Lessons learned in SaaS startups: Chapter 7. Churn kills.
When I started in SaaS, I didn’t know what the word ‘churn’ meant, and I knew nothing about subscriber retention.
I was just merrily on my way gaining customers and rejoicing every time I got a new subscriber. It was a few months in before I got my first cancellation email, and even then I thought nothing of it.
I wasn’t tracking any subscription metrics at all. I didn’t think about it because I was too busy building my product and enjoying the buzz from the product launch.
The truth was that lurking behind all the new subscribers and business growth was this nasty thing called ‘churn’. And churn kills growth.
It didn’t really hit me until about three years into the life of the business.
As you can see in the graphic above, it’s about three to five years into the life of the business that you start to really notice the impact of churn. This was the case for me, as I was finding that our revenue was plateauing, and that was incredibly frustrating.
Every time we would get a customer in, someone else would cancel their subscription. Fortunately though our revenue was still growing slowly, thanks to what we call ‘negative churn’. People would upgrade their plan to the next tier, or they would purchase another add-on of some kind. Also as we were changing our pricing, the plans were gradually getting more expensive, so that meant that new customers were paying more.
However, churn was still a killer.
At one point we changed our pricing in the hope that we could attract larger ‘enterprise’ companies, and make more money in the long run off those companies paying for much higher priced subscriptions (which was supposed to offset those on lower priced subscriptions). But the problem was that those companies were few and far between, and most of the customers we were acquiring were small businesses. So they would opt for the free or basic plan. During those days, the churn really took it’s toll, because our average transaction was lower than what it had been before, so our revenue actually started dropping for the first time, as people ‘churned out’.
It was a costly lesson.
How do you stop churn?
Another question that gets asked is, “What is good churn?”. The answer to this question is, there is no good churn. No churn is acceptable. But it happens. So how do you stop it?
I wouldn’t have been qualified to answer this question a year ago. In fact, I wasn’t even sure if I should blog about churn because I still don’t feel like I know anything about the subject, and there are plenty of qualified people who do. However since our most recent pricing update, I feel like things are on the up again, and a lesson has emerged.
I worked very hard this year on trying to reduce the churn in our business. I did a lot of reading, took action, and fortunately now the metrics are looking good for us in the last 3 months since the update. Our subscriber retention is the best it has ever been.
So how?!
There are many things that I would say are factors in helping to reduce churn, and a lot of these factors are pretty much guesses as there’s no real hard and fast way to measure how an action or an update directly affects churn.
But anyway, here goes…
- More expensive plans
It seems as though offering more expensive plans seems to lower churn. The retention rate for the higher tiered plans is lower than the lower priced ones. Perhaps this is due to the fact that buyers with a bigger budget are more serious and more invested in the tool they are planning on utilizing for the organization. - Pricing plans based on value
We have tried lots of pricing models, but we settled on a model where the user perceives value. A lot of it is psychological. If the buyer feels they are paying for something they aren’t utilizing, then they’ll stop paying for it. If they are paying for features that bring value to them, then they’ll continue to pay. For example, paying for additional seats in a license, when the team is only 3 people, as opposed to paying for 5GB extra storage when they upload 100 documents every day. - Amazing customer service
I’ve talked about this before but offering outstanding customer service has to be a factor in reduced churn. Since we started implementing real-time customer chat, and having a response time of less than an hour, our churn rate has gone down. This is because we can talk to the customer the moment they have a problem, not after and they’ve already left. - Education
We implemented a full help section, with a getting started guide, plus we documented every feature of the tool in detail. This helps the user learn your app, and know that the feature they are looking for is in fact there, so they don’t need to go elsewhere. - Useful emails, not just marketing spam
Emails that go out based on their usage of the app, that actually serve their needs, rather than just spammy emails that talk about features they are not interested in, are useful in reducing churn. Also making sure that the emails go out after the free trial, not just during the trial. - Relationship with the customer
We try to build relationship with every customer. I actually know the names of every customer and when I see a ticket come in with a name I don’t recognize I usually know it’s a new user, or it’s just some sales email. This means that when the time comes for a user to think about leaving, they actually feel pretty sad about it, and often promise to come back. - Features that serve the user
We always ask users that churn why they are leaving. Often we try to build out the feature they felt was missing (as long as it’s not too complicated). Sometimes it’s a report they needed, or an export to XML feature, or a simple tooltip that you can copy and paste text from. The time it takes us to develop these features is nothing compared to the value a customer brings to our business.
I hope that list helps, of course I’m still learning. I’ve learnt the hard way.
Churn kills.
