One of the biggest questions you’ll ask of your business is: How do I keep my customers from leaving? (In other words, how do I reduce churn?)
In this beginner-friendly guide, we’ve got the answer.
Keep reading to discover the secret to retaining more of your customers—and more of your revenue.
It doesn’t matter if your SaaS is in the founding stage and you personally know each one of your customers, or if you’ve recently entered the growth stage and your business is rapidly expanding. One thing’s true for all SaaS stages: Churn is a huge problem that must be dealt with aggressively. If you don’t make a solid plan for controlling churn, your business won’t continue to grow. In fact, it will die a slow, agonizing death, one customer at a time.
To ensure that your SaaS doesn’t suffer from that gruesome fate, we’ve put together this guide. Below, you’ll learn what churn is and how to prevent it. You’ll also discover how to stop it in progress.
Let’s get started.
What is Churn?
First things first: Churn sucks.
Here’s why: Churn means that your customer is leaving you.
And, in most cases, churn is bad news.
In a perfect world, you’d keep your customers around forever. But sometimes, they decide to move on to something new. And it’s not just a gut punch to your ego. Churn also affects your business’ profitability. When a customer leaves, you lose potential revenue. And depending on when the customer churned, you could be losing out on a substantial amount of revenue.
Churn can also be described as customer turnover or customer attrition. These terms mean the exact same thing: A customer has stopped doing business with you.
What are the Different Types of Churn?
The concept of churn sounds simple enough: A customer leaves and you cry about it. But you may be surprised to discover that churn isn’t that simple. Here’s why:
First, Churn is Not Cancellation
Churn is not the same as a cancellation. It’s actually the next step in the process. When a customer cancels, they haven’t churned yet. Instead, they’ve made a decision to stop using your product. But that decision may not be permanent. In fact, it can likely be reversed with an effective win-back strategy. Customers cancel all the time and then return at a later date.
But when a customer churns, they’re gone for good. And it’s almost impossible to get them to return after they’ve churned.
Canceled customers can churn. In other words, they can decide to stop using your product and then never return. Or, canceled customers can be rescued before they churn forever.
So, it may be easier to think of churn as canceling customers who are on the brink of never returning to your SaaS again.
Second, There are Two Types of Churn
Churn can be broken down into two types: Voluntary and Involuntary.
In both types, a customer leaves your business permanently, but the reasons why they leave are different.
Type 1: Voluntary Churn
Voluntary churn happens when a customer actively decides to end their subscription. This is sometimes called “active churn.” We’ll go over the reasons why active churn happens in the next section.
Type 2: Involuntary Churn
As you may have guessed, involuntary churn happens when a customer leaves unintentionally. This is also known as “passive churn.”
Most businesses will experience both types of churn, voluntary and involuntary. However, a lot of businesses focus solely on stopping active churn when passive churn is the true killer that can ultimately destroy a business.
To reduce churn and save your business, you must put equal energy into preventing both types of churn.
Why Do Customers Churn?
Now it’s time to dive into the varied reasons why churn happens. As we teased in the above section, churn can happen voluntarily and involuntarily. So, let’s break it down into those two categories:
Here are the most common reasons for active churn:
You’ve Marketed to the Wrong Audience
Your customers aren’t the right fit for your product. This happens when you market to a faceless, nameless crowd instead of identifying exactly who your product will help.
Your Customer Hasn’t Met Their Goals
Your customer was excited to use your product to accomplish their goals, but that excitement fizzled when they weren’t able to actually solve their problem. This realization can happen immediately or gradually.
Your Marketing Was Better Than Your Product
Sometimes, marketing over-promises and under-delivers. When this happens, a customer feels like they were cheated with a product that ultimately didn’t live up to their expectations.
Your Customer Doesn’t Know How to Use Your Product
You know your product in and out, but your new customer has no clue how to use it. This often happens when there’s little to no customer onboarding.
Your Product Isn’t User Friendly
When customers don’t know exactly how to use your product, they get frustrated and stop trying to figure it out.
Your Competitors Are Gaining On You
Do you have a shiny, new competitor in your industry? Sometimes, customers switch because of price or simply because they’re curious about your competitor.
Here are the most common reasons for passive churn:
Your Customer’s Credit Card Has Expired
Credit cards expire every three years on average. When you break this down, it means that around 3% of credit cards expire each month.
Your Customer’s Bank Has Issued a Fraud Alert
Banks have the power to prevent transactions if they suspect fraudulent activity on an account. Oftentimes, this happens before customers know about it.
There’s a Problem on Your Site Or With Your Payment Processor
The payment failure may be due to a technical issue on your site. This could be due to a poor connection or a problem with your payment processor.
Your Customer Doesn’t Have Funds
Sometimes, the cause of a failed transaction is insufficient funds.
The Customer’s Credit Card Has Be Reported Lost or Stolen
When a customer reports their card lost or stolen, they often forget to update all of their subscription services with their new card information.
How Do You Calculate Churn?
But before we pull out our calculators, let’s briefly discuss why it’s a good idea to track your churn rate.
Simply put: If you don’t know your exact churn rate, you won’t be able to control it.
You can calculate churn in different ways, but here’s an easy formula that even math-haters can do:
Divide your number of customers lost at the end of a specific time period (such as 30 days) by the number of customers you had at the beginning of that same time period. You then multiply that number by 100 to get your churn percentage.
What is an Acceptable Churn Rate?
On average, an acceptable churn rate for SaaS is between 3% to 5% monthly or 5% to 7% annually.
This varies depending on the age of your business.
If you’re a startup, you’ll have a higher churn rate monthly and annually as you fine-tune your business and marketing strategies. However, the ultimate goal is to get your churn rate below 2%. (Keep in mind that this target depends on your industry.)
Why is Customer Churn Bad?
Customer churn is bad because it pokes holes in your bucket. Even when you fill your bucket with water, the holes at the bottom and sides of the bucket will make it impossible to stay full for long. It means that all of your hard work at attracting leads and converting those leads into customers has gone to waste.
Customer conversion is costly. If it takes you $50 to attract and convert a customer, but you only earn $25 from that same customer because they churn after the first month of their subscription, you’ve lost both actual revenue and potential revenue. This is especially brutal if your average customer lifespan is 12 months.
It’s also important to note that it costs more to attract new leads than it does to retain current customers. In fact, it costs between five to 25 times more money to acquire a new customer than it does to retain your current customer. And then there’s the added benefit of continuing to earn more revenue from your current customers through cross-selling and upselling. Because they already trust you and like your product, your current customers are much more likely to buy more.
Is Customer Churn Always Bad?
Though this may sound weird, keep in mind that not all churn is bad for your business. When a customer decides to leave, it may not be a reflection of your product or service.
Let’s take a look at one scenario when churn isn’t that bad:
When a customer isn’t the right one
No matter how universal you think it is, your product will not be the right match for everyone. Some customers won’t be able to find what they’re looking for with your product, and that’s okay. It doesn’t mean that you didn’t create an amazing product. And it doesn’t mean that your amazing product isn’t a fit for the right person. It simply means that your product wasn’t the right fit for that customer.
You can discover the reason why a customer cancels by asking them. When they decide not to renew their subscription, simply ask them why. If your product was a bad fit, don’t take it personally. It’s good to know. And rest assured that bad fits happen to every SaaS from time to time.
However, if you notice that there are a lot of bad-fits in your churn feedback, it’s time to re-evaluate your marketing strategy. Perhaps you haven’t made clear what you offer. Or perhaps you haven’t marketed to the right group of prospective customers. Or finally, you may not know who the right target audience is for your product.
It’s essential that you identify who will get the biggest benefit from your product, and market specifically to that group. Even though you want bad-fit customers to leave, you also don’t want to attract them in the first place. That’s not good for your morale and it’s a drain on your marketing budget.
What is Dunning?
We briefly mentioned the term “win-back strategy” earlier in this guide, and here’s what we mean: Introduce a dunning solution to retain your customers.
Dunning is debt collection or a demand for payment. It’s the process of asking customers to pay what they owe.
Dunning is the business’ response to a payment failure that has already happened.
Pre-dunning, on the other hand, is the business’ response to a failure that is predicted to happen. (Yes, you can predict payment failure. For example, if a credit card is set to expire next month, you can predict payment failure.)
Dunning can occur in many ways, depending on the business. For SaaS businesses, the easiest, most convenient, and most effective way to recover a failed payment is to use a dunning management solution.
What is Dunning Management?
A dunning management software, like Stunning, enables you to reach out to customers before, during, and after churn occurs.
This way, you can rescue a failed payment and keep more of your hard-earned revenue.
Dunning management software works on your behalf automatically, without you needing to lift a finger. It includes several features that allow you to successfully recover failed payments.
To give you a better understanding of how dunning management software works, let’s talk a look at how our dunning solution, Stunning, works.
Dunning management software is always on the hunt for current and future payment failures. When our software encounters a potential or existing payment failure, it springs into action.
For an existing payment failure, Stunning attempts to collect payment through a series of smart retries. With this feature, Stunning intelligently retries the customer’s credit card on file at the best chance of recovering revenue. This happens in the background for up to 21 days to ensure that you have the largest window of recovery.
In addition to smart payment retries, our software can also send out dunning emails in an attempt to collect payment quickly.
For credit cards that are expected to fail, Stunning will try to update the customer’s billing information automatically. If we’re unable to update the credit card, we can send out a series of pre-dunning emails to urge the customer to update before it’s too late.
How Do You Prevent Churn From Happening in the First Place?
We’ve already discussed how Stunning helps you prevent churn through our pre-dunning features. However, here are some other strategies you can implement to reduce churn:
Before your customers get to the point of churning, there are tell-tale signs that they’re heading in that direction. For example, you may notice that your customer’s behavior has changed and they’re not logging into your app as frequently as they once did.
Don’t wait until they initiate the cancellation process before you reach out. Instead, take an aggressive stance and send out a series of emails that re-engage your customers. You can do this with the help of Stunning.
Discover Where Churn is Coming From
Customers churn for different reasons. Discover the leading causes of churn in your business. Use exit surveys to identify the reasons your customers decide to leave.
Level Up Your Customer Engagement
Regularly engage your customers. Send newsletters, special promotions, tips, tutorials, and other valuable content to your customers to stay at the top of their minds. The more they think about your brand, the more likely they will be to use your product.
Educate Your Customer
Lack of proper onboarding is a major reason why customers decide to churn. Don’t let that be your story. When customers first sign up for your product, educate them on how to properly use it, and then continue sending valuable content throughout their time with your business.
How Do You Stop a Churn in Progress?
Now that we’ve covered how to prevent churn, let’s discuss how to respond when your customers are on the brink of canceling or even churning:
Use a Dunning Management Software
As your business grows, you won’t have the ability to identify and then reach out to each customer individually when their payment fails. With a dunning management software, you won’t need to. Our software has the ability to reach out to customers before you even know there’s a problem.
Our dunning software will automatically retry payment collection at scientifically-backed intervals. And if that doesn’t work, we’ll send out emails to notify your customer of a payment failure.
Send Out a Dunning Email
When asking customers to pay what they owe, you can also use in-app messages or SMS messages, but the most reliable method is email for these three reasons:
- You already have your customer’s email address
- Your customer is likely to check their email at least once daily
- Your customer may not sign in to your app to see your in-app message in time to prevent payment failure
And this is why email should be your go-to communication channel for recovering debt.
But, your dunning email should not be sent first.
When you encounter a payment failure (or predict that one is on the horizon), you should always use your dunning software to automatically retry payment collection. This prevents you from interrupting your customer’s experience.
Don’t Lock Users Out
It’s tempting to block access to your product until your customer pays up, but resist that urge. Instead, offer a grace period. Here’s why:
Sometimes, a customer is unaware of a payment failure (due to an issue with your website or their bank). If this happens, you’ll add insult to injury by blocking them out of your app. This immediately sours your professional relationship and causes your customer to no longer trust your company.
Make It Easy to Update Payment Information
When you do send out an email to notify your customer about the failed payment (and also to get updated payment information), be sure to link directly to a secure payment update page. This way, the customer doesn’t need to log in to pay (which can be a barrier for some).
You can easily create payment update pages through Stunning using your own domain so that the page is perfectly branded for your business.
Create a Cancellation Flow
For customers who are set on canceling, create a path that gives them opportunities to either reverse or revise their decision. For example, you can offer to pause a subscription instead of outright canceling it. Or you can offer to downgrade the service or offer their current service at a lower price for a limited time.
Also include an exit survey near the end of the cancellation flow so that you can learn from them. Especially ask why they decided to cancel.
Finally, remember to follow up with your canceled customers. It’s possible that they’ll return one day, so stay at the top of their minds until they do.
Controlling customer churn is crucial to the health of your business. If left unchecked, customer churn can destroy your revenue growth as you find yourself spending more and more money to attract new customers.
However, by implementing a solid dunning strategy, you can reduce customer churn to a manageable level. You can also use these tips to improve your overall customer experience so that your customers will want to stick around.