The Guide to Reduce SaaS Churn: Causes, Strategies and Calculator

Is your SaaS business struggling with high churn rates? SaaS churn is a common challenge that can seriously undermine growth and revenue. 

High churn rates often stem from customers discontinuing the use of a product or service, which indicates missed opportunities to meet and exceed their expectations. For SaaS founders and marketers, achieving a zero churn rate may seem daunting, but it's not impossible.

The key to combating churn lies in implementing targeted strategies and robust retention processes. Maximizing customer engagement and continuously optimizing your approach can turn churn into a manageable factor and enhance both subscriptions and revenue.

In this ultimate guide, we'll delve into the underlying causes of SaaS churn, the essential metrics for tracking it, and actionable strategies to reduce churn effectively while fostering business growth.

What is the SaaS Churn Rate?

The SaaS churn rate is a critical metric indicating the percentage of SaaS customers who stopped using your products or services over time. 

High SaaS churn rates can significantly impact your company's revenue and profitability. The higher the churn rate, the more customers leave, reducing revenue and potential growth challenges.

For instance, if your company experiences a monthly churn rate of 7%, this means that 7% of your customer base stops using your services or products each month.

How to Calculate SaaS Churn Rate?

Understanding how to calculate your customer churn rate is essential for assessing the health of your business.

Formula:

Example:

Let’s say your company had 1,000 customers at the start of the month, and 70 customers left that month. Using the formula:

Churn rate = (70/1000) X 100 = 7%

This means your monthly churn rate is 7%, indicating that 7% of your customers have discontinued their service within that month.

Monitoring and calculating your churn rate regularly will help you understand your customer retention health and inform strategies to reduce churn and improve your overall business performance.

What is a Good and Great SaaS Churn Rate?

Calculating the SaaS churn rate gives you a clear picture of how many customers you've lost over a specific period, such as a quarter. However, knowing the churn rate isn't enough to address the underlying issues causing customer attrition. 

To effectively tackle SaaS customer churn, it's crucial to delve deeper into the types of churn and understand the root causes behind customer loss.

Spotify, Dropbox, and Canva are prominent examples of B2C SaaS companies that deliver software applications and services directly to individual consumers.

In the B2B sector, HubSpot, Zendesk, and Mailchimp represent SMB and early-stage SaaS startups, catering to smaller businesses and newly established startups with tailored solutions.

For large enterprises, Oracle, Salesforce, and Cisco exemplify B2B SaaS giants that offer comprehensive products and services designed to meet the complex needs of large organizations.

What are the Different Types of Customer Churn?

Customer churn is categorized into two types based on why customers stop doing business. Understanding these categories is crucial for addressing and mitigating churn effectively.

1. Voluntary churn or active churn

Voluntary Churn, or Active Churn, occurs when customers voluntarily leave a company or stop using a service or product. 

• Reasons behind voluntary churn: It usually happens due to high prices, poor customer experience, inadequate support, or a mismatch between the product or service and the customer's needs.
• Solution to reduce voluntary churn: Run some checks to ensure your product or services meet the customer's expectations and demands. Collect the feedback of your loyal customers to understand their intent to stop using your product. Doing groundwork can help you improve customer experience and resolve issues promptly and efficiently.

2. Involuntary churn or passive churn

When customers abandon the company without any intention of doing so, it is known as passive or involuntary churn. It is the common cause of the increased customer churn rate for SaaS businesses. 

• Reasons behind involuntary churn: It can happen due to payment or billing issues like expired credit or debit cards, wrong billing address, insufficient funds, or irrelevant card information.  In the case of SaaS companies,  it happens due to outdated products or limits on subscription-based products. The reason for the involuntary is not related to the business.
• Solution to reduce involuntary churn: Create an automatic notification system to remind customers about the expiration of subscription plans, update their profiles, or announce that they should switch to new product versions.  Keep your product or service up-to-date and communicate any changes or new versions to customers.

SaaS companies can significantly enhance customer retention and satisfaction by addressing voluntary and involuntary churn with targeted strategies.

What are the Causes of SaaS Revenue Churn?

Understanding the common causes of revenue churn is vital for reducing customer acquisition expenses, increasing average customer lifetime, and maintaining your SaaS business profitable. Here are the primary reasons why customers may churn and how they affect your growth and success:

1. Poor onboarding experience

The customer's first interaction with your product or service is onboarding. A negative onboarding experience can significantly increase the churn rate.

When customers set up your software, do you provide a guide with clear instructions and a brief of key SaaS features? Or do you provide video tutorials to help users get started with your software effortlessly? If not, the customers will feel dissatisfied with your business onboarding process. 

Other reasons behind the poor onboarding experience are complex and time-consuming procedures, technical errors, and unclear communication. Negative onboarding processes make your customers switch to competitors, which affects your overall business success.

2. Poor customer support

Another cause of increasing customer churn is inadequate or hard-to-reach customer support. Customers experiencing unhelpful staff, long response times or delays in solving issues will likely churn.

The inadequate customer support service decreases customer lifetime value, directly impacting the business profitability and annual recurring revenue (ARR) growth. Moreover, when customers feel undervalued or neglected by the company, it can also break their trust and lead to negative word-of-mouth, further exacerbating churn.

3. Ignore complaints and feedback

People share their experiences and reviews about the products or services online. Suppose potential customers share bad reviews or negative feedback. In that case, it can impact the perception of new and existing customers and influence them to abandon your SaaS brand and stop purchasing your products. 

The condition gets worse when you ignore customer complaints and feedback. This can prompt customer dissatisfaction, increasing the SaaS churn rate and revenue loss. Another consequence of not considering customer feedback is missing opportunities for SaaS growth and innovation and being replaced by competitors.

4. Lack of customer engagement

Customer engagement is a vital metric for predicting churn rate. Customers who feel uninterested in engaging with any business offer are likelier to churn. Lack of customer engagement can also result in reduced lifetime value, diminished brand perception, and difficulty in customer retention.

5. Technical bugs and glitches

Any technical issue like failed login or downtime can increase customer churn.  A product with technical faults, bugs, and glitches reduces the productivity and efficiency of the customers who use your product or service for their business.

Technical issues can disrupt business operations and customer workflows and damage your SaaS product's reputation. Any negative perception of the product or service can discourage customers from using any service or product from the company, affecting customer acquisition and retention.

6. Bad customer experience

Any negative interaction or experience with a SaaS company, its products, service, or team can significantly impact a business's brand image and overall success. Factors contributing to poor customer experience include unmet expectations, long response times, login errors, and slow loading times. 

Dissatisfaction and negative experiences can make customers lose interest in exploring other additional features, products, or services, increasing revenue churn and a spike in customer acquisition costs (CAC). 

7. SaaS pricing issues

Any sudden or frequent price increases can lead to customer dissatisfaction. Customers are sensitive to price increases, which may prompt them to seek cheaper options. When companies do unexpected price hikes, include hidden fees, or have confusing pricing structures, customers feel uncompetitive, leading to an increase in churn rate. 

Before doing business, customers try to identify whether they are getting the value for the paid price. If not, they choose competitors that provide transparent and predictable pricing. SaaS pricing issues not only churn your customers but potentially disrupt your business. 

8. Evolving market dynamics

Changing market dynamics can contribute to revenue churn if your SaaS product fails to keep pace with industry trends.

Increased competition, economic shifts, technological advancements, and regulatory changes can challenge customers and SaaS companies. Staying ahead of these dynamics is essential to retaining customers and preventing monthly churn rates.  

This list of causes helps you determine the reason behind the increase in customer churn. Now that you better understand what causes customer churn, let’s learn the most common metrics used to predict churn for your business.

12 Effective Strategies to Reduce SaaS Churn Rate and Increase Retention

Now that you know how to identify the reason behind the increased SaaS churn. It's time to learn how to reduce the churn rate for your SaaS business. We've compiled 12 simple and effective strategies to minimize churn and retain more paying customers. 

Let's review each strategy in detail.

1. Exceptional onboarding experience

When a SaaS customer interacts with a new product or service, the initial experience can often be overwhelming. SaaS businesses must provide clear and supportive guidance to ensure a smooth and welcoming onboarding process. 

Here are some practical tips to enhance your onboarding experience:

• Streamline the registration or initial setup process to reduce friction and make it as user-friendly as possible.
• Provide accessible guides, video tutorials, and infographics with clear instructions to help customers understand your product or service.
• Showcase your product or service's key benefits and features to help customers recognize its value from the outset.
• Enhance the onboarding experience by sending a personalized welcome message via email, video, or phone call to make new customers feel valued and supported.

Implementing these SaaS onboarding strategies can create a positive first impression, reduce negative churn, and foster a stronger relationship with potential customers.

2. Proactive customer service

Customer service is vital for retaining customers and enhancing their experience with your SaaS product. To minimize churn, it's essential for your business to proactively identify and address customer queries before they escalate into more significant issues.

Here are some key strategies to enhance your customer service:

• Seek out and resolve customer issues before they negatively impact their experience or lead to churn.
• Ensure your customer support team is thoroughly trained to provide exceptional service and handle a variety of customer needs effectively.
• Incorporate tools like chatbots to offer instant solutions and support, ensuring customers receive timely assistance.

3. Use customer feedback

Consider customer feedback and online reviews while reducing your annual churn rate. Ignoring customer feedback can ultimately lead to customer churn, as it can influence the company's reputation and change other people's perceptions.

Collect negative and positive feedback to identify areas for improvement and enhance your product or service quality. Respond to your customers and engage with them on social media platforms to build trust and strengthen customer relationships.

4. Reach your customers

The best way to reduce customer churn is to prevent it from happening. You can achieve it by reaching out to customers who are invested in your product or service or interacted with your SaaS website.

Use proactive communication methods to connect with customers and demonstrate your SaaS features, benefits, and pricing. Direct messages or emails can also be powerful tools for engaging and informing customers about your product's capabilities and new offerings.

Let’s learn from an example!

When you sign up for Grammarly, you receive an email with a welcoming message, a list of features, and a set-up guide for using the tool efficiently and effortlessly.

5. Competitive SaaS pricing 

Deciding the SaaS pricing strategy is essential to mitigating customer churn. Clear and transparent pricing structures showcase the quality of your product or service. 

Assess your pricing model regularly, align it with your target audience's demands and expectations, and compare it with your competitors to retain more customers.

In addition, SaaS companies can offer free trials or discounts on products or subscription-based software, reducing the annual churn rate and increasing recurring revenue. 

6. Cultivate your community

Building a community around your product or service allows customers to stay loyal to your SaaS brand. Your SaaS marketing team can create a community on social media platforms like Facebook groups to attract new customers or plan engaging events for prospective customers.  

The more customers stay loyal to your brand, the less likely they are to churn when something goes wrong. Implement this strategy to develop customer loyalty and lower SaaS churn. 

7. Increase customer engagement

A crucial strategy to reduce churn is keeping your customers engaged. When customers actively engage with your product or service, they’re less likely to churn and recommend your company to others. Improving customer engagement requires consistency and proactive communication to keep customers aligned with your business.

Check out the simple ways to enhance customer engagement, including: 

- Share relevant and valuable content with customers, like blog posts, tutorials, and case studies.

- Create channels for customers to share their feedback and suggestions

- Encourage customers through loyalty programs that can generate more revenue for your business

By incorporating these tactics for customer engagement, you can motivate customers to stay loyal and committed to your brand or business, reducing revenue churn to a minimum.

8. Show competitive advantage

With the saturation in the SaaS industry, competition has become fierce. SaaS companies must build a competitive edge and create innovative products or services that solve customers' real-life problems. 

Establishing your brand as a thoughtful leader in the SaaS niche requires adapting to customer demands and the evolving technological landscape. It allows you to achieve customer success and stay ahead of your competitors.

While emphasizing what's next, monitor your competitors and note their customer success strategies. For instance, follow their websites to see what new features they’ve added for customers or how responsive they are on social media.

By adopting your competitors' strategy, your business can improve customer satisfaction and customer engagement and minimize typical SaaS churn rates. 

9. Attract target audience

Before retaining customers, define buyer personas or ideal customer profiles (ICP) to understand their purchasing behaviour and demographic characteristics.

Defining your ideal Customer profiles provides you with a clear understanding of your customer's pain points, needs, and expectations. They also assist in identifying whether your product or service is the right fit for them.

By consistently monitoring your ICPs, you can determine how well your customers use your product or service to achieve their goals. Metrics such as customer lifetime value (CLV), MRR, and NPS can also assist in identifying which customers are valuable to your business and which are at risk of churning.

10. Keep updating your product

Share new updates on your SaaS offerings with customers regularly. Though adding new features is essential, it is also important to regularly update your customers about new changes and how they can benefit from them. 

Use effective communication methods like emails, in-app notifications, or blog posts to announce what’s new happening, a new product launch, or any new feature added. It keeps them excited and engaged with your business.

The regular update shows your customers how focused you are on delivering quality and value to the customers. This step can significantly improve customer engagement and satisfaction, reducing the churn rate. 

11. Employ a customer success team

Another effective strategy to reduce churn is to dedicate a customer success team to care for your most valuable customers. The team's role is to assess customers, educate them on how to get the value of your product and form a strong and long-term relationship with them.

While helping customers use products or services to achieve personal goals, the team can build mutually beneficial relationships with your customers. Hence, a dedicated team for customer success can reduce gross MRR churn and increase retention rates. 

12. Build long-term customer relationships

Enhance retention by making your customers happy with your business or brand. When your customers are happy and satisfied, they will stay longer. To maintain the long-term customer relationship, give them long-term subscription options to use your service or unlimited access to your product.

SaaS Companies with a subscription-based model can offer annual subscriptions instead of monthly subscriptions, which gives customers enough time to explore the product or service and see its benefits. You can also enhance your customer commitment by offering loyalty programs and long-term membership programs. 

Hence, this customer retention strategy will significantly lower the average churn rate and generate more revenue for your company.

Why is it essential to Reduce the Churn Rate?

High churn rates can significantly impact various facets of a SaaS business, from revenue and market reputation to customer satisfaction. For SaaS marketers, founders, and decision-makers, addressing churn is essential to prevent customer loss and sustain long-term business growth.

1. Increase customer retention

Customer retention is the exact opposite of customer churn, which means the ability to retain existing customers. Enhancing customer retention can significantly reduce marketing, sales, and customer acquisition costs (CAC). 

Retain more customers by addressing your customer's pain points, improving your offerings, monitoring customer activities, creating a clear and transparent SaaS pricing structure, and building long-term relationships. 

2. Improve experience with SaaS products

The churn rate also indicates that customers leave a brand or business because of bad experiences with your SaaS products or services. Considering customer insights and market trends can help you enhance your offerings and increase retention, which leads to sustainable growth and SaaS success.  

3. Better customer experience

Understanding the importance of SaaS churn allows you to identify weaknesses like high pricing or long payment processes. Learn about your target audience's needs, pain points, and values and how they interact with your business. 

4. Boost revenue and profits.

When customers buy your products or services, it will generate more revenue. But if more customers stay with your business, you see an increase in profits and make more money. Hence, reducing revenue churn is good for maintaining healthy and sustainable business growth. 

Knowing the SaaS churn rate is the first step to understanding your customers. It further helps you build long-term customer relationships, reducing acquisition expenses and increasing monthly recurring revenue (MRR).

Common Metrics to Predict Average Churn Rate

Understanding churn patterns and types—whether passive or active—is essential. Focus on key SaaS metrics to gain insights and effectively implement strategies to prevent churn.

1. Monthly Recurring Revenue (MRR) Churn

The monthly churn rate is calculated as the percentage of monthly recurring revenue lost during a specific period ( start Q1 to end Q1). Using the MRR churn rate formula, you can identify the percentage of customers likely to end their subscriptions or average acquisition costs for a given period.

Formula:

Example:

Let's say your company's starting MRR at the beginning of the month is $50000, and during the month, you lost $1000 in MRR due to a subscription cancellation. 

MRR Churn Rate = $1000 / $50000  x 100 = 2%

So, the MRR churn rate for that month is 2%.

The MRR metric can be used to predict the reasons behind customer churn. Monitoring your business's MRR churn rate allows you to prepare strategies and focus on increasing revenue stability.  

2. Customer Lifetime Value (CLV) 

Customer lifetime value (CLV) refers to the gross profit or revenue a customer brings to your business during their average time spent with your business.
Formula:

Here's a revised example using this formula:

Example:

• A customer pays $40 per month for your product.
• The cost to serve this customer is $5 per month.
• The gross margin is calculated as (Revenue - Cost) ÷ Revenue. 
• The average customer lifetime with your business is 24 months.

Calculation:

1. ARPU (Average Revenue Per User): $40/month
2. Gross Margin: 87.5%
3. Customer Lifetime: 24 months

CLV= 40 × 24 × 0.875 = 840.

The Customer Lifetime Value (CLV) for this customer is $840, representing the revenue they generate, adjusted for your profit margin, during their 24-month relationship with your business.

3. Customer Acquisition Cost (CAC)

Customer acquisition cost refers to the amount spent by a business for acquiring customers. This metric is generally used to determine whether it is valuable for businesses to spend on acquiring or retaining customers.

Formula:

Example:

Suppose a SaaS company spent $10,000 on marketing and  $15,000 on monthly sales. They've acquired 100 customers. 

CAC = $10,000 + $15,000/ 100 = $250

So, the CAC per customer is $250. 

Calculating the CAC helps your business determine the total costs of acquiring new customers and monitor the revenue they generate. 

4. Net Promoter Score (NPS)

The net promoter score (NPS) is a metric to determine customer loyalty and satisfaction with your SaaS product or service. In other words, it helps to measure how likely your customers recommend your product or service to others. A higher Net Promoter Score (NPS) reflects strong customer loyalty to your product or brand. 

Formula:

Example:

50% promoters – 10% detractors = 40 % NPS

Understanding the NPS formula is simple when you know what promoter and detractor are and how customers are segmented based on these terms.

These valuable metrics help your SaaS business to understand the strategies to reduce churn rate. It also allows you to determine other things from collected data-driven insights like customer experience, purchasing behaviour, and customer satisfaction.

Reduce SaaS Churn and Improve Business Growth

Higher SaaS churn can stop your business's growth. There is no right time to prevent it from growing but reducing customer churn is crucial for maintaining a business's sustainability and profitability. 

Applying these customer retention strategies allows you to achieve the desirable results and reduce the churn rate. Track your business profits and revenue with these simple tactics, strategies, and metrics. Also, develop effective churn management to mitigate churn, enhance customer retention, and expand your revenue. 

If you want expert help to lower churn, Labsmedia can help you build effective SaaS marketing strategies that meet your marketing efforts, align with your ICP, and boost revenue growth.