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Customer churn is like a pest that you ignore until the harm it does becomes severe. It chunks small pieces of your business from the inside and is barely visible daily. Nobody wants to take care of it either. There are just more intriguing things to do than working on retention strategies: hiring new people, improving sales or adding new features.
From my experience, the vast majority of SaaS companies sooner or later realize how important it is to work on customer retention, especially when they understand that churn increases Customer Acquisition Cost (CAC) and is one of the significant factors reducing profitability.
Acquiring new users is significantly more expensive than maintaining the existing ones. To those who already use your software, you can also up-sell and cross-sell, and happy clients can pull in even more customers. The negative impact of churn works both on losing clients and losing opportunities to pull in more.
Also, churn blocks your future growth.
Below I'm listing the most common reasons for customers to leave SaaS companies. Some will be rather obvious and expected; some might surprise you because not all cancellations come from dissatisfying product usage.
Important message: keep in mind that churn is a leag measure. You need to look for actionable lead measures on which you can act upon. Churn is an outcome of various things. Identifying the root cause should be your primary focus.
In this article, you will learn:
Most people invest money in software because they crave specific results. Whether it's enriching sales data with more information or tracking down website visitors, there's a time when they will say "check" and decide if the tool does the job or not.
If they start raising questions by the time the expected effects don't come to life, they will be highly likely to churn. If you want this problem to occur less, you need to identify the milestone your users want to achieve at what time. And make everything in power, with much emphasis on successful onboarding, to deliver these results within a given timeframe.
However, even if your customer achieves the initial success, you still don't have the guarantee that it will be enough to keep him for longer. You want the successful period to last as long as possible, and it won't always come down to the simple issues your tool resolves.
Customers will usually want to achieve something more significant with a data scraping tool than just "scraping data". They want more leads and increased revenue or spend less time on the research process and allocate it to strategy or management instead. What they want is to receive a specific output, not only an input. In other words, the tool must drive value, i.e., save some time, save money, add more leads or increase profitability.
You can calculate the value equation for pretty much any SaaS business. If not, it’s a big problem. Once you know it, as a rule of thumb, you can take 10-15% of the value created as your revenue share (according to Kyle Poyar’s Pricing book here).
To help them achieve big goals and keep them within your tool, they need to progress on their day-to-day tasks continually. And to do so, you need to be helping them through many various Customer Success efforts, such as product tips, good customer support and listening to their feedback.
One of the most common reasons for churn is that the software doesn't provide the customers with enough functionalities. In many cases, this is a competitor-driven churn; not only that this particular software doesn't provide me with enough features, but also the competition offers exactly what's missing, at a similar price.
Interestingly, the issue might be just the opposite, which was greatly presented by HotJar''s study here. Some tools are just too complex for specific users. If the customer is focused on solving a particular problem, say, collect and manage sales data, everything else that appears on the app (e.g. project management or marketing features) will make him feel lost and distracted.
That's a major reason to stop using a tool, especially if the competitor offers less developed software but more focused on this one outcome that the customer is looking for. Less complexity often comes with a lower price, too, and the decision of leaving and choosing another tool becomes a no-brainer.
To avoid this, you need to be aware of what your clients want. Listen to their feedback, analyze their behaviour on the tool and talk to them about their needs and if your tool meets them accurately. It would help if you were up to date with your competition too, as it can be a great source of information on current market trends and a possible shift in features.
Customer churn might result from a disconnection between what your tool does and what people expect it to do. You can't have a happy and lasting customer base if you can't reach their goals because the software isn't made for doing so.
The usual reason for this to happen is when companies direct their marketing and sales efforts at people who are not the actual buyer personas. Sometimes due to the lack of understanding of who that persona is. Sometimes intentionally, when, for financial reasons, companies want to squeeze in as many paying users as possible.
Either way, you will end up with a solid group of unhappy subscribers with a short customer cycle, which you can't afford to do in the long term.
If you want to avoid this one, you need to know precisely who your customers are, what problems they want to solve, and what language they use when they speak about those issues. If you can headline your website and the product with those needs and proper wording, it will be easier for you to pull in people who are more likely to stay with you. It will also help you create a website that is a self-service sales machine.
There is one thing that SaaS users hate more than issues with the tool and its lousy customer service. Whether it's about a technical problem to be solved or a general enquiry about the tool's settings, people want clear and immediate help. If you don't provide them with it, they will be more likely to leave.
Poor customer service may cause even more harm to the company that just increased customer churn rates. A user with a bad experience might become a detractor. This type of customer actively discourages others from using the tool and damages the brand's name through negative word-of-mouth.
That's why you need to be sure that your customer service team is big enough and qualified to solve users' problems in a reasonable time. Using live chat tools or gathering feedback about one's satisfaction with customer services will be helpful too.
On top of that, I encourage you to build not just a "customer support team" but to work on making your entire team user-oriented. It will extrapolate all employees and all touchpoints with the end-user, but the customer service area is the most fragile and will benefit the best.
Your current customers need to know if the money they pay is relevant to the value they get out of your product features. For this reason, you need a pricing strategy that ties the price to the value and that they both meet your customer's expectations. It would be best to have a good value metric, which determines how much you charge for every plan's features.
If you don't identify the value metric correctly, there are three primary situations where the potential for churn increases. The first one is when users move up from one plan to another, and they don't see a clear benefit of it. For example, the increased number of seats or credits to spend doesn't correlate with a higher price.
Another case is when you're changing your software price (which you should consider doing once in a while: check my blogpost on price increase). To justify any price increase and keep your users in despite asking them to pay more, you need to identify your value metrics so the changes you make are acceptable.
Last but not least is product scalability. If your value metric "punishes" the customer for usage, it creates friction, resulting in churn. To avoid it, you need to think carefully about how your product scales with the user.
For instance, seats or users are not the best value metrics because of their limited scalability potential. Try tapping on usage-based pricing opportunity, which is a new trend, and many tools try this approach. In most cases, it aligns pretty well with the value-based pricing opportunities.
Profitwell ran Best-Worst Choice survey on value-metric preferences for various products. Clients clearly don’t prefer per-user pricing. It’s a good example of a metric that doesn’t scale easily.
Fun fact: we have analyzed value metrics on the Polish SaaS market. Among 117 researched companies, 41 of them leveraged user-based pricing. Yes, it was a mode, the most frequent value metric.
You might have noticed that there's a pattern in why customers leave. In most cases, it's because their voice wasn't taken into consideration at some point in their interaction with the software.
If you want to maximize customer retention rates, you need to find out the reasons for churning. Listen to your key users' voice and let it ring out in your product strategy. All type of customer success efforts will be of help: email questionnaires, exit surveys, feedback calls.
And if you need help with building a complex customer retention strategy, don't hesitate to reach out to us!
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