These are not the words you want to use to describe your clients’ reactions to your SaaS product – and they are all synonyms for “Churn.” Of all of these unsettling terms, I think churn is the worst. Churn is what happens when you’ve built up your hopes and dashed them on the rocks of poor management and failure to meet expectations. And, reducing (dare I say, eliminating?) churn should be the goal of every growing subscription-based company.
Why is Churn so Important?
The official definition of churn rate is “a measure of the number of individuals moving out of a collective group over a specific period of time.” The number is vital for estimating customer lifetime values and determining the ROI of marketing efforts, the quality of customer service programs, and the importance of customer success initiatives. For SaaS companies in particular, it’s the key to sustainability, growth and profit.
Think of it as the beating pulse of your business that determines whether you live, die slowly, or meet your demise like an 17th century duelist who forgot his flintlock at home. Am I being melodramatic? You tell me: What is the worst that could happen if customers leave faster than you can bring them in? Think about it.
Okay. Now that you’re ready to take churn seriously, let’s dive in, because you have the power to beat churn. First, however, you have to understand it.
Let the Numbers Be Your Guide
When calculating churn, the most successful companies factor in revenue, user count, and duration of customer relationships, within the context of company size and industry type. For example, let’s start with two simple churn equations:
Churn Rate = # of customers lost in period / # of total customers at start of period
This gives you a good indicator of customer satisfaction, but doesn’t tell you the impact of these losses on your business.
Churn Rate = $ of recurring revenue lost in period / $ of total revenue at start of period
This tells you whether you’re losing your best customers or your worst customers, and how much that impacts your business.
It’s helpful to know the churn averages of similar-sized businesses, and industry averages. And, you’ll also want to look at the bigger picture of up-sells, cross-sells, upgrades and downgrades – and down-sells. If you find that your churn rates are high, customers are clearly not getting what they need.
A high churn rate can be like hauling water in a leaky sieve; and when it’s dollars that are dripping out, your business is hurting. By taking proactive steps to help your customers be successful with your product or service, you can plug each of those little holes until you’ve got a bowlful of money that runneth over.
However, to get an even better picture of how churn affects your business, you should also calculate your Cost to Acquire a Customer (CAC) number and your customer Lifetime Value (LTV).
CAC = cost of the product + research + development + marketing at every stage of the sales funnel
LTV = Revenue earned from customer within Churn period + up-sells, cross-sells and client referrals
Pro tip: Before calculating CAC and LTV, segment your customer lists. That way you can identify which types of customers tend to deliver the highest LTVs, and which deliver the lowest – iterating marketing efforts accordingly.
If you find that the CAC number is higher than your customer lifetime value (LTV), you have a problem – likely, one or more of these:
- Your marketing efforts aren’t reaching your target demographic.
- That target demographic shifted since the last time you checked.
- Your buyer persona is inaccurate.
- Your keywords are off.
- Your messaging is off (on your website, offer pages, CTAs and ads).
If in calculating your churn, CAC and LTV, you find that your customers are leaving faster than lemmings in a cliff-diving competition, that tells you something: Sometime after purchase, they’re not getting what they hoped for from your product.
“What is the worst that could happen if customers leave faster than you can bring them in?” http://t.co/F9GYxH2FcQ pic.twitter.com/9e8uoqcEJC
— ChartMogul (@ChartMogul) July 7, 2015
It’s Nancy Drew Time
Once you’ve done the math to identify your problem, it’s time to find where the expectation/delivery disconnect is happening. Start by tracking customer behavior and looking for warning signs customers display before they leave. Whenever a customer disengages with a product, there are signs – and you can track them. You might want to offer an exit survey to ask customers why they’re leaving.
Your investigative work has only just begun – now it’s time to dig for clues as to why customers came to you in the first place, what they expected, and what they found. Again, surveys come in handy. Try implementing an entrance survey asking what new customers hope to find and expect to get. Most importantly, ask questions that get them to reveal what success means to them.
Use the information from these exit and entrance surveys to drive your customer success initiatives and increase engagement.
3 Churn-Chopping Hacks to Try Right Now
Now that you’re measuring Churn, CAC and LTV and finding out where you’re going wrong, you can take the appropriate steps to reduce churn by giving your customers what they want: success with your product. We’re proponents of Customer Success initiatives for SaaS businesses. It’s the only way to build sustainable growth. Find out what your customers want and help them to successfully use your product – that will solve 90% of your problems. For the other 10%, try these simple hacks.
1. Don’t let credit cards expire.
This is the easiest money you’ll ever make, and the trick is to find a billing system that provides a credit card updater service which automatically informs users when their cards are about to expire.
2. Embrace high quality content marketing that has a customer-success focus.
With strong content that provides real value and fun, friendly and responsive social media staff, you can become a positive force in your clients’ lives on a daily basis. Answer questions. Offer tips. Make jokes. Tell stories. Make every interaction an enjoyable, valuable experience that helps customers achieve their goals.
3. Increase your usefulness.
Sometimes customers leave because they outgrow what you can do for them. The only solution to that is to keep growing. Consider developing partnerships with complimentary services to expand your reach and make it more convenient for people to stay than to leave. Maybe invite companies to build add-ons and integrations for your product.
Ultimately, when customers can unsubscribe any time, you have to keep providing compelling reasons to stay. Your customers want to love you, and they only leave if your product, service or customer care isn’t giving them what they need. By taking a proactive approach that is driven by data, you can identify what could go wrong before it does go wrong.
What Happens Next?
What’s on the other side of the churn rainbow? When you’ve hacked the churn problem once and for all by cracking the code of customer success, you’ll find a magical land of exponentially growing revenue. Successful customers become brand advocates who cheerfully advertise and refer your business for free, while providing opportunities for up-sells and cross-sells. Lifetime value skyrockets. Your CAC shrinks. And you can focus on bringing even more value into the lives of your customer base.
Can cracking churn make the world a better place? We think it can.
Want to read more about SaaS Churn? Download The Ultimate Churn Rate Cheat Sheet PDF from ChartMogul.