The Significance of SaaS Churn

If you've taken a look at your SaaS churn rates after recently conducting a churn analysis and aren't happy with them or don't understand how to do a revenue churn calculation, keep reading!

What is Churn?

SaaS churn is the rate at which SaaS customers cancel their subscriptions. Using a historical SaaS churn rate can generally forecast the probability rate at which customers will cancel their subscriptions, and digging into the reasons for historical churn can help your business improve cross-departmental operations to reduce risk of future churn. However, it is critical to note that while it's an unfortunate part of business, it is normal; customers’ experience evolution in their business and sometimes moving to another solution or taking a different approach is best.

What Churn Can Tell You

Knowing your company’s churn numbers can help steer a company in the right direction. When companies are aware of churn rates, they can use that information to gauge revenue (both recurring and lost), conduct analysis of product-market-fit, and improve product and service offerings. Churn rate is a critical variable in determining the profitability and sustainability of a given approach to servicing, selling, and all angles of the go-to-market strategy.

SaaS Churn for Growth

While churn is often assigned to one team as a key metric, it is best to approach churn as a tool for developing operational excellence across the entire company. Deep analysis of reasons your customers churn is a lever for tremendous growth -- you’re building a better business!

You might be wondering, “How can I calculate this churn rate?”

Let’s take a look at the formula's meaning, the manipulation that can occur when using it, and the meaning of the derived number.

How can I calculate my churn or retention rate?

Retention is simply churn from the opposite side of the table -- how many customers or dollars did the business keep from the population of existing subscriptions? When you calculate a revenue retention or churn rate, you do not include revenue from new customers sold in the month or date range used to select subscriptions.

Monthly Recurring Revenue (MRR)

This revenue is the recurring revenue generated monthly from an active subscription.

Customer Retention (aka Logo Retention)

Counting customers can be tricky -- do you count the number of contracts, subscriptions, or logos to determine how many customers chose to renew? Sometimes one customer organization has multiple contracts under different departments or divisions of that company. Counting the number of contracts or individual subscriptions will give the most accurate view of how many decision-makers chose to renew with your company, but a higher-level look at logos can help you target the brands that have the most to offer your reputation if they choose to renew and refer your service to new prospects.

Customer Churn Rate

The churn rate formula for customers is – (Lost Customers / Total Customers at Start ) x 100. For example, if a SaaS company had 200 customers at the beginning of last quarter but lost 20 of those customers over the next 12 months, the company experienced a 10% customer churn rate.

The "start" for monthly, quarterly, or annual churn rate results can be changed to identify cohorts of customers who purchased at the same time, renewed in the same month, or experienced a similar approach to onboarding or implementation before new processes were implemented. Reporting on cohorts often proves useful for companies that offer month-to-month payment plans, and can be an interesting exercise when evaluating the success of a dramatic change in a critical customer experience.

Net Revenue Retention

Net Revenue Retention includes both revenue losses and revenue gains to produce a single representation of revenue from existing customers. This is one of the most common metrics used for calculating the overall growth rate of a SaaS business.

Revenue Churn Rate

The churn rate formula for revenue is – ((Monthly Revenue Beginning – Monthly Revenue End) – Monthly Revenue Added) \ Revenue Beginning of Month. This formula uses monthly recurring revenue (MRR) but can be adapted to annual recurring revenue (ARR) by dividing revenues by the average number of months per contract.

Do I have a good revenue churn or retention rate?

You may be wondering if you have a solid revenue churn or retention rate. Good news -- There isn't a one size fits all average churn rate. The size of your SaaS business, company age, annual contracts, and so forth also play a major role in what your churn says about your business and the steps you need to take to grow. Early-stage companies may see 10% of customers lost in a quarter on the side of negative churn whereas big established companies may see this as a positive churn rate.

If you’re unsure what the standard churn and revenue retention rates are for your industry or competitor set, try looking at churn from multiple lenses - customer retention rate, revenue retention rate, upgrades, even the number of customers who have referred you to a new prospect. Looking beyond the numbers that are easiest to calculate will give you a holistic view of your business and a better understanding of where you may need to adjust your sails.

Companies that understand their customers and what they want can have a successful path to high customer success, even early-stage companies.

As an individual or SaaS company, only you can determine if the rate and revenue are what you expect. All companies, both new and established, should aim to improve churn rates. When negative churn appears or a churn rate isn't as expected, it is essential to strategize and develop a plan of action. 

Three Tips to Improving Churn Rate

If you have just performed a churn calculation and are wondering how to improve your rate, here are three tips.

1. Focus on Annual Contracts

While many subscriptions are based on month-to-month contracts, you can also offer or work on selling annual contracts. Annual contracts can help churn in that customers who select this option won't churn right away. If this is something that seems interesting to you, you might want to offer them a discount to encourage their commitment. This will increase the likelihood of them signing up for a longer subscription.

2. Manage Pricing

Similar to an annual contract, offering pricing tiers for subscriptions can help reduce churn as it provides customers with flexibility. Offering different pricing tiers is beneficial as it allows customers to contribute different amounts to the company’s revenue - a lot of customers paying for lower subscriptions still adds to a company’s revenue. 

3. Customer Focus

Focusing on the customers can prevent them from leaving. Sometimes viral growth makes this difficult, but improving your customer service team and communication can make all the difference.

Online Platforms for SaaS Companies

Onboarding new customers smoothly, quickly, and well is one of the most critical means to preventing a customer from churning. Hivewire can help SaaS companies provide customer-facing teams with detailed directions and up-to-date information to tailor each onboarding experience and manage time for maximum satisfaction.

Hivewire

Look no further if you've been searching for a platform to organize and automate customer onboarding tasks or manage workflows. With Hivewire, you can accelerate time to value and reduce customer churn rate while integrating with your CRM. Hivewire allows you to gather data with custom forms and automate away mundane and tedious status updates. It can also integrate with apps - such as Slack or Salesforce - that you likely already use as a SaaS business. 

Being able to link data together to scale progress in one place lets you gather critical data. Sign up here to see a free demo about Hivewire for onboarding teams!