The Software-as-a-Service (SaaS) model relies heavily upon long term customers. There are 3 major metrics that will determine the overall success of a SaaS vendor:
- Customer Acquisition Cost (CAC)
- Lifetime Value of a Customer (LTV)
- Churn Rate
The CAC and LTV are both very popular and have been discussed quite a bit. But many first time SaaS merchants overlook churn or don’t even know what churn is. We will explore the ins and outs of churn and tell you how to fight it.
What is churn rate?
Churn is the number of subscribers who cancel their recurring subscription plans. This number is expressed as a percentage and is calculated by dividing the number of customers who cancel over a certain time frame by the amount of customers you had in the beginning of your chosen time period.
A high churn rate indicates customers are cancelling subscriptions frequently which will also decrease your LTV. It’s the goal of every SaaS merchant to lower the churn rate in order to increase their revenues and cover their CAC.
In a perfect world, churn wouldn’t exist. However, it’s unrealistic to expect every subscriber to remain a customer forever. Instead of eliminating churn, you have to focus on getting it as low as possible. So how do you decrease your churn rate?
While churn is inevitable, simply communicating with customers may stop them from cancelling. The reason they want to cancel could be completely fixable. For instance, perhaps they are cancelling because they think your software doesn’t have a particular feature they need. Your software might actually have this feature but they were just unaware.
Consider having a form for customers to fill out before they cancel to explain why they’re leaving. It’s also important that you set up a support forum where users can ask questions. Lastly, create video tutorials that explain how to use the software and outline all of the features. This will help decrease your churn rate immensely.
2. Monitor expiring subscriptions.
Sending out emails to customers whose subscriptions are up for renewal will give you an opportunity to remind them to renew. This is an excellent time to check in and make sure they are not having issues with the software and gauge the likelihood of them cancelling. This process can be automated with email marketing clients such as Mail Chimp, Aweber, or Constant Contact so it’s not as time consuming.
3. Allow automatic renewal.
The SaaS model is becoming the standard for software. Because of this, users often have multiple subscriptions to different vendors. This leads to them forgetting to renew subscriptions sometimes. Make it easier by allowing customers to enable automatic renewal. One of the biggest benefits of SaaS is the automation it provides.
Many subscription management companies have an automatic renewal feature built in.
4. Cost has to equal value.
A common reason that customers stop using a service is because they don’t feel the amount of money they’re paying is equal to the value they’re receiving. Customers want to feel as if they’re getting the very best their money can buy. A high churn rate could indicate that your software is overpriced or doesn’t provide the same value as your competitors.
This issue can be resolved by checking out similar SaaS merchants. Look at the features they provide and their price points. Do yours match up? If not, then you might want to adjust your pricing or offer more value with extra features and add-ons.
5. Long term subscriptions.
There is a bit of a psychological factor involved with this method. The phrase “out of site, out of mind” applies here. When a customer sees a charge occurring every month, it’s a constant reminder that they have another expense. The more often payments occur, the higher the risk of a customer wanting to cancel.
Consider testing out longer subscription periods such as 6 months or annual subscriptions. Some services offer a lower cost per month for customers willing to sign up for a yearly subscription. For example, a monthly subscription might cost $40 a month, but by signing up for a year the cost could be reduced to $30 a month. This is a common tactic used to decrease churn and increase the LTV metric.
Monitoring churn in conjunction with other metrics such as the CAC and LTV will greatly improve your company’s chance to succeed. Use the tips above to help get your churn rate as low as possible!
Preciouse Gross is the Community Manager at BlueSnap, an international payment solution. Preciouse has been working in the e-commerce payment industry for 6 years helping to develop strategies to increase consumer engagement and interaction.