Running a SaaS business is not easy. Especially if your just-filled bucket starts leaking. It becomes an impossible task to achieve profit targets while your company suffers a high SaaS customer churn rate.
Customer churn is a major problem that requires immediate attention. It is also a big de-motivator. No one likes to lose the fruits for which they have worked hard.
Say, you are a farmer who works hard on his field for over a year. At the time of harvest, you find out that a small part of the crop has been ruined. You would end up being disappointed even though it doesn’t affect much in terms of profit.
Now, one might question the effects of churn stating that it might not be a major problem. Hence, it is not a metric on which resources should be utilized to fix it. Let us consider that too.
So, you shrug your shoulders and prepare for the next year. This time you increase yield by using more fertilisers. You are expecting a good yield but the same thing happens. This time a part of crop larger than last time is ruined. But it still doesn’t affect the profits that much. The cycle continues but the ruined portion keeps getting bigger. You increase your efforts exponentially but so does the cost and the profits start to decline.
Acquiring new customers is way more expensive than retaining the previous ones.
Now you look at the cause which turns out to be pests. You start using organic pesticides. The ruined portion gets smaller until it becomes negligible.
Similarly, controlling churn is a growth driver in a SaaS company. For tackling churn, one needs data because data is the only way to generate insights. This allows the company to find the various reasons for SaaS customer churn.
You need to find why a customer left but it requires asking questions to the customers who have just churned. You could do it by emailing survey or feedback forms. But to discover the ‘why’ and other deep insights you need to talk to them by conducting phone interviews.
However, data itself doesn’t give away the solution. It needs to be analysed and differentiated. And for differentiating customer data, you need to understand the types of churn.
In this blog, you will find 7 types of SaaS customer churn and specific strategies to deal with each of them.
1. Bad Fit
A bad fit churn occurs when the company sells its product to customers that are not the ones for whom the product is made. In other words, the product was never designed to satisfy their needs.
Once a company acquires a bad fit customer – customer churn is inevitable and there is no way to prevent it. No matter how much resources you spend on them eventually they will leave. It is like trying to fit a round cork in a square hole. You can try everything, yet you will be unsuccessful.
According to the Conpass study, 96.7% of consumers surveyed abandoned software because they did not see the first value during the first interaction. Of this number, 73.3% leave within 5 minutes.
Now, you may feel that it isn’t a matter of much concern since these customers were bound to churn. But that is not the case.
Even few bad-fit customers that are bound to churn can affect a startup adversely. They harm the goodwill of the company along with wasting all the resources that were used to acquire/serve them. Also, the resources that you wasted on them could have been used to better serve your existing customers.
To avoid such consequences you should refrain from acquiring bad fit customers knowingly. But for that, you should know your Ideal Customer Profile (ICP), i.e., customers for whom the product is actually made.
Once bad fit customers are acquired, they are difficult to identify because they may behave like good ones. You don’t find out until they leave after posting bad reviews. Luckily, it is easy to classify them in the interview stage.
Strategies for handling Bad Fit churn
- Train your sales team on recognising ideal customers and identify those who do not meet that criteria.
- To take any conflict of interest away between sales reps and selling into a bad fit customer profile, any sales commission paid for should be reversed in case a customer leaves in the first 90 days.
2. Missing Functionality
It is not uncommon for customers to ask for new features. With time a customer’s needs change and the requirement for new features arises. This is the normal and expected behavior of a customer. It is important for you to improve and better your product too so that it survives in the competition.
But when such demands are not fulfilled in time the customers may churn. If a customer churns out due to this reason it implies that the feature was an absolute necessity for him/her.
Otherwise, no customer would do that because switching involves a lot of hassle too. One can derive that a customer switches only when it becomes efficient to switch rather than work without that feature.
But it is important to only add features which help you in achieving your overall vision. If you keep adding features requested by every client which are not part of your original mission behind building the product, you may upset the majority of your existing clients.
According to Oracle, nearly 9 in 10 customers have abandoned a business due to poor customer service. Oracle study found that 86% of customers are willing to pay more for a better customer experience.
This is a clear example of customers looking for an improved functionality – customer service.
Strategies for handling Missed Feature churn
- Create and release a product road map to your customers. In case you don’t have one, it will be worth making one. Your road map could forecast or announce to be released functionality and features up to 2 to 4 quarters in advance.
- Re-prioritising your product road map: Analyse how many customers are you losing because of a particular missing feature and then use the data to re-prioritise. Identify top 10 features because of which your customers are leaving you. Share the updated product road map right away with your customers.
- If some features will not be available in the near term, train sales, support and customer success team members on expectation management. Let the customer know that this feature will not be available in near term upfront. Setting up expectations will take off a ton of frustration and will also remove any post sale surprise.
3. Missed Outcome
Missed outcome churn occurs when the customer is unsuccessful in getting the desired outcome. This means that even though your product is capable of delivering the exact outcome your customers want, but despite that, they are not able to get to it.
There could be several factors due to which a customer is unable to get his desired outcome. Poor onboarding is one of the major factors. There may be complex instructions, time-consuming setup, a step which requires unavailable data, etc. It could be any confusion which might prevent the customer from realising the full potential of your product.
Groove found users who averaged 35 seconds in their initial session and logged in 0.3 times per day were more likely to cancel their subscription. Groove’s offer to help these users through the setup process resulted in a 26% response rate. And of the users who went on to complete the process, over 40% stuck around after 30 days.
This is the worst and unacceptable type of churn. This type of churn needs to be handled immediately because despite your product being ideal, your customer is not satisfied. This can destabilise your products position in the market and lower expectations.
Strategies for addressing Missed Outcome Churn
- Customer Domain knowledge: Work on creating guided educating training program. They could be delivered one to one aka high touch, one to many aka low touch and self-educating material, aka tech-touch approach.
- Webinars: Conduct webinars not limited to educating on product usage, but also on building domain expertise and sharing knowledge on solving the business challenges to get to the desired outcome.
- Unless your product requires a lot of custom changes, consider going prescriptive in taking a customer to their desired outcome, especially when you are dealing with high volume.
- Product onboarding experience: Work on either making the product easy to use and intuitive. Make it easy for users to get to their desired outcome. Make help available right within the product.
- Getting started guides: Make the product simple and easy to use.
- Analyse Product usage data: See where are your customers getting stuck. Work with your product manager and product design team to fix it.
4. Never Onboarded
This type of SaaS customer churn occurs when the customer never got started with the product. Once again customer onboarding plays a crucial part in it.
Magoosh thus integrated their product into a customer’s daily life by praising them while offering quick and easy wins on onboarding like activating the account or completing a form.
One must not assume that the customer is just lazy to not use the product to its potential. There are many logical possibilities such as next steps were not clear, maybe there was simply too much work, maybe it required data or inputs from someone else who didn’t participate. This can be fatal because despite your product having the potential, it is not being given a chance.
To tackle this issue the best way is to conduct a customer interview. That is when you understand the exact issues that the customer is facing and try to solve them. If it fulfills the customer’s needs then s/he would be a customer with success potential. Otherwise, s/he might be a bad fit for your product
Strategy for handling this type of SaaS customer churn.
- Time to value: How long and how much effort it takes before the customer starts to get value. In case it is too much time and effort, work with the product design team to reduce time to value.
- Make help and support available for getting started. This could be self-help, user guides, manuals or even in product instructions. It could be from your support or success teams.
- Guide, Train, Configure, Onboard customers. For free or for a reasonable fee.
- Revisit and streamline the onboarding processes for your customer success team.
- Monitor onboarding of new customers using Account health monitoring tools.
5. User or Buyer Left the company
In this type of churn, the customer left the company and the replacement is unaware of the product. The product subscription is eventually canceled. It is a common but a difficult-to-handle-situation.
Job changes affect the churn condition of a company because the previous executive may not inform the new one about your product. In the previous guy’s absence, the new one may or may not renew the subscription. If he/she decides to start all over then you will have to start over too. This will mean additional acquisition cost and resource implementation for getting the customer back.
But if the contacts are made with the previous executive as well as the user in the company, then you can not only prevent churn but also acquire a new customer with a lower acquisition cost. This new customer will be your previous buyer who got into a new company.
Strategies for handling this type of SaaS customer churn.
- Prepare early: Keep warm relationships with more than one contact. One is too risky, especially for large accounts.
- Prepare a backup in advance. Keeping a tab on the proof of value delivered so that the new executive can be easily demonstrated the value of your product.
- Request your champion hand over the relationship and the product to the new user.
- Bring in the Sales Reps: One of the best ways to tackle this churn is to bring in the Sales Reps working alongside Customer Success Manager: Treat the account just like a fresh sale and start by pitching value.
6. High Price
With the ever-increasing competition, the cost to switch has also come down. This makes it easier for the customers to switch between products since it is much easier to do so now. Customers do switch now more often usually because they believe that cheaper alternatives to your products are available and are better.
While delivering value, your company may have overlooked the pricing of the product. If your product is priced higher than its competitors then you might face churn despite giving your customers all the features.
But if your product is priced well but still experiences churn then what could it be? You might want to look at the customer onboarding process. Because if the customer is not being able to utilise the product fully no price is good enough to prevent churn.
Even after this, your customer might still churn if he/she is not able to find out his/her return on investment (ROI). The customer would never know why he/she is working with the product if they are not able to understand their ROI on using the product.
Some companies calculate SaaS customer churn rate on an annual basis. Others, specifically those updating prices on a monthly basis, evaluate theirs month-to-month. For example, in 2013, SaaS company Groove used its churn data to reduce attrition by 71%.
This allowed Groove to keep their prices updated with respect to the competition and prevent customer churn.
Strategies to address customer churn due to high price:
- Calculating Product Return on Investment or ROI: How obvious is the Product ROI for your customers. For many products, it is not that obvious, and if that is the case, it might make sense to work with your Product design team to effectively build some metric that specifically depicts that. (eg: Saved X amount, or Saved x clicks)
- Communicating ROI effectively: This could be an easier problem to solve, if you are calculating but not communicating, then it’s a simple question to constantly reminding customers of the measurable value delivered.
- Understanding Total cost of ownership: Sometimes, it is not the cost of the product, rather the total cost of ownership. For example, people needed to operate it. This requires a detailed understanding and what can you add or change in the product to bring that down.
- Competition Price Analysis: It might also be possible that there are new cheaper players or an existing player has reduced price. A typical move from being strategic to being a commodity over time. If you want to stay strategic and command the price, then how are you
- Calculate and Monitor Product Stickiness: Cost of switching a product could be higher as more and more features of your product are being utilised. You can use Customer Success tool analytics to calculate the stickiness of the product for every account.
7. Company acquired/merged/closed
Shutting down of a business causes churn that is unavoidable. It is extremely rare that you might be able to take a new referral customer in such a case.
If one considers the other cases – acquisition and merger, the churn here is avoidable. Yes, you will have to start again with convincing the old customer who has merged or has been acquired. Now, starting again might feel a bit demotivating but the new customer will provide more opportunities than the previous one for obvious reasons.
No matter what your churn rate is, the first step is to identify which category does each of your churned customers belong to. Only then can the right strategies be applied so that we gain some insights from the lost customer and the same mistakes are not repeated again.
It is also important to continuously monitor the customers and predict if they are facing some problems. For this, it is best to use a customer success platform that can monitor several data points concurrently to almost accurately predict if the customer is satisfied or not. Then the customer success manager can fully focus on solving the issues of the customer which will lead to a reduction in SaaS customer churn.
It is imperative to understand and reduce the churn rate for any company. High churn rate can lead to slow death of the company no matter how good the product is. Hence, it is important to understand and make strategies to reduce churn before it becomes a too big a monster to handle.