Churn is a critical metric for SaaS companies, as it represents the rate at which customers leave your platform. While most companies track their churn rate, they often fail to look deep enough into it. Simply saying your churn is 7% is not enough information to take meaningful action. Instead, SaaS companies should analyse and segment their churn rate to better understand where they can improve and focus their efforts.
Revenue is Key
First and foremost, track churn by revenue, not by the number of customers. Customer churn is secondary, as not all customers generate the same amount of revenue. By focusing on revenue churn, you can better understand how much revenue you're losing over a certain period. This can help you identify the customers who are generating the most revenue for your business and prioritize retaining them.
Scenario:
Let's say you're the founder of a SaaS company that offers different subscription plans ranging from $10 to $100 per month. You have a total of 1,000 customers and your churn rate is 10%. At first glance, it might seem like you're losing 100 customers per month. However, when you look at the revenue generated by each plan, you notice that 80% of your revenue comes from the customers on the $100 plan, while only 5% comes from the $10 plan. This means that you're actually losing $8,500 in monthly revenue due to churn. By focusing on revenue churn instead of just customer churn, you can prioritize retaining the customers on the higher-tier plans, where the real revenue is generated.
Trend Churn by Date
Trending your churn rate by date is also crucial. Ideally, you should see a downward trend in churn, which should eventually flatten out. If churn continues to increase, it may be an indication of a problem with your product or customer success efforts. By understanding when churn is occurring, you can take action to address the root cause and reduce it.
Scenario:
Let's say you run a SaaS company that provides project management tools to businesses. You have noticed that your churn rate has been increasing over the past few months, and you're not sure why.
By trending your churn rate by date, you're able to see that most of the churn is occurring within the first 30 days of a customer signing up for your platform. This is an indication that new customers may be struggling to onboard and get started with your product. Perhaps they're finding it difficult to navigate or they're not seeing the value right away.
With this information, you can take action to improve your customer success efforts during the onboarding process. You may consider implementing a more comprehensive onboarding program, providing more resources such as video tutorials or personalized onboarding calls, or simplifying your product's interface to make it more user-friendly.
After implementing these changes, you track your churn rate by date again and see that churn has decreased significantly within the first 30 days. This indicates that your efforts have been successful in addressing the root cause of churn and improving the customer experience. You continue to monitor and trend your churn rate to ensure that it remains stable over time.
Segment by Price Point
Segmenting your churn rate by price point or tier is another essential step. For example, if you have two segments, A and B, where A pays $29 and B pays $99 - what are their individual churn rates, and most importantly which segment is more valuable to your business? By knowing who your best customers are, you can focus your efforts on retaining them and increasing their lifetime value (LTV).
Scenario:
Let's say you're the CEO of a SaaS company that offers a SaaS productivity tool. You have two pricing tiers - a basic plan that costs $29 per user per month and a premium plan that costs $99 per user per month. After tracking your churn rate, you notice that the churn rate for the basic plan (Segment A) is 11%, while the premium plan (Segment B) has a negative churn rate of -4%.
This indicates that customers on the premium plan are more likely to stick around and generate more revenue for your business in the long run. With this information, you can focus on retaining customers on the premium plan by offering additional features and incentives to upgrade. Additionally, you may consider adjusting your pricing strategy to encourage more customers to upgrade to the premium plan. By doing so, you can increase your revenue and improve the overall health of your business.
Should you drop your lowest tier plan?
If you have a low-tier plan that has high churn and is not generating a lot of revenue, you may consider dropping it. This can help increase your average price per user since your remaining customers will be paying more on average. Additionally, it allows you to focus on customers that are more likely to stay with your platform long-term.
Scenario:
Let's say your SaaS company has three pricing tiers: Basic, Pro, and Premium. The Basic plan costs $10/month, the Pro plan costs $50/month, and the Premium plan costs $100/month.
After analyzing your churn rates, you notice that the Basic plan has a churn rate of 25%, while the Pro plan has a churn rate of 10%, and the Premium plan has a churn rate of 5%. You also find that the Basic plan only accounts for 10% of your total revenue, while the Pro plan accounts for 60% and the Premium plan accounts for 30%.
In this case, it may make sense to consider dropping the Basic plan since it's not generating much revenue and has a high churn rate. By doing so, you can focus on retaining customers on the Pro and Premium plans, who are more likely to stay with your platform long-term and generate more revenue. Additionally, dropping the Basic plan will increase your average price per user since your remaining customers will be paying more on average.
Understand Churn → Take action
Never look at churn as one number. Dive deeper and segment churn to better understand where you can improve and focus your efforts. By tracking churn by revenue, trending it by date, and segmenting it by price point or tier, you can better understand who your best customers are, where the real LTV is, and take meaningful action to reduce churn and increase revenue. By understanding these nuances, you can take the necessary steps to ensure your business's long-term success.
