Understanding your churn rate and using it to guide decision making.
Eventually, every business owner comes to realize that it costs far less to keep a customer than to find a new one. Thanks to cloud computing, Software as a Service (SaaS) has become a staple in many business operations.
There are all sorts of metrics associated with internet-based computer businesses. For those providing a software distribution model known as Software as a Service or SaaS, the most important metric for your business is also the easiest to calculate. It is called the Churn Rate. Measuring the churn rate tells you if your business is on track to succeed or needs adjustments so that for each measured period there is net growth.
Accounting firms have more than 40 ways to measure SaaS churn - fortunately, you only need one and it is a simple calculation. The most basic definition of SaaS churn is the percentage of customers who end their subscriptions over a given time.
Churn is not a desirable outcome for any business, but in the case of a SaaS, the churn rate has more significance because:
1. You and your customer have a transaction either monthly or annually; the longer they stay with your SaaS, the more revenue you will earn.
2. Acquisition costs are high for subscription services, and the payback time for getting a new customer could be anywhere from one month to one year.
3. Without retaining customers, growing a SaaS business is almost impossible.
Having a high churn rate is a probable teaching moment for a company. Exploring and comparing the data from customers who left your SaaS helps find which metrics may signal a problem. Jill Avery of Harvard Business School says:
"Many firms are attracting the wrong kinds of customers. We see this in industries that promote price heavily up front. They attract deal seekers who then leave quickly when they find a better deal with another company. Think about the customers you want to serve up front, and focus on acquiring the right customers. The goal is to bring in and keep customers who you can provide value to and who are valuable to you."
Monitoring the churn rate can inform your company about things your business is doing well and things that are not helping you. Changes in churn rate are signals your company must be knowledgeable about if you wish to boost revenue. When churn rates go up, something is wrong; when they go down, your SaaS company is doing something right.
Finding out why customers are leaving is key to your overcoming high churn rates. It may be that your marketing tactics need adjusting, customer service may be lacking and so on. This makes follow up a key strategy - it can be nothing more than a quick email along the lines of "Sorry that you are leaving us - please tell us about your experience."
SaaS providers should use their churn rate to help guide decision making.
While there are many ways of calculating churn rate, small and medium-sized businesses can use a simple calculation: churn rate is simply the percent of customers who end their relationship with your company in a given period.
Sometimes churn rates are a result of poor customer selection and not as a result of your SaaS performance.
By: Cody Rogers
With Raaft, you can collect feedback from customers who have used your product and offer them custom responses to keep them around longer. Improve your customer experience and lower churn.