A high customer churn rate is the reason 9 out of 10 startups fail. New customer acquisition costs are covered by your current customers. If too many paying customers churn, then you’re paying for the growth of your SaaS company out of your own pocket.
So, how can you avoid this from happening to your company? The answer is simple: you need to reduce churn and, better yet, prevent it from increasing in the first place.
In this guide, we’ll provide you with the tips and tools required to reduce customer churn:
- Churn in SaaS
- How to calculate customer churn
- Should you reduce your churn rate?
- How to reduce customer churn in SaaS
- How to prevent a high churn rate early on
Churn in SaaS
Churn refers to the rate at which customers stop using or paying for a service over a specific period of time. This metric helps measure the health of a SaaS business, as it reflects the level of customer satisfaction and retention. Customer attrition occurs when too many users churn.
When a customer churns, they cancel their subscription, stop renewing it, or simply stop using a service altogether. A high churn rate negatively impacts a SaaS business, indicating a lack of customer loyalty or a potentially unsustainable business model.
That’s why it’s so important for SaaS companies to continuously work to reduce churn rates by improving the quality of their service, offering better customer support, and implementing customer retention strategies like loyalty programs, discounts, or personalized marketing campaigns. We’ll talk more about reducing churn a little later on.
How to calculate customer churn
To calculate the churn rate over a given period, you need to know the number of customers who canceled their subscriptions or stopped using a service. The formula to calculate the churn rate is:
Churn rate = (Number of customers lost during a period / Total number of customers at the beginning of the period) x 100
For example, if a SaaS company has 1,000 customers at the beginning of the month, and 50 of them cancel their subscriptions or stop using the service during the same month, the churn rate for that month would be:
Churn rate = (50 / 1000) x 100 = 5%
In other words, the company lost 5% of its customers during that month.
You can calculate the churn rate for different periods (e.g. monthly, quarterly, annually). Additionally, you can break down the churn rate by segmenting customers by variables to gain more insight into which groups are most likely to churn.
Customer segmentation is a crucial step in measuring churn rate. For instance, you may discover that your monthly churn rate is 8% — “Things aren’t bad after all,” you may think.
If you were to break down this rate by customer segment, you may find that 3% of loyal customers churn and 13% of new users churn.
These numbers indicate that you’re doing a good job retaining customers who have mastered your app, but 13% of new users are struggling to navigate your product. This is a clear sign that you need to revisit and refine your onboarding process.
Connect Smartlook to your product to gain insight into how customers use and navigate your product. Filter sessions by the date users first log in and review session recordings to see where your new customers are experiencing problems — this is a good place to focus on improving.
Should you reduce your churn rate?
The ideal churn rate for a SaaS company depends on several factors, including the industry, the size of the company, and your target audience. Focus on the following to understand whether you need to work on reducing your churn rate:
- Industry benchmarks: This is the least effective way to determine whether your churn rate is high or not. That said, if your churn rate is significantly higher than the industry average, it may be a cause for concern
- Customer lifetime value (CLV): Calculating the CLV can help you determine whether the revenue you receive from your customers justifies the cost of acquiring and retaining them. If your churn rate is high, it could be reducing CLV and impacting the overall profitability of your business
- Customer acquisition cost (CAC): Are you spending too much time and money acquiring new customers? Have you finally reached the break-even point? This is a sign that you aren’t retaining new users well and your churn rate is too high
- Revenue impact: It’s no secret that a high churn rate directly affects revenue. Having trouble reaching your revenue goals? Then you need to focus on reducing customer attrition
- Growing churn rate: It’s also important to track the trend of your churn rate over time. If your churn rate is consistently increasing, it indicates a problem with your service or business model and requires a deeper analysis to understand why more and more customers are leaving
Whether or not your churn rate is high or not at a given moment, you should always remain proactive with retention efforts and continuously work to improve the customer experience.
How to reduce customer churn in your SaaS company
Assuming you’ve experienced problems with customers churning, let’s go through some steps to help you lower the rate.
- Run a cohort analysis
Now that you understand the importance of reducing customer churn, the next step is determining where to start.
Begin by grouping your customers into cohorts based on shared traits. For example, if you offer a product to small businesses and enterprises, it’s good to split these audiences into two separate groups to reveal their distinctive behavioral patterns.
Smartlook can help you with this. With retention tables, you can run a cohort analysis to compare user retention rates among small businesses and enterprises (or any other audience groups) to spot anomalous declines in activity.
If you discover that specific issues are occurring in one customer segment, you can narrow down your analysis to find a solution that lowers high churn rates faster.
- Pay attention to product experience insights
Next, it’s time to dig into your product analytics. Are specific audience groups facing similar issues when navigating your product? These are the issues you’ll want to address immediately.
A tool like Smartlook is a great place to begin your analysis. Here are some ways to use product analytics tools to identify issues leading to high customer churn:
- Turn to retention tables to monitor changes in activity for particular audience groups over time
- When you spot activity anomalies, watch session recordings to see how specific users interact with your application. By watching customer behavior in real time, you can identify any usability issues or roadblocks that may be contributing to churn. For example, you may notice slow loading times, confusing navigation, or broken links
- Use heatmaps to identify which areas of your product receive the most attention and which are overlooked. Use this information to create educational resources regarding underused features to improve usability
- Perform a funnel analysis to monitor the user journey and determine what prevents them from following the path you’ve designed for them
- With event tracking, you can see whether users manage to complete the tasks they’re aiming for. Say you have a productivity app that allows users to create and manage to-do lists. One key task that users want is the ability to create a new to-do list. To complete this task, a user needs to click the “Add new to-do list” button, name the item, add relevant details, and save it. Event tracking allows you to monitor each step as separate events so you can determine whether users are successfully creating new to-do lists or getting stuck in the middle of the process. Repeating drop-offs indicate that the step-by-step process isn’t intuitive enough and you need to make adjustments to the user interface (UI)
Remember to apply filters to focus on the behavior of specific customer segments. With Smartlook, you can filter product insights by a range of factors, like custom events, user parameters (e.g. first seen date), behavior, and more. Sign up for Smartlook’s full-featured, 30-day free trial to see for yourself!
- Transform issues into improvement opportunities and take action
After running a cohort analysis and watching product experience insights, you should have a clear understanding of the issues contributing to your high customer churn rate. The next step is to transform these issues into improvement opportunities.
Sit down with your product team and brainstorm ways to enhance your product to address any issues you’ve identified. For example, if you notice that users are having trouble creating a new to-do item in your productivity app, try improving the UI to make the process more intuitive.
But “improving your UI” isn’t really an action plan. You need to develop a hypothesis regarding what you can do to create a more intuitive UI.
Options include replacing buttons, changing button colors, and reorganizing the entire process. But how do you know exactly what to target?
One way to prove a hypothesis before investing time and money is to build a mockup or fully interactive prototype and test it with your loyal customers — do they like it? If you receive plenty of positive feedback, then it’s time to put your idea into practice.
Another approach is making one small change at a time and then A/B testing it. Split your customer base into two equal segments so that only one sees the updated interface. Do you notice a positive impact on user behavior? If yes, then release the update to your entire customer base.
- Inform your customers of the changes you’ve made
Once you’ve made changes to your product, let your customers know!
This helps build trust and shows your customers that you value their feedback and are committed to improving their experience. It’s also a great chance to urge them to interact with a new feature or design to collect data on the impact faster.
Use every communication channel you have at your disposal to announce updates and attract the attention of potential churning customers. Create an email campaign to reach active users and customers that have been idle for some time. Personalize messages to various customer segments to ensure your messages don’t go unnoticed.
Don’t forget to create in-app notifications that inform users of updates. These can be pop-up windows, push notifications, or a static banner at the top of the app’s interface.
- Continue to monitor product experience insights
Monitor the impact of your recent updates to see if they are having the desired effect. By continuing to track your product analytics, you can see if the changes you’ve made are reducing customer churn and improving the overall user experience. If not, you may need to go back to the drawing board to identify new improvement opportunities.
How to prevent high churn early
Paying attention to customer churn only when it becomes a problem is incredibly ineffective.
Although you can never achieve a 0% rate (which is perfectly natural), you need to be constantly working at keeping your churn rate low if you want to achieve steady SaaS growth.
We’ve split our churn prevention strategy into the following three stages:
- Early-stage customer churn: this refers to the effort you take to retain new customers
- Mid-term customer churn: these are the steps you should take to turn existing customers into loyal customers
- Long-term customers churn: in this section, we’ll explain how to drive long-term retention
Early-stage customer churn
Of all your customers, new users are most likely to churn. You can minimize early-stage churn with these simple steps:
- Offer a free trial without commitment
There’s no sense in trying to convert each and every prospect, especially if your product isn’t what they need. Offer a free trial or freemium version of your product to give potential customers a chance to test it out and see if it’s a good fit.
After thoroughly testing your app, your prospects will be able to make an informed decision about buying your product (or not). This way, you’ll avoid high churn from users that were bound to churn.
- Collect data on new users early
Use analytics tools to track how new users interact with your product. This will help you identify any roadblocks or issues that are preventing them from getting the most from your product.
Often, you can prevent early-stage churn simply by offering a more personalized onboarding experience and thoughtful support.
To do so, you’ll need to understand your new customers’ primary needs. Run a quick questionnaire asking new users to specify their priorities before they get to know your product interface. Use their answers to trigger onboarding flows and personalized marketing messages that focus on the features and workflows they express interest in.
- Create an excellent onboarding experience
Your onboarding process determines whether a new user will stick to your product or churn in a matter of days. Create a seamless onboarding experience with the help of in-app guidance.
Use a product adoption solution like Whatfix or Appcues to implement in-app assistance without having to lay a finger on any product code. Enrich your product experience with checklists, tooltips, and interactive walkthroughs, and you’ll not only reduce early-stage churn but also take the burden off your customer support team.
- Develop on-demand customer training resources
Even with a great onboarding experience, users will still need extra help to complete tasks, use the advanced functionality of your product, or troubleshoot issues. Develop on-demand training resources like webinars, videos, and knowledge-base articles to provide ongoing support and education.
- Establish a personal connection with new users
This is a task for your marketing team. Marketers should develop a powerful strategy for connecting with new customers and building brand trust from early on.
Start with personalized welcome emails to greet new users and offer assistance if needed. Nurture them with tips and tricks for getting started.
Another effective way to connect with new customers and make them stick around is creating a community around your product. This can include a user forum, a Facebook group, or a Slack channel. After interacting with loyal customers in the community, your new users will have a more positive perception of your brand.
Mid-term customer churn
As customers continue to use your product, it’s important to support them throughout their journey. If they stick around during this stage, it’s more likely you won’t lose them to long-term customer churn.
Here are some tips for preventing mid-term customer churn:
- Identify UI issues and fix them promptly
Keep a close eye on user feedback and analytics to identify any UI issues that may be causing frustration or confusion. Correct them quickly to improve the user experience and prevent churn.
Here are a few best practices for staying on top of product performance and implementing changes fast:
- Use tools like heatmaps, session replays, and user surveys to gather data on how users interact with your product and identify any pain points or areas of confusion. Smartlook is a great way to monitor product analytics
- Perform prototype testing or A/B testing to validate potential solutions to UI issues before implementing them
- Continuously monitor user feedback and analytics to identify new issues as they arise
- Continue to drive feature adoption
If you check your product analytics, there’s a 99% chance you’ll discover that some features are underused. Encourage users to try them out. Make sure they’re aware of all the different ways your product can help them.
Not sure how to drive feature adoption? It’s easier than you think:
- Use in-app messaging or email campaigns to highlight new features and functionality
- Provide helpful resources such as tutorials, webinars, and knowledge-base articles to educate users regarding how underused features are designed to help them improve workflows
- Gather feedback from users about which features are most important to them and adjust your feature adoption efforts accordingly. There’s a good chance some customer segments simply don’t require the functionality you’re attempting to provide them with
- Improve your customer service
Provide prompt and helpful customer service to address any arising issues or questions. This way, you’ll continue to build long-term customer relationships and reduce the likelihood of churn.
Here are a few tips to help you provide a positive customer service experience:
- Offer multiple channels for support, such as email, chat, social media, and phone
- Use customer service software that allows you to track and manage support requests efficiently
- Ensure prompt response times to support requests, ideally within several minutes
- If you can’t reply fast, consider a chatbot that can reply to frequently asked questions and reduce the load on your support teams’ shoulders, allowing them to focus on complex requests
Long-term customer churn
Your long-term customers are your most valuable assets. They’re least likely to churn, but if they do, you’ll lose all of the money you spent to retain them over the course of months or even years. Always do your best to keep them happy.
- Collect customer feedback and act on it
We can’t stress enough the importance of continuously collecting product feedback to find new areas to improve.
Alongside analyzing visual product insights, you should be listening to the voice of your customers (VoC). Run customer surveys and interviews to get a better understanding of what’s hidden behind your quantitative data.
This is where a survey tool like Survicate shines. You can create micro surveys to ask users about their experience with your product while interacting with it. Best of all, Survicate integrates with Smartlook allowing you to view real sessions behind user feedback.
- Reward loyal customers
Offering rewards or incentives to loyal customers helps strengthen relationships and reduce the probability of churn. The most effective ways to reward long-term customers include:
- Loyalty programs: Offer discounts, free products, or exclusive access to new features to customers who have been with your product or service for a specific amount of time
- Referral programs: Encourage loyal customers to refer their friends and family to your product or service by offering them rewards. Your long-term customers will be happy to receive discounts or even cash bonuses for recommending your product to their network
- Surprise and delight: Surprise your loyal customers with unexpected rewards or gifts, such as personalized thank-you notes, support, or free swag
- Build flows for identifying at-risk customers
Imagine you have a loyal customer who’s been waiting for a requested feature for too long, and they leave just before you release it. If you run regular checks to identify at-risk customers, you can stop this from happening to you.
One way to do this is by setting up flows that automatically flag customers who haven’t logged in or used your product in a while. You can then reach out to these customers with targeted messaging or special offers to encourage them to come back.
Sending out Net Promoter Score (NPS) and customer satisfaction (CSAT) surveys is another way to identify customers at risk of churning. By regularly conducting these surveys, you can monitor the dynamics of customer satisfaction in specific audience segments and take action to address problems before they turn into larger issues.
Address customer churn with Smartlook
Customer churn has a tremendous impact on the growth and success of a SaaS company. You should not only work on reducing it when it’s high but also make a continuous effort to prevent it from increasing.
Smartlook is a product analytics tool that will help you identify signs of customer frustration so you can react promptly. With our session recordings and event tracking features, you’ll never miss a UX-related issue. Instead, you’ll be able to spot them before they result in customer churn. Schedule a Smartlook demo and start your free 30-day trial today.