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The software world has gone SaaSy. Software-as-a-Service has become not just a hit, but the de facto choice for business owners who want to grow their business. The SaaS model gives everything that a business keen on scaling up needs — affordability, flexibility and also quick scalability.
However, from the other side of the table, from the SaaS provider’s side, things are not always bright. It is always a struggle to keep churn rates low.
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Jill Avery, a senior lecturer at Harvard Business School describes churn as thus: “Customer churn rate is a metric that measures the percentage of customers who end their relationship with a company in a particular period.”
In an ideal world, the churn rate must be kept to a bare minimum — if possible less than 5%. That is what Lincoln Murphy recommends.
But, ideal worlds do not exist. Studies have suggested that, in reality, 30% of SaaS providers have an unhealthy level of churn.
Now why is a high churn rate a problem? Research by Frederick Reichheld of Bain & Company found that it costs 5 to 25 times more to acquire a new customer than to retain an existing one. For a SaaS business, retaining an existing customer is definitely more profitable than trying to acquire a new customer. This is because the CLTV of loyal customers would far exceed the Customer Acquisition Cost (CAC).Now that the importance of the churn rate is established, how does one calculate churn?
There is a straight-forward formula that helps calculate SaaS churn rate. It is as below:
Let’s see how this formula can be used to calculate churn rate.
Let’s say you begin the month of January with 500 users. By 31st January, your business would have 400 users. 400 users have churned.
So, the churn rate would be calculated as: (500-400) / 500 = 20%.
There are several reasons why customers churn. The most common reasons are:
Now let’s look at some proven strategies that help arrest SaaS customer churn rates.
First impressions last long. The same applies to SaaS user onboarding as well. If they are onboarded into the app the right way, chances are that they will stay longer as a user. In fact, studies by Localytics show that the first 90 days after user onboarding matter the most. More than 80% of customers would churn if the user onboarding has not been proper.
That begs the question: how can one liven up user onboarding?
The user onboarding process should initiate the user into actively using the app. It is more like integrating the app into their daily life or making it a habit to use the app for whatever purpose it was downloaded.
Some good steps you can take include:
A good example of this would be the onboarding experience of the language learning app – Duolingo.
When it comes to retaining existing users, nothing beats the charm of great user engagement. In fact, customer engagement and churn have an inversely proportional relationship. The higher the value of one, lower would be the other. That makes it imperative for a SaaS app to always focus on heightening user engagement.
User engagement can be heightened in two ways. One, for first-time users who are exploring your website and product offerings, an interactive live chat tool like Acquire can help.
Secondly, for existing customers who are already using the product, the approach should be different. They should be served information at junctures where their attention span would be at its maximum.
Zapier knows how to do that. In fact, it uses a very unique timing to heighten user engagement — when they are sending their invoices.
As you can see from the image above, Zapier uses a crucial juncture when user attention would be at its maximum to reiterate its feature offerings. Reiterating the feature list not only makes the user inquisitive about using the app, but also keeps them engaged with it. That should arrest the churn rate for a while.
Take a look at Olive Sen, Director Strategy and Growth at OLX India share his secret sauce for user retention:
SaaS is a subscription-based business model. Users pay to use the application or service for a definite period of time. The prepaid payment ensures a steady flow of income to the business. However, maximizing this flow of income and ensuring that it remains stable can be challenging.
A small change to the pricing model can help solve both these challenges. The idea is to make users pay for the long-term, annually, for instance, instead of monthly. This ensures that the user has enough time to remain an active user of the app. It also eliminates the scenario where the user churns without exploring the available features.
Most SaaS businesses actually follow this practice as a default model. The annual subscription plan would be far less than the monthly subscription plan. This induces the user to opt for the annual plan as it offers maximum RoI. The end result? No churn for a year to come.
Check out how Trello, the project management and productivity-enhancing tool makes its pricing inducive for annual subscribers.
For Monthly Plan:
For Yearly Plan:
Nudge Dormant Users
Dormant customers are the first to churn. They are dormant because they have not engaged with the application for a long time. Hence, it is easy to arrive at the decision that the subscription is no longer needed. No user would want to pay for a service that they are not using.
How can a SaaS business turn this around to its advantage? By nudging dormant users to use the app extensively. Sending periodical newsletters or re-engagement emails can give a helping hand here.
Again, Duolingo does it right with a nice re-engagement email that would make any user pick up another language learning session.
We don’t know if there is life on Mars yet. But, we know for sure that the customer churn rate can be arrested. SaaS businesses have been winning at this for sometime now. Your business can do this too, with the right strategy. The above mentioned strategies can be a starting point for you.
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