SaaS Adoption Metrics: Guide To Churn For Customer Success

As every SaaS entrepreneur knows, retention is one of the most important indicators in determining the health of your business. It takes time and money to acquire new customers, but if they don't become established long-term users, it can become an exercise in futility. This is where customer success comes in and one of their key responsibilities is to improve retention. The measurement of churn helps us understand and make decisions to improve retention. Despite the importance of this indicator, the measurement, tracking and benchmarking of churn often causes great confusion. In this article we cover how you can track churn to improve performance.

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What is Customer Churn?

It is the percentage of consumers who quit using their services. Customer churn rates are a good way to measure business health. It's also a great way to understand your overall customer experience. In fact, measuring churn rates is very important and often the first Key Performance Indicator (KPI) SaaS companies track.

Churn rates help you understand how many customers are leaving your business and why. It is essential to understand if your marketing and customer retention strategy is working. When you lose a customer in business, you lose not only the revenue from that customer. There are additional costs associated with acquiring new customers, such as marketing costs and cost of sales. Therefore, it is important to understand the customer withdrawal rate. It helps companies determine customer lifetime value (LTV) and set the amount of money they can spend on acquiring new customers (Cost of Acquisition: CAC). The ratio of LTV to CAC helps companies determine if they spend too much on acquiring new customers. If the ratio of LTV to CAC is 1:1 and unhealthy, you may have to improve either or both indicators to keep your business going.

There are two main ways of looking at churn: customer churn and revenue churn. Customer churn is related to the percentage of customers choosing to terminate their subscription within a given period. Revenue churn is related to the percentage of revenue lost within a given period.

In a subscription business where all participants pay the same amount to use the product/service, it's good to remember that the customer churn rate and the revenue churn rate are essentially equal to each other. However, the numbers will differ for subscription businesses that use a pricing strategy that does not charge the same amount to all participants (such as tiered pricing or per-user pricing). It is important to analyze both indicators to fully understand which customers churn and what is the impact on the business.

How is the churn rate measured?

Customer churn rates are used to measure how many customers have left within a given period. Customer churn rates are often measured per time period such as monthly, quarterly, and yearly. These are expressed as percentages.

Before measuring customer churn rates, it is important to first define what constitutes actual customer churn for your business. For SaaS companies, measuring the churn rate based on the length of the subscription/membership term makes sense. In this case, you define a cancelation event as when the customer does not renew or cancel the subscription.

Churn rate = the number of customers lost in a time period/number of customers at the start of the time period.

What is the cause of customer churn?

The reasons for customer churn are myriad, many of which are unique to your company and will depend on your business practices.

Here are some of them.

Overly focused on acquiring new customers.

The customer service team is often able to foresee signs of churn. However, companies often forget to focus their resources on maintaining relationships with existing customers in the pursuit of new ones. Both are equally important.

Not taking time to understand the customer journey

Understanding customer needs and the key stages in the customer relationships are critical to keeping customers in the long term and reducing churn.

If you haven't done so already, create a customer journey map that will help you understand your customer's intentions, motivations, problems, and why they choose your company among their competitors.

Competitors offer better quality solutions.

If you are losing customers to competitors, it is possible your company may not be sufficiently delivering or conveying value to your users. If this is the case, take the time to evaluate (or re-evaluate) the features and services you are providing to your targeted customers. It may be time to relook your go to market strategy or business model.

What is a good churn rate?

According to the benchmark report, the average subscription churn rate is 5.57%. However, since churn rates vary widely across industries and business models, do check out industry standards to figure out how your company compares.

Final Verdict

Understanding churn rates is critical to assessing your customer success efforts' effectiveness and overall customer satisfaction. Business leaders sometimes forget it is easier and cheaper to keep existing customers than new ones and it is the job of customer success teams to represent this segment of the business. In many cases churn is the best indicator of the long term success of the company and should not be lightly ignored.

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