Churn rate tells you if customers continue to use and pay for your product. You can measure churn in two ways: Revenue churn and Logo churn.
Separating the two is important. Lets say you have 10 customers. 9 pay $100/mo and 1 pays $500/mo.
If the $500/mo customer cancels next month, your logo churn would be 1/10 or 10%. Your revenue churn would be $500/$1400 or 35%.
It’s important to measure both churn rates but the more important one to measure is how much revenue you’re churning.
To increase customer retention, its very important to have strong onboarding and a customer success team that can help make sure new customers get value from your product as fast as possible. Many companies are even incentivizing customer success managers with a commission for every customer they “activate”.
Lets talk about why this is important if you’re trying to build a $1m+ business.
Is Churn Management Really Important for a SaaS Business?
Churn has a major impact on your ability to build a $1m/year SaaS business. Churn matters even more if you’re trying to scale to $100m or more in annual recurring revenue.
Lets say you already do $50,000 in monthly recurring revenue. You have 5% revenue churn monthly. Next month, here’s what your economics look like:
New revenue: $5,000
Churned revenue: ($2500)
Net new revenue: $2500
Effective churn management helps make sure that you don’t start each month “in the hole”. In order to have month over month revenue growth, you first have to add enough new revenue to make up for lost or churned revenue.
This math is why its difficult to build a $100m revenue SaaS company if you’re annual revenue churn is anything north of 10%. This means each year you have to add $10m in new revenue just to get back to 0% growth.
What customer churn is considered “good” for SaaS companies?
After analyzing over 3,000 SaaS companies including their retention rates, customer satisfaction scores, and churn management strategies, clear benchmarks emerge on what your churn rate should be depending on your price point.
If your price point is under $100 per year, you’re doing a great job if you keep annual revenue churn under 20%.
If your price point is $100-$10k/year, your doing a great job if you keep annual revenue churn under 10%.
If your price point is $10k+ per year, your a top SaaS company if annual revenue churn is under 5%.
This makes sense. When customers pay more, you should be delivering more value and they should be more sticky.
How to Keep Customer Churn Low?
Focus on the customer experience from day one. Ask yourself what you need to get a customer to do in the first 7 days to make sure they get value. Then focus all of your energy on making sure they hit this benchmark.
You should also come up with key indicators to identify at risk customers in your customer base. For example, if you help customers manage contracts and they haven’t added a contract in the last 30 days, you should flag that customer for your customer success team to figure out why they stopped using.
Even if that customer is still paying, because they aren’t using the product they are very high risk for churning. Get ahead of it by marking at risk customers.
Look at all of your customer data to find opportunities to identify potential churning customers before they happen. Did they complete the customer journey you know they need to complete to get value? Does your tool directly impact their bottom-line? If not, how can you prove you’re making or saving them money?
When Should You Worry About Churn?
If a customer has been paying you for a long time period, meaning they have a high lifetime value, and they email your support asking to cancel, this should raise red flags. These high value customers are your most important customer relationships. Export all historical payments by customers, sum up the payments, and you’ll get a list of your most valuable customers. If one of them asks to cancel, do everything you can to keep them.
Offer incentives, tell them you can pause billing their credit card for a month, and take other proactive steps to keep them engaged with your product and your team. The more personalization you can add, the better.
In addition to using your own customer data sets, use tools like Hubspot, study case studies from Harvard Business School, and see what your competitors are doing on social media to keep their customer engagement high.
Churn and Retention Are Directly Tied to How You Get Customers In The First Place
If your revenue churn one month is 5%, your retention is 95%. Churn and retention are different ways of saying the same thing (but retention sounds better).
Both of these metrics are tied to your customer acquisition channels. Generally speaking, the more you spend on customer acquisition costs (CAC), the lower your retention will be.
If a customer is a perfect fit for you, you shouldn’t have to market like crazy to land them as a customer. If you have to do a lot of convincing, you’ll spend more getting customers who might not be a good fit. This is why you see venture backed companies spending massive amounts of money on CAC. They have to find new places to get new customers who might not be perfect fits.
3 Examples of Low Customer Churn
Loginext charges $300k/year and has gross revenue churn of 5%. They do more than $18m in annual revenue and are growing rapidly due to their high customer retention rates.
Britech is based in Brazil and recently passed $10m in revenues with customers paying $3k/mo on average. Customer attrition is low at just 5% annually. This means the average customer lifecycle is over 200 months (1/churn) calculated by 1/.05.
LivingSecurity has 58 customers and is about to pass $2m in revenues. Less than 1% of customers churn each year. They actually show up onsite at customers offices as part of their customer churn management program.
In summary, to prevent customers from becoming churners, compare tactics you’re using to industry benchmarks, make sure your onboarding is strong, and be sure to proactively label customers based off usage rates so you can re-active customers before they email and ask to cancel.