that of B2B companies. Here is why:
B2C SaaS businesses are also faced with unique churn challenges. This requires B2C SaaS businesses to approach churn with a more specialized strategy. Here are a few of the most common obstacles B2C SaaS companies face that B2B businesses don’t:
Many SaaS companies cannot be classified as typical B2B or B2C companies. The individuals or companies that fall in between B2B and B2C are called "prosumers."
Prosumers are individuals who purchase tools or subscribe to online tools for potentially professional purposes. Influencers, photographers, podcasters, video creators, and bloggers can all be considered "prosumers."
Not surprisingly, the average prosumer churn rate falls somewhere in between that for B2B and B2C companies.
If you’re going to reduce your SaaS churn rate, you’ll first need to determine why it’s happening. You’ve got to diagnosis the underlying issues before you can come up with an effective prescription for fixing them.
In order to diagnose the cause of your high churn rates, you should take a hard look at the customers who tend to be churning the most. Do they fall into a specific demographic? Are you acquiring them from a particular marketing strategy? Do most of them drop off at the same month in their subscription? All of these questions can help you understand why your churn rate is so high.
If your analysis doesn’t lead you to clear answers, you may want to send unsubscribed customers an e-mail asking for their feedback. Or you could implement one of Churnkey’s cancel flows to find out why they’re leaving in real-time. Customer feedback is huge for understanding the causes of your high B2C and B2B churn rate.
Price point is the most significant factor contributing to the differences between B2B and B2C churn rates. However, there are other variables throughout the consumer journey that subscription businesses can adjust to reduce churn rate:
You should never overlook your SaaS company's churn rate, as it determines the customer retention rate, your revenue ceiling, and, ultimately, limits your business growth.
Now that you understand the differences between B2B and B2C churn rates and the factors behind them, it's time to take action!
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