Why SaaS Businesses Experience Churn and How to Reduce Its Impact on the Company’s Bottom Line
Subscription-based businesses all face a certain amount of churn, but it can be difficult to determine if the churn a business is facing is normal or problematic. That’s why monitoring and analyzing churn rates is crucial for effective SaaS finance management. Before tackling this issue, business leaders must understand what churn is, how they can measure it, and how they can reduce its impact on the bottom line.
What Is Churn, and Why Do Businesses Experience It?
There are two types of churn business leaders should monitor: customer churn and revenue churn. Understanding the difference between these metrics can help business leaders understand why their seemingly growing business fails to generate enough revenue. This assessment can also help them highlight the most important and relevant metrics to investors to show growth and long-term viability.
Even while seeming to grow, some businesses fail to generate sufficient revenue (Image Source).
Customer churn refers to the loss of paying customers. Most businesses automatically include customers who leave the business or cancel their subscription in their calculations, but customers who remain but downgrade their subscription should also be included in this metric.
Revenue churn, on the other hand, refers to the amount of gross recurring revenue that a business loses in a given time period. This is an important metric since early-stage SaaS businesses can sometimes have extensive product lines at different price points and each subscription would represent a different dollar value to the business.
All businesses experience churn but business leaders must determine what an acceptable level of churn is for their own unique business situation. Here is how business leaders can define that level and reduce the impact of churn on overall profitability.
How to Determine the Acceptable Level of Churn for SaaS Businesses
Consider How Much Churn Was Unavoidable
Despite efforts to reduce all types of churn, every business still experiences it. The first step in understanding and managing churn is determining how much of it was unavoidable. Typically, SaaS businesses experience a lower level compared to other industries such as healthcare, consumer goods, and media and entertainment.
Understanding the underlying reasons for customer and revenue churn is possible through customer feedback forms, sales interactions, and more. Churn that occurred due to external factors outside of the company’s control can be considered acceptable to a business, but adjustments have to be made for churn that occurred due to internal factors.
Measure Churn Against Growth Metrics
In the early stages of a business, investors, team leaders, and decision makers often decide on growth metrics to achieve at defined points in time. These predetermined metrics can act as a gauge to assess how much churn is acceptable to a business.
If a business is able to reach its growth metrics despite the churn they are experiencing, then that level should not be a major concern for business leaders. However, if churn levels will prevent a business from reaching its goals, decision makers should consider a change in strategy to encourage more sales.
Compare Monthly Churn to Annual Churn
Business leaders can sometimes react too quickly to an unacceptable churn rate. Decision makers should understand that seasonal fluctuations in churn and revenue are inevitable. This is why it’s crucial that monthly churn is compared to annual churn to identify trends that can guide decision making.
High monthly churn rates can also be normal for growth stage SaaS businesses that are still looking for their ideal customer base. Annual churn rates give business leaders a more accurate picture of growth over time, while monthly churn rates can help them react quickly if a trend is detected.
Tips for Reducing the Impact of Churn on Profitability
Collect Customer Feedback to Understand the Underlying Issues Causing Churn
The first step in reducing churn is understanding the reasons for it. Sales and customer success teams should regularly engage with customers who downgrade or cancel their subscriptions to understand why they choose to do so. This can help business leaders identify issues with their product, pricing, or delivery strategy. Businesses that act on this customer feedback are also more likely to retain customers for longer and can attract new customers more effectively.
Develop Products in Accordance With Customers’ Needs
Early-stage SaaS companies often have unfinalized product lines that are only decided once customer feedback and sales figures are available. Businesses must keep past customer feedback in mind when developing new products or adjusting existing products. This allows SaaS businesses to rise above the competition and serve their customers more effectively, thereby reducing churn.
Monitor and Evaluate Customer Engagement and Usage
Even without direct customer feedback, SaaS companies generate a significant amount of data that can be used to improve the customer experience to attract and retain customers. Customer engagement information can provide sales teams with qualitative insights on why customers choose to leave and usage data highlights the areas in which the product meets or falls short of customer needs. This can then drive further refinement in product lines and customer engagement.
Modern Software Can Close the Gap Between Data Collection and Data Utilization for Effective SaaS Financial Management
All SaaS companies experience churn in its various forms, and a business’s success relies heavily on the effectiveness with which its leaders deal with it. Business leaders must understand why they are experiencing churn and solve the root cause of those issues. Modern software can help with this by giving business teams the necessary insights into their customers’ needs and how they can serve them more effectively.
To find out how Place can help you retain customers and reduce churn, schedule a demo with us today.
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