What is a good churn rate for SaaS companies?

What is a good churn rate for SaaS companies?

TL: DR

  • Customer churn is an important metric for any SaaS company. It represents how many customers leave the service during a certain period of time.
  • A high SaaS churn rate can be damaging to the revenue of a SaaS company, while a low churn rate is desirable.
  • The average churn rate for SaaS companies is 10%.
  • However, even having a churn rate of 10% is bad because that would mean you're replacing what equates to your customer base every 10 months.
  • There are many ways to lower the average churn rate for SaaS companies, such as offering proactive customer support, creating a strong onboarding program, and developing targeted loyalty programs to keep customers engaged.

Churn is one of the most important metrics for companies to track. It's a measure of how many customers leave your brand within a certain time period.

High churn can be disastrous for a company, while low churn indicates that customers are happy with their product and/or service.

In fact, only 1 out of 26 unhappy customers complain; the rest simply churn. That's why paying attention to this metric is so important — it can tell you important things about shortcomings in your customer support setup.

There are many factors that contribute to churn, and it's important to understand them all — including the average churn rate for your industry — if you want to keep customers and grow your business. In this article, we'll cover what a good churn rate is for SaaS companies to aim for and what typical churn rates look like across industries. 

Why is churn an important metric for companies to track?

Churn is an important metric for companies to track, as it provides a snapshot of customer loyalty and reveals how satisfied customers are with their service.

Many businesses rely on customer retention as a source of revenue, and tracking churn allows them to identify trends within the customer base so they can take proactive measures to address any issues that may be reducing satisfaction.

Knowing the rate of churn helps companies spot problems in the user experience or areas where there is a lack of engagement, ultimately allowing them to both retain existing customers and attract new ones.

It is essential for businesses to stay informed about their churn rate and regularly assess how their performance could be improved, especially in an economic recession where retaining your customers is more important than ever.

What causes customer churn?

There are many reasons why customers may leave a business, including poor customer experience, lack of product innovation, or high prices. Understanding the underlying causes of churn can help companies take steps to address these issues and keep their customers happy.

Poor Service Experience 

Customer service is an integral part of any successful business, and poor service experiences can be one of the main reasons for customer churn. If your customers feel like their concerns are not being addressed in a timely manner, they may eventually decide to take their business elsewhere.

To prevent this from happening, it's important to ensure that your customer service team is well-trained and equipped with all the necessary tools to provide excellent customer service.

Actionable tip: examine your entire support workflow and plug any gaps you find. Keeping track of these important metrics can pin-point where you're going wrong and what needs fixing.

Lack of Engagement 

Your customers need to feel like they're an important part of your brand in order to stay loyal — and this means actively engaging with them on a regular basis. Whether it's through email newsletters or social media posts, make sure you're providing valuable content that will keep them interested in your brand, provide real value and encourage them to stick around longer.

Actionable tip: remember to work closely with your marketing team to create content your customers are asking for. Whether that's white papers, FAQs or blog posts, taking an active involvement even if you aren't a marketer yourself can really up engagement.

Pricing Issues 

The cost of your product or service can also be a major factor in customer churn. If customers find that the price is too high compared to what they're getting from your competitors, they may decide to switch over.

To prevent this, it's important to assess the market and ensure that you're offering competitive pricing. Additionally, consider implementing tiered pricing to give customers more options and promote loyalty.

Actionable tip: do your homework on the state of your industry — especially in terms of pricing. Frequently check your competitors' pricing pages to see how the needle is moving and adjust accordingly.

Competitor Offers 

Competition is always tough in any industry, especially in today's digital age, where there are countless businesses competing for attention online. Make sure you know what offers your competitors are offering so that you can stay ahead of them by constantly innovating and improving upon what already exists — whether it's new products or services, better pricing models, or improved customer service processes.

Actionable tip: monitor your competitors' social media pages to see if they're offering discounts or other incentives to sign up. Then do that, but better.

Customer needs are unmet

Finally, customers may also leave if their needs are not being met by your product or service. If your product fails to deliver the features they need or isn't meeting their expectations, they may decide that it's time to move on and find another solution.

To prevent this, make sure you're regularly taking feedback from your customers and making improvements to your product based on their suggestions. This will help ensure that you're always meeting their needs, which in turn can help reduce churn rates.

Actionable tip: Send out CSAT, CES and NPS survey to gauge the mood. Solicit and then listen to customer feedback and make sure you communicate this feedback company-wide.

Monthly churn and Yearly churn table
Monthly churn and equivalent yearly churn

What churn rate should companies typically aim for?

A churn rate of 5% annually is often considered low, while anything over 20% is high.

However, even having a monthly churn rate of 10% is bad because that would mean you're replacing what equates to your customer base every ten months, so companies shouldn't get complacent with average churn rates and strive to achieve lower ones.

There are other factors that contribute to a business's average churn rate, including the industry they are in and the quality of its customer experience. So, what may be a high churn rate for one business may be average for another.

It's important to track your average churn rate over time and make adjustments as needed to ensure customer satisfaction and loyalty.

How to calculate churn

So, how can you calculate the churn rate at your company?

To calculate churn, you'll need to use this formula:

(Lost Customers/Total Customers during the start of a specific time period) X 100

Take the number of lost customers you have had during a specific time period and divide it by the total customers at the start of the time period and times that number by 100.

For example, if you have 1000 customers and 10 of them left in a month, then your average monthly churn rate is 1%.

What are the average churn rates across different industries?

As we mentioned before, average churn rates vary across industries, so it's important to understand the average churn rate for your particular industry when evaluating the success of your customer experience.

Here's an average breakdown of churn rates by industry (2020 figures):

How can companies reduce customer churn?

We've already covered 10 ways to reduce customer churn in a previous article.

The main strategies to focus on are providing excellent customer service, incentivizing customers to stay, and creating comprehensive customer experiences.

It's also important to ensure that your business is listening to feedback from existing customers. This allows you to identify unspoken complaints or issues with the product before they escalate into customers churning.

Proactive support can be particularly helpful in this regard because it allows you to identify and address customer issues before they even realize there's a problem. This means that customers can be reassured that their concerns are being heard and addressed, reducing the likelihood of them churning.

Wrapping It Up

Churn rate is an important metric that businesses must pay attention to in order to ensure customer satisfaction and loyalty. The average churn rate for SaaS companies is around 10%, but this can vary depending on a variety of factors.

Companies should strive to reduce their average churn rate by investing in customer service, incentivizing customers to stay, and creating comprehensive and cohesive customer experiences. Taking feedback from existing customers can also help identify potential issues before they escalate into major problems and cause customers to churn.

Author

Shifa Rahaman

Content Marketing Manager

Contributor