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Churn is the enemy of any subscription company.
It’s normal for customers to come and go, but if your retention rate is slower than new customers signing up, then something has to change.
According to McKinsey, 92% of SaaS businesses failed with yearly growth rates of less than 20%. One of the most common reasons for failure was a lack proper of retention strategies in place.
In this blog, we will see some of the most common causes of SaaS churn and actionable advice on how to combat them. You will be able to keep your subscribers engaged and onboard more new users.
What is the SaaS churn rate?
A high churn rate indicates dissatisfied customers or a need to reassess your target customer’s need.
The churn rate has a direct impact on revenue as a spike in churn corresponds to a drop in revenue.
Churn rate signals if your customer base is growing or shrinking when combined with new customer acquisition metrics and helps you forecast whether that base will continue to grow or shrink. In this way, the churn rate is a primary way to gauge whether your business is growing or not.
Monthly Churn Rate vs. Annual Churn Rate
The main difference between monthly and annual churn rates is the time period over which the rate is calculated:
Monthly churn rates compound over time, so a monthly churn rate of 5% translates to a much higher annual churn rate. For example, a 5% monthly churn rate means a business will have a little over half as many customers at the end of the year as it did at the beginning.
Customer Churn vs. Revenue Churn
We should measure SaaS churn not only by counting customers but also by counting revenue. While customer churn is the number of customers that have discontinued their subscriptions in a given period, revenue churn refers to how much revenue the lost customers translate to.
At the end of the day, every business wants to make a profit, right? So if one single customer pays you $1M annually with a 40% gross margin, your business is definitely making money.
But you don’t want to put all your eggs in a single basket. Hence, it's important to look at both the customers and revenue churn and decrease both of them.
Let’s say your product has a $10 per month and a $100 per month pricing plan. Loosing 5 customers paying $10 per month is still good compared to losing one customer paying $100 per month.
Voluntary vs. Involuntary Churn
Also known as proactive churn, voluntary churn occurs when a customer intentionally cancels a subscription for reasons such as dissatisfaction with the product, better offers from competitors, or a change in their needs.
Involuntary churn, also known as passive or delinquent churn, occurs when a customer can't continue using your service for reasons beyond their control. Common causes include payment issues such as expired credit cards, declined transactions, and bank errors.
Voluntary churn is more common but involuntary churn is more painful. If you meet the needs of your customers, it’s possible to reduce voluntary churn. The first step is to figure out why people are churning in the first place.
Involuntary churn is easier to tackle. In most cases, customers didn’t want to churn so if you take proactive measures, you will be able to reduce the churn by a large amount.
Is There Such a Thing as a Good Churn Rate?
For any business, having a zero churn rate is ideal, but in reality, it’s an unattainable feat. Some user attrition is inevitable regardless of the circumstances.
Generally, an annual churn rate between 4% and 7% is manageable. But, different industries have their unique benchmarks for what is considered an acceptable churn rate. So, a “good” churn rate for your SaaS product should align with your specific sales goals and also prevail within your industry standards.
Factors that Impact Average SaaS Churn Rate
Multiple factors have an impact on the average SaaS churn rate, including:
B2B SaaS Churn Rates vs. B2C SaaS Churn Rates
Compared to B2C SaaS churn rates, B2B SaaS churn rates are significantly lower.
That means B2B SaaS companies tend to experience less customer churn as their relationships with customers are often more stable and involve longer-term contracts.
B2B customers are generally less likely to switch providers quickly.
Hence a typical B2B SaaS churn rate is around 5% whereas a B2C SaaS churn rate is considerably higher depending on the industry.
How SaaS Company Size Impacts Average Churn Rate?
Larger companies and enterprises see lower churn rates, around 0.5 and 1% monthly. SMBs experience higher churn rates, between 3 and 7% monthly, because of shorter subscription cycles and different customer dynamics.
Typically larger SaaS companies have lower churn rates than smaller companies. This is because larger companies often have more stable clients, longer contracts, and higher switching costs.
Smaller companies have higher churn rates than larger companies because of shorter subscription cycles, a less stable customer base, and less revenue from enterprise deals
Churn Rates by Industry
Churn rates vary by industry. Here are the median customer churn rates by Industry for 2024 according to B2B NPS® & CX Benchmarks Report by CustomerGauge:
How Contract Lengths Affect Retention Rates?
Longer contracts are generally associated with lower churn rates for SaaS businesses. Here’s why:
However, longer contracts can backfire if customers become dissatisfied or outgrow your solution. To keep customers engaged throughout longer contracts, you should provide exceptional customer service, regularly update the product, and offer tiered contracts with different lengths and pricing options.
How to Calculate SaaS Churn Rate?
Usually, SaaS products that send invoices to their clients monthly and have relatively inexpensive subscriptions measure their monthly churn rates. But, mid-market and enterprise SaaS products focus on annual or quarterly churn. Here’s the formula to calculate monthly and annual churn rates.
Churn Rate Benchmarks for SaaS Companies
The B2B SaaS industry has experienced several ups and downs following the pandemic, which is depicted by the churn rate.
The average monthly user churn rate was peak at 7.5% in late 2021 for B2B SaaS.
It has since decreased and stands at approximately 3.5% as of the first half of 2024.
The benchmark for sustainable growth in SaaS is an annual churn rate of less than 5%.
There are variation between SMBs and enterprise SaaS companies.
SMBs have an annual customer churn rate of 3 to 5% while enterprise SaaS has a churn rate of 1 to 2%.
Common Mistakes in Calculating Churn Rate
Watch out for the following common mistakes that can skew your churn rate calculations:
Mistake #1: Focusing Only on User Churn and Ignoring MRR Churn
A major error is focusing solely on user churn while neglecting MRR (Monthly Recurring Revenue) churn. User churn measures the percentage of customers leaving, but it does not reflect the financial loss. MRR churn tracks the revenue lost from cancellations and failed payments, giving a clearer picture of the financial impact.
For example, losing 7% of low-paying customers might not significantly hurt your revenue, but if two high-paying enterprise customers churn, your MRR churn will be much larger. Ignoring MRR churn gives a false sense of stability, even when revenue is slipping away.
Tracking both user churn and MRR churn provides a complete view of customer and revenue loss.
Mistake #2: Counting Cancelled Customers as Churned
Many businesses count canceled customers (who have indicated they will stop at the end of their subscription period) as already churned customers. Canceled customers still represent an opportunity for retention, as they haven't yet stopped paying. Around 45% of customers who cancel do so weeks before their subscription ends, leaving room for retention efforts.
If 12 customers cancel but you recover 6 through customer outreach, your churn rate is significantly lower. By treating these customers as churned, you ignore the opportunity to engage them, distorting your churn metrics and harming future projections.
Focus on retaining canceled customers through proactive customer support before they officially churn.
Mistake #3: Always keep your eye on the parts of the customer lifecycle that have an impact on churn
The lifetime of a customer is a multi-faceted churn event. You need to examine each stage of the customer lifecycle independently to get the churn rate in the short, medium, and long term. Customers who stick around for a while are more likely to have a low churn rate than new ones, who often disappear as soon as they don't see any value.
The churn rate of a cohort might start at 10% and drop to 2.5% after four months and 0.2% after eight months. Your churn reduction strategies will be ineffective and customer retention will remain a mystery until you follow these steps to analyze churn.
Use the phases of the customer lifecycle to categorize churn and implement targeted strategies. Improve onboarding for new customers, resolve ongoing issues for intermediate users, and upsell to long-term customers.
Mistake #4: You should not ignore the fact that churn varies across price points
Customers in lower tiers tend to churn more frequently than those in higher tiers or with longer contracts. You won't know where your customers are leaving unless you break down turnover by price tier.
Lower turnover is observed among enterprise clients, who often have longer contracts and receive more specialized attention. On the other hand, low-tier customers tend to churn more often, although having a lesser individual financial effect. But losing these clients over and time again hurts your brand's credibility and development potential.
Determine which parts of the business need more work by breaking out churn by plan type. Low retention rates among high-tier customers have a major impact on MRR, thus addressing this issue is of the utmost importance.
5 Actionable Strategies to Reduce Your SaaS Churn Rate
Reducing churn requires a thorough approach to managing the root causes of customer attrition. Here are five strategies that will help you improve your customer retention:
1. Regularly conduct usability testing & user interviews
It’s always a good idea to test your early prototypes with a small set of users. With some basic usability testing, you will find out where the most obvious mishaps occur in your product. This way, you can make changes in your product that will preemptively reduce your churn rate when your product hits the market.
User interviews will provide a lot of insight into your customers’ needs. It will guide you towards creating a product that is valuable to them and directed at their needs and aspirations. It’s important to have an ongoing feedback loop that includes usability testing and user interviews before any major release or launch.
2. Improve Customer Onboarding Process
Once you've aligned your product with customer needs through usability testing and user interviews, it's important to ensure new users have a great start with an smooth onboarding process.
A smooth onboarding process is important to set the stage for a positive customer experience. Offer tutorials and demo videos, provide clear and concise instructions, and assign a dedicated onboarding specialist to guide your customers through the initial setup. Help your customers hit the ground running as quickly as possible to reduce the chances of early churn.
Collect feedback from your customers during the onboarding process. This feedback will provide data into areas in your onboarding process that need improvement and address any pain points early on. Actively listen to your customers and make necessary adjustments to improve the onboarding experience, increase customer satisfaction, and reduce churn.
3. Improve Customer Service & Support
After a successful onboarding experience, continued engagement and support are critical to ensure long-term customer satisfaction and retention.
Responsive customer support makes or breaks the customer experience. Invest in a knowledgeable support team that will promptly address any customer concerns and provide personalized solutions. Implement self-service options such as community forums and detailed knowledge bases to reduce their reliance on support teams and provide quick answers to very commonly asked customer questions.
In addition to providing excellent customer support, proactively engage with your customers. Regularly check in with them to offer assistance when necessary and ensure their needs are being met.
4. Encourage customers to opt for annual pricing plans
In addition to excellent customer support, offering flexible and appealing pricing options can further solidify your long-term relationships with your customers.
Increasing the proportion of annual plans in comparison to monthly plans helps reduce churn in SaaS companies.
Some strategies to incentivize your customers to commit to annual contracts include:
- Highlight your annual pricing plans clearly on your pricing page
- Offer a discount of 15-20% on annual plans
- Set up email campaigns to get monthly plan customers to switch to your annual plan
5. Track Service Consumption
Along with offering flexible pricing, understanding how customers are using your product is key to identifying opportunities for improvement in your product and thus reducing churn.
The more you track how your customers use your product, the more you can prevent churn. Granular usage data will give you indicators of a lack of feature adoptions or poor user experience so you can take pre-emptive actions.
Share these insights with your product team to implement them in the product and to create more stickiness in your SaaS product to reduce churn.
This way, you can significantly reduce churn over the long term by refining each aspect of the customer experience - from product development to pricing strategies - and building strong relationships with your customers.
Tools and Software for Monitoring and Reducing Churn Rate
Let’s explore the tools that will help you monitor and reduce your churn rate:
1. MeetRecord
MeetRecord helps reduce customer churn by leveraging its AI-driven meeting analytics and insights to improve customer experience and engagement.
MeetRecord captures and organizes key discussion points and action items during customer meetings. This way, you can timely follow-ups with your customers and address customer issues.
Historical meeting analysis helps pinpoint customers who are at risk of churn based on behavior patterns, such as decreased engagement, repeated unresolved issues, or negative sentiment over time.
MeetRecord allows teams to review customer meetings for training purposes. You can learn from past customer interactions - both successful and failed - and thus help your customer-facing team members to continuously improve their communication and problem-solving skills to reduce churn.
2. ChurnBuster
ChurnBuster ensures your customers update their payment information thus saving you thousands of dollars every month.
Churnbuster will send out emails in the case of failed payments. Churn Buster will also reach out on your behalf if you have the phone numbers of your customers.
Using ChurnBuster to reach out to customers via phone substantially increases the number of customers updating their payment information.
3. Intercom
One of the first commercial software startups to apply AI for customer support was Intercom, which aims to lower churn and save time and money. Intercom helps re-engage existing customers with targeted email marketing, provides self-serve support, chatbots, and product tours.
Conclusions
You are not alone if your SaaS company is experiencing significant churn rates. Don't give up. Although churn is a prevalent problem in subscription businesses, there are solutions available.
Take proactive measures to keep your clients from leaving, and be mindful of the possible dangers.
Recognise the main causes of churn and take action to solve them in order to lower your churn rate and maintain business growth.
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