SaaS Churn (Part 1 of 3): Why Churn Happens & What You Can Do About It
This is the 1st in my series of posts about churn in SaaS. In these posts, I discuss the details of why churn happens, how you can analyze it and what you can do to prevent it.
You can read Part 2 of the series here.
Losing customers can be detrimental to the growth of any SaaS business. In the early stages of growth, losing customers might indicate that you do not have a product-market fit. This then necessitates going back to the drawing board and validating the problem you’re trying to solve with the customers. Losing customers in the later stages of growth might even result in a growth ceiling where your business simply stops to grow!
Hence, churn results in a leaky growth funnel. Churn is bad. Churn is your enemy. And it needs to be tackled in a systematic way.
Before I get into the details of why churn happens and how it can be tackled, please note that some churn is unavoidable. If your SaaS product caters to SMB businesses, a 3–7% monthly churn rate might be acceptable. On the other hand, if your product caters largely to enterprises, monthly churn as low as 1% might be acceptable. If your churn rate is higher than these numbers, you should tackle churn on priority before focusing on any of the other stages of your funnel such as conversion, expansion etc.
Churn can be of 2 types:
- Revenue churn, where you lose revenue and not always the total numbers of customers
- Logo churn, where you lose customers that might or might not affect your overall revenues
To keep this post simple, I’ll use the more simpler definition of churn i.e logo churn.
When you analyze the lifecycle of a customer’s relationship with your product/business, you will realize that churn can happen at any stage — early stages when the subscription has just been purchased, middle stages when they are using your product or later stages when the subscription is due for renewal. The diagram below shows a quick summary of the reasons for churn in various stages of this lifecycle.
In the next few points, I’ll discuss each of the reasons for churn you see in the different stages of the lifecycle above in greater detail. I’ll also discuss potential solutions for each of those reasons for churn.
Product Onboarding
Great product onboarding is critical to customer success. If your customers are confused about the steps they have to perform before they can start using your product, you don’t have a great onboarding experience. Or if your customers feel the need to speak with you to understand how they can start using your product, you haven’t built an intuitive onboarding experience within the product.
SaaS startups selling to SMBs need to invest time in making the product onboarding seamless. You cannot have customers getting frustrated and canceling their subscriptions before they have even started using your product!
I should add a caveat that onboarding needs to be handled differently if you sell to larger enterprises where your annual contract value is in tens of thousands of dollars or higher. In this case, given that the contract value is huge and that the product is more complex, you need a customer success or a post-sales team to provide that differential service where you handhold your customers throughout the process of onboarding. On the other hand, onboarding experience for SMBs should be intuitive and friendly so that manual intervention is not required.
Solution: Invest your time in making your product onboarding intuitive so that your customers can start deriving value out of your product almost immediately on purchasing the subscription!
Adoption Within Teams
Sold a multi-user license product to a team and only a minority of the folks are using your product? Chances are that they will either downgrade their subscription or worse, cancel their subscription during renewal.
Solution: Ensure that all the relevant folks in the team have adopted your product. Unfortunately, a sale is not enough and you need to ensure that the licenses are getting utilized and all the relevant folks in the team are using your product. Use automated email campaigns to drive adoption within teams or create use cases in the product itself that require team members to collaborate in the product. Or if you have a customer success team, ensure that they use Adoption & Usage Rate Within Teams as one of the metrics they track.
Occasional Usage
If your product is a painkiller that is used by your customers sporadically, chances are that they will cancel their subscription sooner or later. They are certainly able to derive some value from your product but is the value enough for them to continue their subscription year after year? Perhaps not!
One of the major reasons for churn for the website testing product (called Live) at BrowserStack was that people ended up using the product only occasionally. Invariably they would cancel their subscription at some point in time. Among the ones who canceled, only 1/3rd came back and purchased a subscription again. Given that you need to do website testing only occasionally, it was difficult to change this fundamental behavior.
Solution: If you cannot convert your painkiller product into a vitamin where the usage is more regular, you could look into building tangential products that solve some of the other related problems for your customers. Remember, you’re trying to increase the value that your customers derive out of your product. Tangential products can help drive the overall value perception among your customers.
In my previous example of BrowserStack, the company ended up building a few other products that increased the value it provided customers manifold. In addition to opening new markets for the company, it also helped reduce churn at an organization level where the customers were now using one or more products of BrowserStack almost all the time. As a result, even though they might cancel their subscription for one of BrowserStack’s products, they would still maintain their subscription for one or more of the other products.
Technical Issues With The Product
I don’t need to add much here. :) Build a product that just works beautifully. Build a system that is scalable. Minimize the issues reported to you by your customers. Customers churning because of technical issues with the product is simply unacceptable!
Bad Customer Service
It is not enough for your product to be of superior quality. If your support team is unresponsive or not helpful, it can lead to customer frustration. And if that were to happen often, it will invariably lead to frustration building up over time which might result in customer churn.
Customer’s Company Shut Down or Got Acquired
This is pertinent only if you’re selling to SMBs. Smaller businesses shut down frequently. Sometimes they also get acquired. There is not much you can do about this form of churn. In case of an acquisition, hopefully the parent company can also start using your product.
Champion/Hero Leaves Company
If you sell to enterprises, you will almost always have a champion within the customer’s team who loves your product and who ends up evangelizing your product within his or her organization and perhaps even to the world outside. If you have a hero who has been responsible for the introduction of your product within his or her company, there may be a chance that the company might stop using your product once he or she leaves the company.
Solution: Get more people in the customer’s team to actively use your product and eventually, cultivate more champions in the customer’s team. If enough people see value in the product, you will reduce the likelihood of churn. Also, maintain your relationship with your initial champion. More often than not, they will introduce your product to whichever other company they join.
Pricing (Can’t Afford It Anymore / Moved to Competitor)
Some customers might churn because they can’t afford your product anymore or because competitor’s offer similar products for a lesser price.
Solution: If a customer can’t afford your product anymore, perhaps you should let them go. Reducing your prices is never a sound strategy as you will always have customers who find your product expensive. On the other hand, if you have a competitor who is undercutting you on price that is resulting in your customers leaving in droves, your strategy to tackle this is dependent on many other things. Reducing prices is never really the answer. And if the prices have to be reduced, it has to be a factor of many other things such as overall market size, your funding, your competitor’s funding, markets you’re focused on etc.
Don’t See Much Value In Your Product Anymore
If a customer churns because the product doesn’t add much value to them anymore, perhaps you have stopped innovating on the product. In such cases, these customers are most likely moving to a competitor. The problem with this kind of churn is that sometimes it might just be too late to recover if the market has too many competitors who are innovating and iterating on their products at a much faster pace than you are.
Solution: Needless to say, you always have to keep iterating on the product and adding more value to it. If you don’t do so, some day your competitor would.
Credit Card Issues During Renewals
A large part of churn, especially when you’re selling to SMB, is almost involuntary where you lose customers because you’re not able to charge their credit cards during renewals. This could be because the customers credit card has expired or customers have canceled the credit card they had used to purchase the subscription.
Solution: Use Stripe as your payment gateway. They work directly with Visa, Mastercard and Diners to automatically update the expiring credit cards. Alternatively, you could send a series of dunning emails (eg. 1st email on the day the renewal failed, 2nd email two days later and a 3rd email maybe a week later) to your customers to remind them of the renewal and to request them to update their credit card information. Generally, SaaS companies tend to send such emails only to the account administrators who had purchased the subscription. At BrowserStack, we experimented with sending one or more of such emails to the team members as well who actually use BrowserStack, in addition to the administrator. This helped reduce churn as the folks who used BrowserStack then requested the administrator (who might be from the finance or accounts team) to update the card details immediately so that their access to the product was not revoked.
In the next few posts, I’ll cover a few more ways in which you can tackle churn in addition to the solutions mentioned above. I’ll also talk about the steps you can undertake to understand exactly why your business has churn and how you can prioritize the various solutions for churn.
Update: You can read Part 2 and Part 3 of the SaaS Churn series here and here
