SaaS Churn: How to Calculate and Reduce It

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On the one hand, churn management increases revenue. On the other hand, a client who is thinking about leaving the service cannot be loyal. Therefore, it is essential to know the leaving customers, communicate with them, and return to cooperation.

But you can only effectively manage what you measure.

In this article, I'm going to show you how you can determine your level of customer churn and what you can do about it.

Measuring Customer Churn in SaaS products

When we talk about churn, first of all, we need to answer two questions:

  • How stable is our customer base? Ideally, the number of customers at the beginning of the month, and if in the end, it is constant.
  • What proportion of customers left the company? Ideally zero.

Two important metrics will help answer these questions:

Customer Retention Rate (CRR) and Churn rate (CR).

With these metrics, you can calculate the proportion of customers who no longer use the services of your company. Formulas take into account new customers – this way, we can neutralize the impact of the rapid growth of the base in any period. In total, CCR and CR give 100%.

Here how you can read these metrics using an example:

Given:

Customers at the start of the period = 100.

Customers at the end of the period = 105.

New customers = 10.

Now consider Customer Retention Rate to be:

CCR = (105-10) / 100 = 95%. In our example, we see that the number of customers is decreasing, since the indicator is less than 100%.

Given:

Customers at the start of the period = 100.

The number of departed customers = 5.

We consider Churn Rate:

CR = 5/100 = 5%. This is an indicator of churn. Whether it depends a lot or less on specific factors of your company and industry.

What is Wrong about Customer Retention Rate and Churn Rate

The problem with calculating CCR and CR is fixing outflow. To stop using a SaaS product, in most cases, a user simply needs to cancel his subscription. What if the client did it temporarily and after a few months will return? In this case, the calculation of CCR and CR may be inaccurate.

We must choose a hypothesis of behavior that will show whether the client left forever, or is it temporary inactivity.

Keep reading to discover what metrics we use to calculate the outflow of customers more accurately.

User Churn vs. Revenue churn

When the term churn is mentioned, it most often means the outflow of customers (user churn). However, there is another variable to take into question.

The number of customers that you have lost over a certain period (usually a month or a year) is user churn.

However, a more meaningful indicator is the “income churn,” since it does not mean an abstract number of people, but a specific amount of money that you did not receive due to the departure of customers or their choice of a cheaper tariff.

From a business point of view, it is the revenue churn that is of most interest: it allows you to see real losses from user churn. 

The loss of a user who brought you $ 50 a month and a client with a tariff plan of $ 500 / month will affect the company's profits in different ways.

User churn ignores these differences, and in the end, you cannot track the loss of an important client. Revenue churn provides an opportunity to get a more accurate picture of the state of your business.

Why Is This So important?

We have now figured out the basic concept of churn and learned how to calculate it. But why is it so important to know these types of “outflow” and generally think about them? It's all about the growth in the number of active customers.

Churn is the opposite of growth. It destroys all your work done and depletes the funds you can reinvest in customer acquisition.

The more customers you acquire today, the fewer there will be tomorrow, which means that the cost of each new customer, as well as the difficulty of finding them, is steadily increasing.

If you continue to lose your current users, it will be much more difficult to find others.

Churn is usually an indicator of problems with the product itself. You need to understand what exactly causes the outflow of customers and eliminate the discovered product flaws because only this will reduce churn.

Process Performance Metrics

These metrics will help you understand how much our outflow management work pays off.

Active customer share

I note right away that each company has its concept of “active customer.” You need to understand what actions a client must take to become active. After that, you can calculate the proportion of active customers from all customers of the company.

Why does it matter?. It's easier to answer the question: “What proportion of customers use the service”? If this share begins to grow or fall, we must respond: find out which segment of customers is changing and decide what to do with it.

I recommend to consider the percentage of active customers for such periods:

Active customers for one month (Monthly Active Users, MAU).

Active customers for two consecutive months (2Monthly Active Users, 2MAU).

Clients active during the quarter (Quarter Active Users, QAU).

Active customers bring money. Inactive – this is an outflow.

How to calculate MAU, 2MAU, and QAU on the example of 4 clients with different activities (“1” means that the client was active this month):

MAU = 3/4 = 75%.

2MAU = 2/4 = 50%.

QAU = 1/4 = 25%.

What to look for? Logically, you need to focus on increasing customer activity. First of all, the causes of inactivity are studied, in each period they can be different. For instance:

consider that email marketing is not effective;

there is no newsletter for a new mailing list;

there is no time/specialist who will be engaged in the mailing.

You also need to study the drivers that lead to activity. These actions are often followed by the replenishment of the account balance. That is, we must encourage the client to “touch” the service as often as possible, and not immediately sell it.

Returned Customer Income

We determined that the user leaves the service and contacted him on some channel. The client agreed to continue cooperation and paid.

Income from a returned customer is the amount that the customer paid after our communication on any channel.

Why does it matter? This indicator is used to calculate the average check. The average test should be considered for each client separately and, in general, after all, outflow communications.

What to look for? A separate cut for the analytics of this indicator can be a communication channel (phone, email, personal meeting) and a client segment. You can segment by several metrics:

What income was earlier?

When was the last deposit?

What services did you use before?

For example, you highlighted customers who left the service and made calls to them. Naturally, there will be customers whom you did not reach. Compare the amount of revenue after dialing customers and not dialing. If the choice of the outflow segment was made correctly, then the amount of income after dialing should significantly exceed the amount after dialing to customers.

  • The number of payments after 30, 60, 90 days after the communication
  • The number of payments characterizes the stability of the process and the correct choice of outflow management strategy.

Suppose you returned the customer to the service. After a long break, he replenished his balance. It's good! What next? Do you control the future? We believe that this is necessary.

Why does it matter? Typically, the share of recurring payments from returned customers with whom you communicated should significantly exceed the percentage of recurring payments from customers with whom there was no communication. This trend confirms that we have chosen the right strategy.

To find out this indicator, we simply check if the client has paid again after the first deposit.

  1. We make a sample for the quarter. We look at the number of payments after dialing and without it. The share of payments after dialing is higher. Our strategy is correct – we influence the client's decision to return to the service.
  1. Next, we see what percentage of customers made more than one payment.
  1. Fix financial indicators. Compare the average customer check after dialing and without it. The difference in terms of the number of payments is noticeable. We also see that customers who have already managed to make four payments after returning have an average check higher. The share of such clients in our case is small (about 3%), so there can be any trends.

What to look for? If the client returned, then he believed that the problem due to which he left was resolved.

For the indicator to grow, it is necessary to analyze the reasons for the outflow of customers and develop retention tools.

For example, a client left a SaaS for email marketing due to poor email delivery. We contact the customer and give recommendations on how to improve delivery. After his return, we must check whether he used our advice. If we failed to raise the indicator, we are once again working on ways to increase deliverability. If this is not done, the client runs the risk of getting a negative experience still and abandoning the service.

Process Quality Metrics

Quality indicators show a balanced process. For example, we received $ 10,000 from returned customers – is this good or bad? And if one client brought this money? And what if 10,000 customers? The indicators below will allow you to see if there are distortions in the process.

Average check

To calculate the average bill of returned customers, you need to divide the income from customers with whom you had communication, divided by the number of customers who made payment after contact.

The calculation of the average value has several disadvantages. For example, the average is distorted for arrays with a large spread in values. For numbers 100, 200, and –300, the arithmetic mean will be 0, and this can not always be interpreted. Therefore, we additionally recommend measuring the standard deviation and the median.

The standard deviation shows how many units each indicator deviates on average from the average value of the sample.

The median splits the sample into two equal parts. Half of the observations lie below the norm, the other half is higher.

What to look for? An excellent way to increase the average bill (tariff changes do not count) is to connect withholding tools. A company offer for customer returns should be helpful and understandable. And most importantly – it contains a solution to the problem that the client encountered.

For example, one of our offers contains personal expert advice. With this tool, we listen and hear the client, and he hears us. We give additional value, and after that, the client is ready to pay his previous payment and not the minimum.

Conversion

Conversion, in churn management, is the proportion of customers who returned to the service, from all customers with whom there was communication.

What to look for? In short: do not take into processing those customers who are “not outflow.” To do this, you need to analyze customer behavior for outflow regularly.

I recommend comparing the conversion rate for customers with whom you spoke about returning with conversions when there was no contact. If the conversion in the second case is higher, then the actions are aimed at the wrong customers. Customers pay without our efforts. So these are not outgoing customers.

Such actions save company resources and help focus on customers who have left the service.

Customer feedback

The reviews help to understand if the customer is satisfied with the service after returning. Naturally, we must focus on improving this assessment.

What To Consider:

  • CSAT (Customer Satisfaction Index). It shows how customers are satisfied with the service at the point of contact with the company (phone, email, or point of sale). For example, in UniSender, customers evaluate the quality of technical support immediately after communication. Now CSAT UniSender 95 out of 100%.
  • CES (Customer Efforts Score). Shows how convenient it is for the client to use the service. Our question is: “How easy was it to register with the service?”
  • NPS (Net Promoter Score). Customer Loyalty Index. Shows what proportion of brand promoters among customers. For example, we ask: “Based on your experience with the company, are you ready to recommend it to your friends and acquaintances?” NPS can be from -100 to 100. UniSender +41.

I will soon show you how to collect customer reviews and how it works in UniSender.

What to look for? Low scores should lead to a more detailed study of dissatisfaction. Analytics and changes should relate to specific employees, employee groups, retention tools, or company products.

The process of collecting feedback should be constant, and its analytics is regular. The main tools for improving the quality of the process and customer satisfaction are made possible by the consistent collection of feedback.

Cyclicity in measurements.

Collection of proposals for improving and monitoring the effectiveness of implemented changes. In which sections to measure outflow

Stationary intervals

I recommend measuring indicators as often as possible. New actions occur in the service every day. Therefore, we must control them.

Customer segments

Typically, different segments will have different indicators. We set different goals for them in conversion and average bill.

Segmentation can also optimize churn management costs. For example, for more profitable customers, you can use phone calls, and for less valuable clients, we set up automatic conversations.

Communication channel

We determine which channel holds customers better: a phone call, a message on Viber, or an email. For each channel, we get different outflow metrics.

How to Reduce Churn?

Let's now try to find out what are the ways to reduce customer churn.

The main goal is to make your product indispensable. It should become such a valuable element of the daily routine of users that they can not go without it for a day.

One way to add value to a product is to remind customers of it regularly. For example, you can send your customers a regular report by email with data on the work done.

Another strategy could be the introduction of a multi-user mode. This function will make your product an integral part of the workflow of the whole company or department, which in itself makes it difficult to refuse the service and switch to something new

What are Acceptable Churn Rate Values?

Is there a norm for an “outflow coefficient”? The typical “good” value for cloud companies working with small businesses is 3-5% per month. The larger your client's business, the lower the churn rate should be, as the market is more modest.

Most startups in the first year experience problems with an outflow of 10-15%, as they only improve their product; however, after some have managed to reduce this value.

Track your churn rate, look for the cause of its occurrence, and work to eliminate the outflow. After all, often, the source of growth is a reduction in existing shortcomings.

–> To discover more about how to reduce your SaaS Churn, check these podcasts and Dan Martell's material.

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