Software as a service — more commonly known by its acronym, SaaS — refers to software products or service platforms that users subscribe to or purchase outright. When customers leave the service, it’s known as churn. SaaS churn is a metric for quantifying the number or percentage of users who unsubscribe, cancel, quit, or just go away.
What is SaaS Churn
To understand SaaS churn, it helps to look at how SaaS platforms work. Slack is an example of a SaaS platform. The instant messaging and technology service offers individuals and companies a variety of free and paid membership tiers. Individuals can simply sign up to use Slack for free. Small and medium businesses can subscribe to Slack for a monthly fee and use the service and integrations for employee communications. There are platforms like Slack that offer clients the option to pay a flat fee for the service. When the Slack team discusses “growth,” they’re talking about acquiring new users, including those who sign up per month, per quarter, and annually. Of course, one of the main goals of most companies is customer growth. But most of us know that growth is just one part of being a successful business. Unless the company is also keeping track of churn — the number of customers that leave — then growth numbers really don’t have much meaning.
Look at it this way, if Slack gets 50 new customers in March and then 100 new customers in April, then the company doubled their growth, right? Perhaps. What if the company also lost 25 users in March? What if they lost 125 users in April? Context is everything and when you’re analyzing growth, a company cannot look at the number of newly acquired customers without also looking at losses, too.
Types of SaaS Churn
There are different ways to define SaaS churn. Businesses commonly look at overall customer churn and monthly recurring revenue (MRR) churn.
- Customer Churn: This is the simplest way of quantifying churn. Take the number of all customers lost in a given period of time — like the first quarter of the year. “All customers” means trial users, paying and non-paying users. Then divide the number of “all customers who left” by the number of all customers at the start of the quarter.
# of all users who left during a specific period /
# of all users at the start of that period
So if a SaaS platform like MailChimp starts the first quarter of the year with 500 paying and non-paying users and by the end of the quarter, 25 users have been inactive, the company’s customer churn for Q1 is 5%. Why would a company want to look at customer churn for non-paying users? Because the step that comes after quantifying churn is identifying why customers churn. For that metric, it doesn’t matter how much an ex-subscriber paid for your service. What matters is why they didn’t want to use it anymore.
There are a variety of ways to break customer churn down into different cohorts and time periods. The numbers a company would want to look at depends on what they’re trying to achieve. For example, if they’re interested in cohort analysis, the company will quantify churn for groups of customers that share a common trait (like trial users) and then work to reduce churn on that cohort.
- Recurring Revenue: Not all companies are concerned with losing business from certain cohorts. For example, non-paying customers or trial users are not always counted when companies are tallying gains and losses. Especially companies that are past the start-up phase and those that operate subscription models. These businesses tend to track the percentage of their monthly recurring revenue (MRR) or actual paying subscribers that leave the platform.
# of paid users who left during a specific period /
# of paid users at the start of that period
From there, companies can analyze why growth isn’t higher or why it’s growing slower than expected.
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What you Need to Know About SaaS Churn
There are different ways to measure churn and each way will tell a different story about a business. You can simply look at the number of customers that leave your business or stop using the platform, but that could be a gross oversimplification. Before landing on the right formula for calculating churn, you have to identify your goals.
Some companies want to look at their monthly active-user churn while another company might be more interested in what percentage of paying subscribers stop using a SaaS platform during the holiday season. Why would a company want to see their holiday churn? Because for a lot of businesses, the holidays are a slow time of the year. Knowing how many fewer paying customers they’ll have during November and December can help determine advertising and marketing spend for the quarter. When customer churn is high, it also means that the cost of acquiring new subscribers increases. So churn doesn’t just give a company an idea of their product’s popularity, it also helps teams identify goals, determine whether to fund certain projects, and even helps the company come up with a budget.
Real Life Examples of SaaS Churn:
- Viber messaging app: Improved its app interface and reduced churn
- Comarch B2B SaaS: A business IT software company drove loyalty and lowered customer churn.
Why do you need to know SaaS churn rates?
Quantifying SaaS churn is beneficial for several reasons. We can start with the fact that you can put a price on what it costs to acquire new customers and what it costs to retain customers at risk of churn. Acquiring a new customer can cost 5 to 25 percent more than retaining a customer. Also, the chances of making more income from existing customers is about 60 to 70 percent while the chances of income coming from new customers is about 5 to 20 percent. So a company would be doing itself a disservice if it didn’t prioritize reducing churn over acquiring new customers.
Here is the process of landing new customers versus keeping existing users.
How to obtain new customers:
- Work leads through the entire sales funnel
- Utilize marketing resources
- Utilize sales resources
How to retain existing users:
- Identify specific reasons why customers leave
- Fix the problem that causes customers to leave
The steps for acquiring customers costs time and money; but retaining customers is something a company can do with a few tools. For example, Mixpanel’s Journey Analytics helps you understand why users convert and what engages them across your platform. Its pinpoint the last actions customers take before leaving. So, for example, it traces users’ behaviors and shows when customers drop out of a long and onerous onboarding funnel. It shows when subscribers become less and less active on your platform. And it also sends alerts when certain metrics change.
If you can identify why people leave your site, you can work on solutions for reducing churn.
Here are some benefits of identifying SaaS churn:
- You can identify improvements you need to make to your platform’s user experience
- You can make improvements to your user interface
- You can reduce revenue loss
- You can lower new customer acquisition costs
- You can lower your sales and marketing costs
What it all comes down to is that reducing churn should be a priority for every business and you can’t reduce churn without knowing the different ways to measure it.
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