Everything You Need to Know About Customer Churn
Are you searching for the perfect hack to eliminate all that pesky churn? A hack so powerful, accounts will always renew, frequently upgrade and never leave?
That would be amazing, of course. But you won’t find such a hack here. Or, anywhere for that matter.
That’s because customer churn reduction is part of the long game — requiring smart strategy and consistent execution — and attrition is an inevitable part of the SaaS world.
If you’re here, we think you’re up for the challenge.
Here’s what you’ll want to know to A) Help users see your solution as an invaluable asset and B) Start on your churn reduction journey:
- Why users are leaving
- How to improve your onboarding
- How to perform a churn analysis
- Finding your churn indicators
- How to maintain customer engagement
What does churn mean?
Customer churn occurs when an account cancels your services. You measure this by calculating the churn rate — the number of customers who leave over a given period of time.
Once you have your churn rate, you’ll see exactly how impactful customer turnover is across your organization. One direct impact is on customer acquisition costs.
Customer acquisition costs (CAC)
The CAC indicates how much you spend on winning a new customer. If you’re investing time and money to acquire customers and they churn before you make back those costs, then your CAC costs rise.
By reducing churn across all stages of the customer lifecycle, you’ll be able to make a higher — and quicker — return on investment when it comes to converting leads. Your efforts will also lead to higher monthly recurring revenue.
Monthly recurring revenue (MRR)
For SaaS companies that rely on software subscriptions, the money earned month over month is often higher than new sales. That’s why MRR is the lifeblood of any subscription business.
Addressing churn is critical to reducing CAC and increasing MRR.
Small numbers, big impact
While churn goes by many names — say, customer attrition and turnover — these phrases represent the same outcome: Lost revenue.
No matter how strong your marketing strategy is, or how effective your lead-nurturing approach is, every customer costs money to obtain. And, as SaaS thought leaders are fond of saying, acquiring a new customer can cost five times more than retaining an existing customer.
Addressed another way, a 5% increase in customer retention can increase profits by 25% to 95%, according to research from Bain & Company. Long-term customer loyalty directly translates into cost savings.
The benefits are clear. But before you start to tackle churn, it’s important to understand the stages of the customer journey where it’s most likely to occur — and why it’s happening.
Types of customer churn
Not all churn is created equal. If clients are leaving soon after completing onboarding, it represents a vastly different issue than those who leave after years of a relationship with your company. To create a strategy that effectively addresses churn, you’ll need to address the causes behind both.
When it comes to customer churn, there are two distinct kinds: Avoidable and unavoidable.
- Avoidable churn: This customer seemingly matched your segmentation, and should have found value in your software. What happened? Avoidable churn is the red flag that signals something isn’t right. This could mean there’s a gap in your service or that platform itself. It’s critical to evaluate your processes early and often and to ensure there are touchpoints and open the lines of communication between your users and your organization.
- Unavoidable churn is more rare, but happens due to reasons your team can’t really control, like when customers go out of business. While some SaaS companies also include a champion leaving as a contributor to unavoidable churn, later we’ll go into why that’s not entirely true.
Why SaaS customers leave
Here are some common reasons why users attrit:
- Inability to adopt: Identifying the stakeholders early on is crucial. So is focusing during user onboarding to ensure your new customers are seeing the value of your software and understanding how to use it. If users aren’t using key features, it’s a huge red flag that churn is around the corner.
- Starting off on the wrong foot: The onboarding process is your opportunity to build the foundation for a long-lasting relationship with customers. It’s here you should address any of their concerns, learn more about their business challenges and walk them through getting value out of your product.
- Lack of support: Users are likely to churn when there is no person or system in place to provide them with prompt support to overcome the initial obstacles they face when getting up and running. If you take too long to come back with answers to their questions, they may just get discouraged and prefer to quit instead of endlessly waiting for someone to follow up on their issue.
- Poor product/market fit: Trying to sell to everybody will only result in a higher churn rate as customers begin to realize your product doesn’t fit their needs. This poor sales strategy will also lead to spending more resources on opportunities that will eventually attrit.
- Failed product iteration: CS and product development teams may fail to gather and integrate the data and feedback users generate. The consequence is that without the right information, your product strays from customer needs and increases the likelihood of customer churn.
- Lack of user engagement: It’s up to your team to ensure you develop initiatives that re-engage customers and help them find the value they may be missing.
- Not keeping a pulse: Your team can get so focused on what’s happening inside your own product that they stop considering what other alternatives buyers have. This can cause users to churn because your competitors fill a new market need that you may not even be aware of.
- No logical updates: What happens if users are happy with your product but it’s missing features for their new needs? If they have no choice but to look elsewhere to fill the gap, then you’ve missed an opportunity for expansion. Aggregate user feedback and always be thinking about how you can take the next step in filling your users’ needs.
- Not achieving outcomes: Customers churn when they’ve been with you awhile but still haven’t filled the need for which they purchased you. That’s why establishing these desired outcomes early and ensuring success in hitting them is critical to a lasting relationship.
On paper, these causes of churn may seem obvious. Unhappy customers churn and satisfied ones stay. But if the equation were that simple, you probably wouldn’t be reading this. It’s easy to say why a customer left after they left. The key to reducing churn is to find and solve why a customer may consider leaving before they ever do.
Spoiler alert: There’s no crystal ball required, just a little bit of CS magic.
Adjusting your onboarding strategy
If your churn is primarily generated in the early stages of the customer lifecycle, your onboarding could be the culprit. In a recent webinar hosted by UserIQ, 76% of SaaS companies said they don’t think their company delivers wins during the onboarding process.
So how do you change that?
Monitor your customer’s time to first value. If it’s taking them too long to get there, there’s an issue. Onboarding should help a user get to the point where they’ve found the core value in your solution, and they understand how it will help to achieve their business goals.
Create and define specific processes and goals throughout each stage of onboarding:
- Initial contact. As CS engages with the new user, they should be made to feel welcome through a brand-appropriate first impression. Your team should come to this meeting armed with a full debrief from sales to ensure you have a clear understanding of the client’s challenges and goals. Create an agenda for next steps and assign any upcoming action items before you meet.
- Kickoff. Provide users with their login credentials and relevant info. Define the customer’s success metrics and ensure everyone has shared expectations for onboarding. Ask questions about how they think the process will so that you can provide the most meaningful resources for them.
While some customers look forward to a hands-on, self-service approach, others may be expecting more guidance in the early stages of onboarding.
- Training. Show customers the most relevant features to their needs. Explain each as well their role in the organization’s success. By highlighting these specific features, you’ll be able to minimize time to value. Don’t feel like you need to show them everything you product does — introducing them to more features later on in the relationship is great way to maintain engagement.
- Adoption. The product is officially integrated into the client’s operations. Once you’ve determined that customers have achieved their short-term goals, establish a feedback loop so that you can find opportunities to further improve your onboarding. From here on out, the name of the game is maintaining their engagement and creating your next brand promoter.
Understand and fulfill your responsibilities from first contact all the way through adoption to maximize customer success.
If your team needs some help with onboarding, one option is to use a guided tour software that lets them combine both high-tech and high-touch approaches to CS. Walkthroughs help to reinforce customer onboarding for your users — wherever they are in their journey.
The effective onboarding program is one that is personalized to your customers’ needs while still being scalable no matter the size of your user base. As you begin to adjust your processes, you can start to perform a churn analysis to figure out where your team stands.
How do you perform a churn analysis?
One of the biggest questions CS teams have is whether their churn rate is “good.” It’s important to remember that although the average churn rate for SaaS companies is about 5%, this number will vary significantly across businesses and product types.
But for this example, let’s stick to that mythical 5%. Having a customer churn rate below 5% seems like a win if you’re a SaaS company, right? After all, you’re keeping 95% of your users.
Not so fast, buckaroo.
A 5% churn rate still means you’re losing half your customers each year.
The result of this loss means that if you want to grow at all, you actually have to work four times as hard to win new accounts. Twice as hard just to replace those customers, and then more to add to your overall customer and MRR.
No matter how strong your product and marketing teams are, maintaining your customer base falls primarily on the shoulders of your CS team. A big part of that is conducting a churn analysis.
To conduct this analysis, you’ll need to calculate your churn rate on a regular basis. As your team begins to track this number, you’ll start to notice patterns across accounts that tend to point toward dissasafication and, eventually, churn.
Analyzing your churn doesn’t only mean knowing what your churn rate is. It’s about figuring out why customers are churning at the rate they are, and how to fix the problem.
How can you predict churn before it happens?
When a customer’s experience with your product doesn’t align with their pre-purchase expectations, they churn. And, while this is occasionally inevitable, there are ways that your team can look into the future and prevent customer dissatisfaction before it ever has a chance to happen.
To reduce churn, you need to get ahead of the loss by identifying leading indicators that could be considered red flags. These metrics will help you identify when a customer is about to stop using your product and cancel their contract — before they ever actually decide to do so.
Indicators of customer churn
The key to reducing customer churn is to forecast its approach. And the secret to forecasting its approach is to monitor churn indicators.
Although your churn reduction strategy will reflect the unique needs of your users as well as the pain points specific to your customer lifecycle, there are some common ones shared across the SaaS industry:
- A drop in usage. Usage indicators will vary depending on the type of solution you offer and can include metrics such as total users, time spent in the app and log-in frequency. No matter which is most relevant to your product, if you notice that a customer’s usage pattern has noticeably dropped, churn is often the next step. Deploying an outreach initiative such as a personalized campaign is one effective way to check in with the customer and address any challenges they’re having before it’s too late.
- Organizational changes. While you can’t necessarily control this variable, it’s one that your team can plan and prepare for. Change is inevitable — people leave companies all the time. For example, if you sell a content management system (CMS) and the marketing director who championed your product leaves, there’s a strong likelihood that their replacement will have a different platform preference. While you can’t influence stakeholder changes, you can set your team up for success by growing your sphere of influence and fostering deeper relationships at the customer’s company. That way when — not if — your original champion leaves, your company still has a contact who understands the value you bring to their organization.
- Customer feedback. If you regularly collect customer feedback through a multichannel approach, and recent sentiment has been trending downward, your CS team should intervene immediately.
No matter which metrics your team monitors, it’s important to remember that predictive indicators are only helpful if they stimulate action.
You know what the stages and signs of churn are. Now it’s time to figure out where your customer success team stands and how you can fix it.
Improving customer success processes
You’ve listened to your customer’s feedback. You’ve started to monitor predictive indicators of churn to figure out where you can step in. And, now, it’s time to put all of that customer knowledge into action.
Rather than waiting for account health to fall under what your company defines as a good score, leverage the metrics you monitor to create a proactive strategy. From there, you’ll be able to activate the right levers across the customer journey to ensure satisfaction.
While your exact strategy may vary depending on the pain points specific to your users, some effective methods include:
Reach out to your customers before they need you. If you’ve noticed a dip in their usage patterns, it could indicate that they’ve run into a bug or aren’t getting the same value from your solution. Or, if they’re only making use of a fraction of your software’s capabilities, highlight some of the functions that could offer relevant value to their company.
A proactive customer service strategy delivers cost savings and boosts retention. If you wait for customers to come to you with issues, they’ve already registered frustration with either your product or your service and are at greater risk of churning.
Ask for feedback often
If you don’t already have a Voice-of-the-Customer (VoC) program in place, that’ll be a crucial step in reducing churn. Your users want to know that their voice is valued, and your team needs to know how to improve to deliver success to your users.
Use NPS surveys, either in-app or via email, so you can define your detractors, passives and promoters. By segmenting NPS responses to get an even deeper understanding of your users, you’ll be able to take targeted actions to turn every customer into a product champion.
Leverage customer history
No matter how strong your CS strategy is, some churn is inevitable. On the plus side, there’s a silver lining — data, and lots of it.
When turnover does happen, you have a full case study on customer dissatisfaction within the context of your own company. Use that account as a way to predict key signs of potential churn for future customers. Doing the same analytic breakdown of happy customers can also clue you into what pieces of your strategy work the best, so you can apply a consistently high-quality approach across your client portfolio.
The importance of playbooks
Playbooks are relatively new in the CS space, but they offer some serious benefits. With a playbook in hand, your CS representatives will have a guided path to shepherd customers toward success.
While we’d all love to work one-on-one with each user, as an organization grows, that becomes increasingly difficult to achieve. However, by building scalable processes to manage CS teams, you can assure that customers are receiving consistent, high-quality experiences no matter how many accounts your team is managing.
Playbooks are highly unique to your own business and your team’s processes. The overarching goal is that they’ll help to continuously move customers along a path of success.
Once you identify which churn indicators you’re looking to tackle, you’ll need to include specific tasks for CS representatives to execute depending on changes in each. For example, if you provide a content management system solution and a user hasn’t uploaded any new media within the past week, a team member would have the exact messaging and outreach strategy at their fingertips.
Playbooks help to better allocate employee time and resources. When creating your processes, keep in mind they should help to automate low-touch interactions so that your team can focus their efforts on more valuable strategies.
Once you have consistent and scalable processes in place to best serve customers, you’ll be well along the path of combatting churn.
Staying ahead of churn
For SaaS companies, retaining users and increasing customer lifetime value is critical to success. Churn poses a constant threat to this goal. But, once you’ve identified the primary causes of friction across the customer journey, your team will have all of the tools you need to manage churn before customers ever leave.
The most important thing to remember is that this is a continuous process. After you’ve tweaked your product and customer service strategy to improve user experience, keep monitoring the health of your accounts to stay ahead of any issues down the road.
Once you have your churn strategy down to a science, you’ll quickly see the benefits for both your users and your company.
Ready to take on churn? Learn how UserIQ can give your team tools to create better customer outcomes.