2020 was an unusual year.
It completely swept people off their feet as no one saw a global pandemic coming. At least, it wasn’t something I ever imagined possible.
Businesses suffered losses because of it, but there was also a silver lining. Even when millions of people lost their jobs globally and profits went down for many businesses, the pandemic served as an eye opener of sorts.
Case in point, business leaders who previously swore remote work wouldn’t work for them were forced to make their employees work from home and magic happened.
But that’s not all the good news.
The SaaS model experienced skyrocketed growth as companies were forced to find cloud solutions to keep them going. Zoom, for example, grew exponentially, experiencing almost 400 percent growth in 2020. Consider the following chart from Statista.
The market for cloud computing is projected to have a compound annual growth rate (CAGR) of 17.5 percent, growing from $371.4 billion in 2020 to $832.1 billion by 2025. SaaS is the largest market segment in this sector, so it will take the lion share.
2020 is over, and we expect to see more growth in the SaaS market this year. While it’s good to celebrate milestones, all serious marketers know better than to camp on old successes.
At the very minimum, you need to keep the momentum from the previous year going – and that’s why I wrote this article.
I want to show you ways to make your existing users happy and reduce churn with a retention strategy so you can focus your efforts on acquiring new customers without worrying so much about losing them.
What Is a Good Churn Rate For 2021?
All companies regularly lose a fraction of their customers. That’s bound to happen. Churn is a normal part of business and people know it. The question SaaS leaders often struggle with is, what churn rate is good and when should you feel alarmed?
Although there are minor variations in the results, the industry average seems to be around 5 – 10% per month.
If companies lose 5 – 10% of their customers (or revenue) monthly, that would result in an approximately 46 – 72% annual churn rate.
These numbers are incredibly high.
Any company in this category would have to spend much on customer acquisition before they can even hope to level out. It’s hard to build a sustainable business this way because you will be channeling so much time and money in staying balanced.
If you’re in the 5 – 10% churn per month category, the most valuable investment you can make in your business is to create high growth systems and processes that will help you raise retention incrementally.
We’ll consider retention in a later section, but first…
Why You Need a Retention Strategy: the Factors Affecting SaaS Churn Rate
If you’ve gone through SaaS churn reports before, you would likely get confused when you see varying benchmarks from different researches.
For example, some companies have churn rates between 5 and 10% per annum while others do that rate bracket per month. How could you possibly explain that? The three reasons below tell why this kind of disparity occurs in SaaS.
- When the company started: Startups have more churn compared to companies that have been existing for 5+ years. This trend happens in every business, but it’s particularly common with the SaaS model. When a new kid comes to the block, people like to test it just to see how it compares with solutions they have been using. Most of them will drop the software after a short while and churn will shoot up for the new companies. This is something every startup deals with on different levels but with time and product market fit, they start acquiring more targeted customers and achieving higher retention rates.
- Pricing and contract length: Generally speaking, SaaS companies with larger contracts tend to have fewer customers and lower churn rates compared to smaller contract companies.
Pricing is also why B2B companies experience less churn than B2C companies. The rationale is this: B2B services cost more, so customers will wait to be sure before considering a purchase, and usually, more than one person is involved in the decision making process. However, B2C companies like Netflix have shorter sales cycles, acquire customers more quickly, and have higher attrition (or churn) rates. According to the Recurly Research cited earlier, the average churn rate for B2B is 5% while that of B2C is at 7.05%.
- Positioning: Software-as-a-service companies could either position as vertical or horizontal. Vertical SaaS companies serve a specific niche market while horizontal SaaS companies are more or less universal in their offerings. For example,Veeva, is a vertical company that provides CRM solutions for businesses in the life science industry while Hubspot’s CRM is for just about any business that needs it. Vertical companies have smaller TAM (total addressable market), and highly targeted offerings which usually leads to lower churn compared to horizontal companies.
Why B2B SaaS Companies are Losing Customers
People are quick to point customer experience and the number of features (too much/too little) as the top reasons why SaaS customers churn. These factors are important and they have their place when the context is right, but every SaaS company is different.
Image source: bplans
Two SaaS companies operating in the same industry would experience churn differently, based on a range of reasons as outlined above. Thus, the best way to find out why you are losing customers is to research your business and conduct regular customer surveys (this includes surveying both existing customers and those who decide to stop using your service).
This should form the baseline of your retention strategy.
Your goal is to look out for recurring themes.
Are customers mostly leaving 3-6 months after their first subscription or do they last more than a year before they begin to drop off?
If you have an in-app set up where customers can review your product, what’s the average review you’re getting about their experience?
After gathering these important stats from your research, you will have a better understanding of why your customers are leaving and what you can possibly do about that. It will help you more than just following generalizations that may or may not apply to your specific situation.
I won’t talk about customer surveys in this article. If you will like a comprehensive guide on that, check this post by SaaS growth consultant Nicolas Mérouze. It’s the best I read on the subject in 2020.
Customer-Centric SaaS Companies Have Higher Retention Rates
Your marketing and sales activities can help you attract paying customers, but they won’t guarantee that those customers will stick around.
What would make them stick is not even the kind of solution you provide. The days of banking just on your solutions to keep customers renewing their subscription is gone. Unless you are the first and only company in your market, your solutions alone aren’t sufficient to keep customers.
You need to add something else. It’s that added experience that makes B2B SaaS customers stay when there are other similar solutions in the market. This is the core of your retention strategy.
What Drew says about Dropbox below is true for any SaaS company with competitors.
“People do not choose Dropbox because it has this much space or gigabytes. They choose it for the experience.” ~ Drew Houston, co-founder – Dropbox
Solve your ideal user’s problems, but make their life even better by giving them experiences they can’t find anywhere else. Customer experience is the advantage you have in a world where new SaaS companies are popping up daily.
Be intentional about making prospects and users experience your brand at every touchpoint. Give them top-notch experiences from your website to your email series to the product itself.
The top players have mastered this.
They spend money on building fast loading websites and creating website copy and content flywheels that can’t easily be replicated. This is what the likes of Hubspot, Databox, Shopify, etc., are doing. Ahrefs even spent $33,115 in 2020 on hiring three different copywriting agencies to come up with a new homepage copy for them. Watch the video where their CMO talks about it here.
You may not have the budget to spend like Ahrefs, but it shouldn’t stop you from taking your website design and content seriously. Treat these like assets and they would yield returns for you.
Other things you can do to improve customer experience include personalizing onboarding and doubling down on customer success.
Use Integrations to Make Customers Sticky
B2B customers are less likely to churn when they’re actively using your SaaS product. And one powerful way to make this engagement happen is to integrate other apps into your software solution.
Integrations simplify your customers’ work for them because it means they don’t have to be hopping from one app to another to get things done. This additional benefit provided through integration is a good reason for customers to keep using your product. It also helps acquisition, as you will see below from Typeform’s story.
Zapier reports that integrating with Typeform has helped the online form builder to reduce churn by 40% for customers who used the Zapier integration.
Typeform also experienced a 32% increase in daily sign-ups after this partnership with Zapier.
This is not an outlier situation.
There are almost countless stories of how integration helped SaaS companies skyrocket growth through a solid retention strategy. Slack is another example. Its rise to market domination is phenomenal and this success has been attributed, among other things, to its massive integrations and partnerships.
Integration is a core SaaS growth principle and a powerful way to reduce churn. The key to making it work is to study your ideal customers.
Survey them. Ask about their ideal workflows and what other solutions they use to complement what you’re providing. Armed with this information, you will know what SaaS integrations your customers would find useful and will be able to create a successful retention strategy.
Get Started With Your Retention Strategy
There are several retention strategies you can use to reduce churn, but not all of them are proactive. Being proactive gives you peace of mind. There’s something about not having to feel you’re in a tight spot, and preventing customers from leaking through the backdoor gives you that sense of freedom.
If you run a SaaS company or have access to your churn reports, you’ve probably compared it against the benchmark in this article. The 5 – 10% churn rate is the average reported, but your company could be surpassing it or doing way less. You’ve also seen three reasons why this could be happening.
What’s the next action to take?
Take out some time to survey your current customers that fit into your ICP. Or refer to data you already have from surveying them. Use that information as a tool for serving them better. You can start with the integrations we talked about earlier.