Customer success is the growth engine of every business. It’s the only component that helps companies retain customers, expand them, and create advocates that will bring in even more customers in return.
Investing in your customers’ success is always important, but it’s even more so in times of crisis when reducing churn is the only way you can avoid going out of business.
When times get tough, companies look for ways they can reduce their expenditures – they reduce employee headcount and cancel subscriptions for nonessential tools. Your goal should always be becoming indispensable for your customers.
Sure, things might be a little better now than they were 2 months ago. But, if the 2007 Financial Crisis taught us anything, it’s this: it takes years to come back after an economic event of this magnitude.
This is why we’ve decided to put together this article for any SaaS businesses out there facing high customer churn. We’ll discuss the KPIs you need to watch, the types and impact of customer churn you can expect, and what you need to do to avoid it.
How to measure customer churn
Churn can be measured in two ways: customer and revenue. At the same time, there are two types of churn rates you can measure: gross and net.
The gross MRR churn rate is the percentage of total monthly revenue lost from contracts that your customers canceled. To calculate it, you need to take your MRR churn (the sum of any canceled contracts), divide it by your MRR at the beginning of the month, then multiply it by 100 to get a percentage.
The net MRR churn rate, on the other hand, is the percentage of total monthly revenue lost from canceled contracts, modified by any additional revenue from upgrades or service expansions from your remaining customers. To calculate it, start with your MRR churn and subtract any revenue gained from customers you managed to upsell. Then, take that number and divide it by your MRR at the beginning of the month, and multiply by 100 to get your net MRR churn rate in the form of a percentage.
When analyzing churn, we recommend you look at the net MRR churn rate as it gives you a clearer picture of what revenue changes you can expect from your current customer base. If you measure it by segment, it can also give you insights into how well you’re able to serve various customer segments.
At the same time, when we analyze churn, we want to get down to a root-cause analysis that can help indicate whether our customers churn voluntary or involuntary. And the best (and easiest!) way to do this is by talking to your churned customers and finding out what determined them to leave you.
This type of analysis identifies the patterns and drivers of churn at every stage of the customer journey. It’s crucial that you identify the causes of churn so you can address and prevent it in the future.
Depending on what causes a customer to leave you, churn can also be split into voluntary and involuntary.
Voluntary churn means customers voluntarily choose to leave you. Involuntary churn, however, can be caused by factors customers might not even be aware of (like their credit card expiring).
At the same time, customer churn represents the lost number of customers. If you don’t have a good relationship with your customers, or if your product is nonessential, this is the type of churn you can expect.
For this, keeping an eye on your Account / Customer Retention Rate can help you anticipate and prevent churn early on.
If you can’t convince your customers to keep their current subscriptions, the next best thing you can do is to persuade them to downgrade it instead of canceling it. This is known as revenue churn, and it has a direct impact on your MRR, even if you manage to keep most of your current customer base.
Revenue churn is better than customer churn because even if your profit diminishes, at least you have a steady flux of income. You also have the opportunity of upselling your customers in the future.
But measuring churn is not enough – you also need to know what causes it. From this point of view, churn can be voluntary or involuntary.
How to reduce churn
To be able to determine what causes your customer to churn, you should keep an eye on the following KPIs:
- Decreasing customer engagement / product usage: this is when tracking metrics like Time on site or Number of support tickets comes in handy – if your customers are using your product less and less, that’s an indicator they might churn soon;
- Account management changes: when the person in charge with the account changes, their preferred tool stack might also change; new business needs can also indicate churn if your product no longer supports your customer’s interests;
- Account/Customer Retention Rate: the percentage of customers/accounts you retained over a given period;
- Changing product adoption trends over time: how many of your users are aware of your product, understand its value, and use it regularly;
- Relationship Depth/Quality: this is a hard KPI to measure, but it’s a good indicator of customer loyalty;
- Business Health/Industry Health: a comprehensive evaluation of crucial elements that could threaten your business or your industry in the future.
Once you know what you’re up against, here are a few tactics and solutions:
How to reduce voluntary churn
These are the most common reasons why customers voluntarily choose to cancel their subscriptions during crises:
1. Onboarding is too difficult
The way a customer relationship begins is often a good indicator of how it will end. If the customer has a rough time onboarding, it might be difficult or impossible to recover.
This is why you should always prioritize developing a consistent and successful onboarding process. If your product is hard to use, you’ll lose a big business opportunity as your customers will decide to switch to a competitor whose product/service is more intuitive.
Define goals your customers should achieve during onboarding and track their progress. If they get stuck, send them tutorials or offer consultation sessions.
2. Your product quality is bad
In these situations, having a risk mitigation strategy is mandatory. You cannot always prevent threats, but having a strategy in place to help lessen the effects of these threats will help you improve your retention rate in the long run.
You should also make sure you respond to your customers as fast as you can, and acknowledge your fault and outline the actions you will take to solve the problem.
3. Customer support is bad or non-existent
Ideally, you should regularly collect the right support data and make informed decisions to ensure the quality of the support you’re offering, so this issue would never arise.
However, for some SaaS businesses, crises come with a high influx of traffic, which means more users than usual need help. In cases like these, one solution could be growing your support team, if possible.
4. Your competitors are stealing your customers
Call 10 churned customers and ask them what caused them to switch to a competitor.
Alternatively, you could send them a survey. But if they’ve already left, they probably won’t fill it out anyway, so calling should give you better results.
5. You have a missing feature
This can be closely related to the situation above. In crises, customers’ needs and priorities can change, and if your product/service no longer meets their demands, they’ll switch to one that can, even if they’ve previously been happy with you.
In this situation, you need to find the root cause – what are your customers trying to achieve?
One solution could be to build that missing feature as fast as you can. But if you can find a workaround, you can teach your customers how to use your product, if the solution is not immediately obvious to them.
How to reduce involuntary churn
Sometimes, customers might churn not because they want to, but because they have to. Or, sometimes, they might not even be aware they’re churning. It’s your job to make sure you reduce involuntary churn. Here’s how:
1. Your customer goes out of business, can’t pay, or is acquired by another company
You should assign a risk factor to each customer you work with and coordinate a strategy together with your customer success, finance, and executive teams to determine the concessions you’re willing to make on contracts, during this time.
If the situation is temporary, offering a discount could be a viable solution. Others can be delaying payments or extending the contract length.
If a customer’s card is about to expire, the payment won’t get through. In this case, it’s your job to make sure your customer updates their payment details. This is why you need a dunning strategy that will help you prevent failed payments from happening.
3. Account updater
Some platforms like Stripe have a card updater feature and automatically communicate with card issuers to update card details. But this might not always be possible, so it’s best that you use this option together with the dunning messages.
Crises put all of us under stress. But the good news is that we’re not helpless against them, and SaaS business can make a difference through proactive action.
Customer success software is especially helpful during these times because it can help SaaS businesses proactively spot customers that need attention before they drop off.
Focusing on customer success and using data to predict churn is the most powerful way to help plan the future of our businesses.
Are you struggling with high churn rates?
Philipp is the founder of Custify, a Customer Success Software, so he is very deep into any Customer Success best practices and things that can be done to Reduce Churn. Book a call with him to get 1:1 mentorship, and start crushing churn.