Having a net churn rate below 5% seems like a good win if you're a SaaS company, right? After all, you're keeping 95% of your customers.
In reality, a 5% churn rate means you’re losing half your customers each year and all that work acquiring and converting them goes down the drain. The result of this loss means that if you want to grow at all, you actually have to work four times as hard. Twice as hard just to replace those customers, and then some to add to your overall customer and MRR count.
You shouldn’t want to work four times as hard on anything.
To put it simply: Churn is the silent killer of your company, and if you don’t tackle churn early, you’ll end up working considerably too much just to stand still. Let’s walk through this by first illustrating the true impact of the different stages of churn (short, mid, and long term) before illuminating the triumph of improving churn at each stage.
"Beast Mode SaaS = Kill Churn + Retain Customers + Grow Revenue"
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The Impact of Churn
No realistic SaaS company is going to ignore churn, but far too many consider there to be ‘good’ positive churn rates. Here’s what's happening to your active subscriptions with those good churn rates:
Even with a so-called 'good' churn rate of 3%, you’re losing over a quarter of your customers, and a 'really good' churn rate of 1% costs you over 10% of customers per year:
The best way to track churn is by cohort as above. It is easiest to visualize churn (or it’s inverse, retention) through a retention cohort curve:
If you have ‘bad churn’, you’re losing customers from any given cohort continually. The retention line continues to slope down to zero, and at some point everyone who joined at a specific point is going to churn out of your service.
If you have good churn, then you might lose customers initially, but eventually the customers that stay are happy with your product and the retention line plateaus when you stop losing customers.
Short Term Churn
The short term period for your product is the first few months a customer has signed up, the initial point where they get their first experiences of the product.
Churn rates are higher in this first, short-term period as people sign up for services to test them and find their core value. They are testing it out, finding out what they like or don’t like and deciding whether it something they want to stay with.
This is the activation or ‘A-Ha’ moment — the point at which a customer will either figure out in they see value in your product. If your service can’t offer that core value then they’ll churn out quickly.
Improving short-term churn
Improving churn in this period can have a massive impact on your churn rates throughout your customer lifetime. If you get your customers to experience that activation point here, showing a core value, then that can cascade further along as they integrate with the service and continue to use it.
At HubSpot, Brian Balfour (VP of growth) along with the growth team had a problem with short-term retention with their product Sidekick. When they looked closely at the data, they saw that people were signing up for the product, a service that let your track emails easily, using it once, and then almost never using the service again.
For SaaS companies, this comes down to finding the right people to use your product, and then showing them the core value as quickly as possible.
Using their data, HubSpot found two ways they could improve their targeting to get the right customers, and help them be successful:
Segment customers based on need: As the product had a number of different features — email tracking, social information for contacts — they segmented depending on role within the company. A marketer got a different onboarding experience to a sales person as they were likely to see the core value in different features of the product.
Continually help them be successful: They realized that customers that were also subscribed to their blog were less likely to churn. They decided to auto-subscribe customers to the blog to keep the product and company always fresh in their minds.
Early stage churn could be a sign you need to look at your sales funnel to see if you’re selling to the right customers. You could be overpromising and selling to customers that aren’t a good fit for your product. These customers churn out and have a negative experience, leading to less referrals and the problems outlined above.
HubSpot then improved their product, showing the customers the core value:
Drill down on customer experience: Customers that had never seen Sidekick before weren’t shown its value, so immediately stopped using the product. They changed this to have a specific onboarding experience for new users.
Hone product around most valuable use case: One of the reasons that people were churning out of the service was that customers were using it for personal email, whereas the core value was with work emails. They forced users to switch context to their work email during onboarding to show the core value.
Educate them on your product: They used videos, tool tips and images for different audiences to teach new customers about the product.
You can improve your customer service to make sure that users that have signed up find the right value in your product.
The medium term is after those first few months while the customer is still evaluating your product. Once people have moved on to the medium-term phase of use of your product then they are likely to be enjoying the product on some level and have experienced the core value.
At this point, to keep customers interacting and in your service, you have to create habits around that core value, and make the service an important part of their life.
What you are looking to do is slow the decrease down so it doesn’t approach zero as fast, and ideally to flatten off the churn, so customers continue to use the service.
Improving mid-term churn
The best way to do this is to improve the overall quality of your service. You can refine current features, adding small changes, or making them easier to understand. This means that customers will continue to find that core value. You can add extra features, but everything should revolve around the value you originally offered to your customer and boosting that.
Buffer makes sure that the service is kept in their customer’s minds through emails telling them that their Buffer queue is running low and that they should add more to the site. This keeps users coming back to the site and continuing to use the service.
Finally, the classic ways are still the best. Fixing bugs and improving your customer service make your product easier to use and will mean your customers are happier to continue to use your service.
Long term is when the customer has an established history with your product. If you master long-term retention with your service then you’ll be showing a real core value to your product for users for extended periods of time.
A good example of this is Evernote. At Evernote, their version of a retention curve looks like this:
In the long-term, customers come back to Evernote. That’s because they make an effort to get their core value in front of their customers over and over again.
Improving long-term churn
The main way to improve your long-term churn is to upgrade accounts. When customers upgrade, they’re investing further in your product, and looking to get more core value from the service.
You can also reactivate dormant accounts, re-introducing them to the core value. This works well if you have taken the time to improve your service around the core value, and you can show them improvements that will get the interested and involved in the product again. This is what Evernote has done, slowly building up their product around a focused service until they have become the top product available.
You need to get people to experience the core value of your product time and time again, every day. This is something that only happens for services and products that have true value. By showing this core value and becoming embedded in people’s lives, you can improve your long-term retention.
The job is never done.
The Holy Grail: Negative Churn
If you make the improvements to short, medium, and long-term churn and start to upsell on existing accounts you will get negative churn. This is where you start to see increases in revenue from your existing customer base, as well as growth from new acquisitions. Here’s the same company as above, but with a 10% negative churn rate:
Now the foundation is not only solid but pushing up revenue each and every month. This is what you should be aiming for with your SaaS company, and using negative churn to take your growth into stratosphere.
If you’re happy with ‘good churn’, eventually you'll no longer be able to refill your leaky bucket, and you’ll realize any your company was built on sinking foundations. Your growth will plateau and, as customer acquisition becomes more expensive, you’ll eventually start losing revenue.
But by fighting churn at every point, you can make your customers see the true value of your service and be willing to pay more for more of it, moving to the only good churn — negative churn.