We’ve all heard of Salesforce, HubSpot, or Intuit Mailchimp. They have truly ushered in the era of increasing SaaS growth. Software-as-a-service (SaaS), simply put, is when users avail the software on a subscription basis. With multiple advantages like security, less storage space, flexibility, and accessibility among others, SaaS models have proven extremely fruitful for businesses to grow, improve customer satisfaction and customer experience.
Software spending will grow at 10.5% in 2020, most of which will be SaaS driven. SaaS and cloud operations have even received a boost due to Covid-19 with 57% of companies planning to increase their operations.Gartner and Flexera
SaaS growth can be explained due to the tremendous results achieved via usage in marketing, customer success, sales, and storage. SaaS businesses can be compared to plants. Living, providing, evolving, growing, and contracting when the time comes. And as the business grows, customers also come and go. These churn rates can impact your business and place limitations on market expansion and growth.
SaaS Churn Rate: Explained
SaaS churn rates, simply put, show the rate at which your existing customers terminate/cancel their subscriptions in a specified period.
It is an indicator of how invested a user is in your offering in terms of efficiency, purpose, pricing, and delivery. Churn rate determines among other things, how your product has engaged with the customer.
And for SaaS growth, the growth rate (new sign-ups, upsells, etc.) must always exceed the churn rate (canceled, lost subscribers).
Since SaaS is predicted to grow globally, customer retention and customer success are important to reduce SaaS churn rates. Since customer satisfaction is one of the main differentiators between a successful company and others, customer experience has become an important aspect of overall business success and company growth.
To keep you updated with the latest trends and learn what to avoid, we have compiled a list of 10 SaaS Churn Statistics for 2020.
How to Calculate Churn Rate
It may sound simple, but to calculate Churn Rate for Software as a Service, there are some nuances. Simply, Churn Rate is the number of customers that are left divided by the total number of customers at the beginning of the period measured… calculated as a percentage. Here’s the Churn Rate formula:
Things to keep in mind when calculating Churn:
- You must exclude all new customers from these calculations. Churn is only a comparison of canceled vs. existing customers.
- You must calculate using the same period, but that can be tricky. Perhaps some customers have different length contracts, different payment arrangements, or offers… you may want to segment the calculation based on each to see if those impact churn.
- You should further segment your customers by the product mix or package that they’re subscribed to. This will provide you more detail on how well your pricing or product packages impact churn.
- You should calculate your churn rate based on the source of the sale and what the cost of acquisition is. You may find that the churn rate of your greatest acquisition expensed campaigns may make that marketing strategy unsustainable to the health of your company.
- You should calculate churn on a regular basis to observe your trends on churn and whether it’s increasing (poor retention) or improving (customer loyalty) over time.
Churn isn’t always a bad thing… many SaaS companies use churn to replace unprofitable subscribers with more profitable ones. While you may have a negative churn rate in these situations, your business will be more profitable in the long run. This is known as Net Negative Monthly Recurring Revenue (MRR) Churn, where your additional revenue on new and existing customers is outpacing the revenue you’re losing through downgrades and cancellations.
10 SaaS Churn Statistics
- SaaS churn and Contract periods – SaaS companies whose contracts with customers last 2 years or more are likely to report lower churn rates. Longer contracts, either annual or more, have led to lower churn rates with month-month subscription models experiencing a churn rate of almost 14%. This can be accounted for loyalty, user experience, and product success among others.
- Churn Rate and Growth Rate – Low-growth companies and start-ups are more likely to experience higher churn rates. Most low-growth companies, almost 42%, see a higher churn than high-growth companies. This can be attributed to the product, marketing efforts, or customer engagement practices.
- Median Annual Churn Rate – For businesses that make less than $10 million annually, 20% is the median annual SaaS churn rate. Medium SaaS companies lose about 5% to 7% percentage of revenue to churn annually. This means, more than two-thirds of SaaS companies had 5% or more churn rates in a year. Also, 5-7% is considered ‘acceptable churn’ depending on the size of the organization.
- SaaS Churn Rate and Sales – Sales and customer relationship is the base to retain a client and chuck churn. According to MarketingCharts, channel sales have the highest churn at 17% while field sales average at 11% to 8%. Inside sales have a churn rate of 14%. This is once again reaffirming the importance of customer relationships and personalised efforts in retaining and increasing customer loyalty.
- Mobile Apps and SaaS Churn Rate – The monthly retention rate via mobile apps at 41.5% is a revelation. This is almost 4 times higher than the user experience with web interfaces according to Reply.io. Interactive mobile apps that focused on product delivery have contributed to this reduced churn rate trend.
- Customer Service and Churn Rate – While 47% recommend a business if it provided good customer service and response, 42% left a SaaS subscription due to poor customer service. Users now want the experience to be one that facilitates customer success. There is a need to upgrade to customer success to reduce churn rates.
- Number of Customers and Churn Rates – Almost 69% of SaaS companies take the number of customers into account while measuring churn rates. 62% use revenue as their primary yardstick to understand churn rates. Besides this, user licenses are also another way to measure churn rates.
- New Customer Acquisition and Churn Rates – Companies are prioritizing new customer acquisition to remain afloat and improve numbers. Only 59% rate existing customer renewals and satisfaction as a priority. This lack of customer success contributes to higher churn rates. Upselling and cross-selling have a high potential for expansion of the business.
- The SaaS Quick Ratio – Most fast-growing SaaS firms have an average Quick Ratio of 3.9 to 1. Even though Mamoon’s benchmark for promising SaaS companies is 4, companies have shown good results by generating revenue lost to churn.
- Increased Churn rates – While 34% of companies saw their churn rates decrease, 30% reported their churn rates have increased. It can also be noted that most of the companies reporting high churn rates generated revenue of less than $10 million.
Bottom-line: Make your SaaS stick
There is a need to recognise that customer retention, loyalty, and success are the keys to business growth and success. By acting on customer experience early, one can reduce churn rates. It’s also important to help your customers engage with your SaaS so they can derive valuable insights and also accept their feedback to improve user experience and product design. Proactively solving user problems and measuring usage can help reduce churn rates and promote growth.