What SaaS Founders Should Know about Churn

There’s something glamorous about getting a new customer when it comes to sales. New customers are a sign of a growing company, and ‘closing’ a prospect is exciting. Yet, in focusing so much on new customers, businesses often overlook existing ones.

This is a mistake because losing customers (churn) can’t just hold back a company’s growth—it can prove fatal to the whole business if high and signals problems early on. It’s especially problematic if the economy enters a recession and acquiring new customers proves to be challenging - replacing churn becomes harder, and your business declines.

Churn: A Brief Overview

When we talk about churn, we’re simply referring to the percent (typically monthly) at which a company loses existing customers and revenue. This is usually expressed in two ways:

Gross Churn: The loss from your installed base (i.e., recurring revenue) as a result of cancellations and downgrades

Net Churn: The loss from your installed base (i.e., recurring revenue) due to cancellations and downgrades, taking into account any expansion from existing customers.

A simple example may help. If your Monthly Recurring Revenue (MRR) from current customers is $5 million in January and $4 million in February, your gross churn rate is 20%. However, if you start at $5 million, lose $1 million in revenue from some customers and gain $1 million from other existing ones, your net churn is 0%.

As a lender, we like companies where gross churn is 3% or less each month. Any figure significantly higher, without explanation, makes us concerned. Imagine a company with a gross churn of 8% monthly. That means they’re losing nearly 50% of their installed revenue in 6 months!

Why Churn Matters

We’ve all heard the phrase, “The customer is always right.” It tends to be said in the context of customer service, but those at the executive level should also think about the axiom in terms of churn. If customers who signed up are leaving in droves, a company needs to accept that they’re right. Unless the customer has gone out of business, their cancellation means something wrong about the product or the way it is being delivered.

High churn can signal that:

• Some customers just aren’t using the product much, if at all

• They don’t find the user experience friendly

• The price is too high

• A competitor has introduced a product that is better or better-priced

Strategies to Reduce Churn

Fortunately, high churn is not inevitable. The key, above all, is to talk to your customers. You have to reach out first, especially to those you notice aren’t using your product much. A conversation may reveal something that you can do to improve their experience. Finding out you have a less than satisfied customer may not be what you want to hear—but you’d rather listen to it while they’re signed up than figure it out after leaving. By that time, it’s too late.

With this in mind, here are some strategies you can use to minimize churn:

• Invest in customer service (or success) - take feedback

• Adjust your pricing - target customers segments with appropriate pricing strategies

• Tweak your user experience - you might find that simple changes can make significant differences

• Add product features for free or even at a premium but which makes the product much more useful

Keeping your customers happy won’t just keep them around: It can also help to win new customers. Word of mouth is a powerful (and free!) weapon in your sales arsenal, and many of those who love what you offer will rave about it to others. Let their brand evangelism flourish.

It’s also crucial to focus on acquiring the right customers. You can have an excellent product, but if you’re selling to those who aren’t likely to use it consistently, you’re asking for high levels of churn from part of your installed base.

It’s Cheaper to Retain than Obtain

Loss of activity and cost goes into winning customers. Firstly, you have developed the product and spent money on marketing and sales teams and strategy. What a waste is customers leave too soon.

Churn is, therefore, costly to your business. By contrast, preventing churn is relatively inexpensive. According to the Harvard Business Review, it is 5-25x cheaper to keep a customer than acquire a new one. So, by all means, find those new prospects. But don’t forget about those who already signed up.

Interested in a smart financing solution for your growing SaaS business? Give us a shout. We’re Element SaaS Finance, and we offer easy-to-understand term loans for software companies. We’d love to hear from you.