Whether you’re a first-time SaaS entrepreneur or a seasoned pro, churn rate is a number every SaaS marketer needs to know. But how much do you really need to care? Is your churn rate a KPI — or TMI? Let’s look at the questions every Saas marketer should be able to answer about churn and its importance in exit valuations.
What Is Churn Rate?
If your customers are like drops of water and your business is the bucket, your churn rate is how much water is leaking out of your bucket. Also known as the rate of attrition, churn rate is defined by Investopedia as “the percentage of subscribers to a service who discontinue their subscriptions to that service within a given time period.” Churn rate is often part of a round-up of so-called “magic metrics” every investor will look at before buying a SaaS company that also include monthly recurring revenue (MRR), annually recurring revenue (ARR), growth in recurring revenue, lifetime value of customer (LTV), customer acquisition costs (CAC) and LTV / CAC.
Is There Such a Thing as a Healthy SaaS Churn Rate?
B2B SaaS companies serving the enterprise level tend to have the lowest churn rates, while SaaS company serving small-to-medium businesses tend to have higher churn rates. According to Cobloom, “The ‘ideal’ churn rate of 5-7% annual churn does seem to hold true for the larger SaaS companies, but smaller companies seem to have much higher churn.”
How Does Churn Rate Affect Exit Evaluations?
Obviously, leaking customers isn’t great for short-term growth and will hinder long-term success of your venture. There’s more to the story than just the numbers. A high churn rate can tell a potential investor a lot about your SaaS product, and the news is not great.
According to Thomas Smale, a high churn rate “can also say to buyers that the product does not adequately fit the customer’s needs, sits in a market with limited demand or there are stronger competing products.”
The takeaway for a potential investor here is that your SaaS product may need additional development or doesn’t have a large enough market. They will likely factor that into their valuation. Fixing a high churn rate not only improves metrics in an exit valuation, it may uncover weak spots in your product.
How Do You Fix a High SaaS Churn Rate?
There are a lot of reasons your customers will quit your product that have nothing to do with the quality of your product and ability to solve a problem in the marketplace — from a company going belly up to switching their technology. But there are plenty of ways you can take the bull by the horns and lower your customer churn rate. We looked at a few case studies for ideas.
The Actionable Feedback Approach
At Baremetrics, they reduced churn by changing the way customers cancel their account online, a process which focused on getting to the “why” behind the cancellation. The result was a 15% reduction in cancellations.
The Customer Satisfaction Approach
Kissmetrics credits customer onboarding with being their “secret sauce” to reducing SaaS churn. They zeroed in on giving their customers aha moments that gave them a sense of accomplishment and improved their feelings about the product.
These are just a few ideas. Each case is different, and you can’t control everything. Even after you’ve addressed your churn issue, there’s no 100 percent cure. “The reality is, you’ll never retain all of your customers,” says Tommy Walker, former Editor-in-Chief at ConversionXL.
That doesn’t mean you should take a fatalistic approach and give up, just get better at identifying what’s leading to customer dissatisfaction. There are always ways to get that churn number down and your valuation up. It’s just a matter of looking for them.
To discover how Raaft can lower your Churn for your Saas, book a demo from Raaft today!
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