Imagine this – you launch a promising SaaS startup that gains impressive initial traction. However, 6-12 months down the line your once-smooth hockey stick growth suddenly plateaus.
Your customer pipeline dries up. Quarterly sales drop. Before you know it, you’re struggling to even hit last year’s numbers, much less grow.
This painful scenario plays out for 87% of SaaS startups, often leaving founders bewildered on what went wrong. So what’s the root cause?
Simply put, out-of-control customer churn.
Most startups focus obsessively on customer acquisition, yet neglect retention. They splurge on marketing campaigns, splashy events, and sales bounties to reel in customers.
But unbeknownst to them, a steadily growing percentage of recently won customers have either cancelled renewals, downgraded subscriptions, or halted usage.
This churn phenomenon eats silently into revenue streams in the background while expensive acquisition soars in the foreground.
The dangerous revenue imbalance continues undetected, until growth stalls altogether. Businesses chronically underestimate how violently churn can derail progress.
So if you don’t want your thriving SaaS business to succumb to such a fate, this comprehensive guide to understanding churn is for you!
What Exactly is Churn Rate?
At its core, churn rate represents the percentage of paying customers who cancel or opt out of your service over a given time period.
It can be measured in terms of:
- Customer subscriptions cancelled
- Value of recurring revenue lost
- Reduction in usage and transactions
Mathematically speaking, here is the simplest churn rate formula:
Churn rate = Customers lost in period / Total customers at start of period x 100
For example, if you lost 50 out of 1000 customers over the last month, your monthly churn rate is 5%.
Types of Churn Rates
While the basic logic of churn calculations is straightforward, there are a few meaningful variations that provide different insights into customer behavior.
Customer Churn Rate
This measures percentage of total customers (or user accounts) that cancell subscriptions or stop using your product.
It indicates satisfaction with your core value proposition and onboarding process. This is the most fundamental churn metric.
Revenue Churn Rate
Measures percentage of recurring subscription revenue lost in dollar terms from customers quitting your service.
Shows whether high-value customers are being retained and the monetary damages of churn.
Average Revenue Churn Rate Benchmarks
- SaaS – 5 to 7% annual revenue churn
- Mobile Apps – 8 to 10% annual revenue churn
- Cloud storage – 12 to 15% annual revenue churn
Gross MRR Churn
Measures the contracted monthly recurring revenue (MRR) lost from downgrades to lower pricing plans or free options.
Indicates dissatisfaction with features or willingness to pay.
Net MRR Churn
Measures net change in contracted MRR after factoring expansion revenue from existing satisfied customers purchasing add-ons or upgrading plans.
Provides full picture of customer lifetime value.
Impacts of High Churn Rates
Uncontrolled churn that continues unabated can systematically destroy the financials and operating metrics of any SaaS business. Specifically:
Steep Drop in Revenue and Cash Flow
This is the most apparent repercussion of rampant churn. Monthly income statements will reveal the hard truth of declining sales and worsening cash deficits.
One analysis across nearly 5000 SaaS companies found that a 5% increase in net dollar churn results in 33% faster cash burn.
Ballooning Customer Acquisition Costs
As churn rises steadily, a company must spend increasingly more on sales & marketing to attract new customers to offset defections.
One survey saw SaaS startups with chkurn rates above 7% spend 60% more on CAC.
Downward Valuation Spiral
Investors and acquirers value SaaS businesses primarily based on proven customer lifetime value and consistent revenue growth.
Spiraling churn severely erodes both metrics quickly, making it difficult to raise further funding.
VCs consider anything above 5% monthly churn as dangerously high risk for investment.
Loss of Product Authority
As loyal users leave and public criticism of your product spreads, it becomes progressively harder to establish authentic brand authority in your niche.
Prospective customers will have multiplied doubts subscribing to a service with questionable social proof metrics.
Reasons Customers Churn
Before exploring specific strategies to decrease churn, it’s important to first analyze why customers cancel subscriptions en masse in the first place. This will vary for each business, but some widespread reasons are:
Lack of Value
Customers don’t realize enough tangible benefit from using your product continuously to warrant the subscription spending.
Steep Learning Curve
Typically early on in the customer lifecycle – complex software with a high learning curve leads to frustration.
Weaker Feature Set
Competitors often launch better capabilities, forcing users to switch platforms.
Hidden Costs
Surprise premium charges or fees outside the base plan anger long term users.
Account Management Issues
Fundamental platform problems like login difficulties, missing payments, sync errors infuriate users.
Lack of Customer Success
No human touchpoints to resolve concerns or provide adoption training alienates users.
Analyzing platform analytics, user research, and churn reasons data reveals what specifically disappoints your customers.
Strategies to Reduce Churn
Armed with reasons why customers cancel subscriptions, here are proven strategies to directly address those gaps and boost retention:
1. Robust Onboarding
Create multi-touch 30/60/90 day onboarding journeys with email courses, live walkthroughs, Q&As and permanent support channels.
SaaS platforms see up to 92%+ higher customer retention rates when users are fully onboarded.
2. Ongoing Education
Advanced features often confuse and overwhelm users. Continual self-service education via tutorials, docs, blogs and videos boosts adoption.
3. Loyalty Rewards
Surprise loyal customers on milestones with discounts, extended trials or bonuses. Feel valued and stick around longer.
4. Real Human Connection
Proactively reach out to struggling users via emails, in-app messages or calls to resolve issues preventing cancellation.
Building an emotional connection with support staff cements loyalty.
5. Account Reviews
Schedule periodic account reviews to suggest better-fitted plans, unused features or new functionality matching updated user needs.
6. In-App Surveys
Prompt for dynamic user feedback when frustration detected so you can address concerns before cancellation.
Continual small delights have an outsized impact on long-term retention.
Conclusion
Running a startup can often feel like a constant battle – sourcing funds, finding product-market fit, pleasing customers. However, none of those matter if churn is not sustainably managed.
As the examples in this guide demonstrated, uncontrolled churn can completely undermine everything else you work so hard at as a founder. No matter what your acquisition volumes, churn caps your ability to scale.
By thoroughly understanding the scope of issues churn creates, accurately tracking cancellation drivers in your business, and structurally improving the customer journey, you can hold on to happy subscribers for longer.
So be sure to monitor all churn rate metrics religiously each month,detect deterioration early, and course-correct customer experience gaps immediately. Your company’s potential likely hangs in the balance!
