If you have ever been even remotely interested in SaaS companies, you have absolutely heard the term churn. SaaS companies are absolutely obsessed with churn and with good reason.
Churn at a SaaS company is like the kiss of death. High churn might mean the closing of your business if you can’t get it under control. Even if you have the best sales team in the world that is constantly bringing in a slew of new businesses, new business usually can’t make up for a high churn rate.
So what exactly is churn and why is it so bad?
Churn is very simple. When a customer cancels their subscription to your services, we call that churn.
The obvious reason why it’s bad is that you just lost business and thus revenue. But the real danger of churn is that it usually can’t be easily made up by bringing in new business. As your company scales, even a seemingly low churn rate can leave you losing tens of thousands of dollars per month. And it’ll definitely be hard to make up for this revenue loss purely with new business bookings.
So how do you calculate your churn rate?
There are two main ways you can calculate your churn rate — by customer lost or by revenue lost.
Customer Churn Rate = Total number of clients that churned in period / Total number of clients at the start of period
MRR (Monthly Recurring Revenue) Churn Rate = Total amount of MRR that churned in period / Total amount of MRR at the start of period
For most intents and purposes, the MRR Churn Rate is more important. It’s much better that you lose 5 customers that each pay $100 than lose 1 customer that pays $3,000. By focusing on the revenue lost, you can get a much better sense of where your company is at financially.
So now you know how to calculate your churn rate. But you’re still confused. What’s the big deal?
Well, here is the big deal. Let me show you three different hypothetical companies that all have a churn rate of 2.5% and see what the impact is on them.
Company A has a MRR of $100,000. They will lose $2,500.
Company B has a MRR of $500,000. They will lose $12,500.
Company C has a MRR of $1,000,000. They will lose $25,000.
As you can see, as your company scales, even a 2.5% churn rate has a substantial impact on your revenue numbers. Imagine having to make up $25,000 per month in new bookings to compensate for lost revenue. That’s going to be hard to do.
You can also look at the chart below to really see the full impact of a 2.5% churn rate on companies with MRRs ranging from $100,000 to $10,000,000.
Effect of Negative Churn
Now, on the other hand, let’s imagine that you are actually generating more revenue than you are losing. This usually means that you are retaining most of your existing customers while also either upselling them and/or bringing in new business. This is often times what people call “negative churn.” A negative churn means that your business is growing.
So let’s also explore the other side of the equation. What is the impact of a -2.5% churn rate on your business? Let’s just take one example of a company that has a MRR of $1,000,000. If they experienced a churn rate of -2.5% every month for 2 years, how would their business change?
*Numbers were rounded to the nearest dollar for simplicity.
With a -2.5% churn rate every month for 2 years, the company has increased their MRR by almost $750,000. And remember, this is PER MONTH.
So what can you do to prevent churn?
You get it now. Churn is important and getting to a negative churn rate is even more important. So what are some action steps you can take?
Of course, there are hundreds of things you can do to possibly prevent customers from churning. But I would say the top three actionable items would be:
- Frequently engage with and talk to your customers. This not only helps increase engagement with your platform, but it also helps you pick up on signs of churn early on so you can do everything in your power to change their mind. And even if you don’t succeed in changing their mind, the intel you have gathered in conversations with them will be valuable to prevent future churn.
- Analyze customers that have churned before and find correlations between churn and other factors. This is also where the intel from the previous point comes in handy. It’s critical that you not only analyze what they said but also their historical usage on the platform. Were they not engaging with enough parts of the platform? Were they using it wrong? Were there too many users on the platform? Were they dropping off at a certain point? There are multiple factors you can take into consideration to determine the most accurate reason for why customers churn.
- Make sure your pricing and product are in line. It is incredibly important that your customers see your pricing as worthy of the product. If you are charging premium prices, make sure you are actually providing a premium product and experience. Make sure you are charging prices that customers are willing to pay. Every time your customer gets a new bill, it’ll cross their mind that maybe they should cancel. But they will stay with you if your pricing is within an acceptable range for them and if they think they are getting that much value out of your product. For more information on pricing techniques for SaaS companies, check out my article on pricing here!
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