The secret to a business’s success is a fine balance between customer acquisition and customer retention. The mistake that most businesses make is to stay focused on customer acquisition. No doubt that customer acquisition is important for a company’s bottom line, but even more important than that is retaining your existing customer. Lowering the churn rate is one of the best growth strategies that your company can adopt. For SaaS companies, lowering churn is key to improving revenue generation.
You must be well aware of the cost of acquisition. And every year this cost keeps increasing. According to a Forrester report, customer acquisition cost (CAC) is five times higher than the cost of customer retention cost (CRC). Acquiring customers requires mammoth effort and resources at every stage- from initial interaction to finally closing the deal. So if CAC takes a majority stake in your marketing budget then it’s probable that you are not investing as many resources on improving relationships with your existing customers which makes them more likely to churn.
The longer your customers stay with you, the lower your churn rate will be and the stronger your business will grow. Reducing churn is the first step to customer retention and customer loyalty.
Most enterprise-level businesses aim to reduce churn to less than 1% annually. You might think that’s impossible but implementing sustainable strategies, with customer satisfaction as a central driver, is possible for businesses to lower their churn rates to less than 1%.
What is churn rate?
Customer churn rate is defined as the percentage of a company’s total customers that stop doing business with the company over a specified time period.
How to calculate churn rate?
To evaluate your company’s churn rate, choose a period of time you want to measure and identify the following values:
- Number of customers at the start of the period (X)
- Number of customers lost during that period (Y)
Then, use the following formula to determine your customer churn rate (Z) as a percentage.
Z= (X/Y) * 100
For example, if a business had 100 existing customers at the start of the month and lost 10 customers by the end of the month, it would divide 10 into 100, and get .1, or 10 per cent. This means the company had a monthly churn rate of 10 per cent.
What factors lead to customer churn?
A multitude of reasons contributes to customer churn. Some of which are:
- Price– Price is a common denominator on why customers tend to churn. If your customers find a cost-effective solution to their problems then they may choose the alternative over you. This means that you will have to offer products and services that add value to customers. A comprehensive customer onboarding campaign will ensure that customers feel that the purchase was worth its price.
- Product fit– Inadequate product fit is another common reason for customer churn. This requires sales and customer services alignment. If sales personnel are not incentivised well and always hustling to meet a quota then they may not be able to sell to good-fit customers. This inadequacy in the sales process results in churn within a short time-frame when customers realise that the products/services purchased cannot aptly solve their problems or address their pain points.
- User experience– Flawless user experience is critical to customer satisfaction. If your applications and software lack usability then your customers will be less likely to use it regularly and opt for a superior alternative. Bad user experience leads to customer churn.
- Customer experience– Customers look for value in whatever they purchase. Additionally, they tend to stick to businesses that can create a positive brand experience. An exceptional customer experience that encompasses every customer touchpoint- marketing content, social media channels, customer support team, and account managers, will ensure greater customer retention. If your brand’s customer experience falls short then your customers will likely churn.
How to reduce the churn rate?
It’s generally accepted that anywhere between 5-7% is a healthy monthly churn rate. For established and successful SaaS companies, the churn rate should be around 5-7% annually. For SaaS companies in the early stages, the ideal churn rate is around 5% monthly. For SaaS companies in the financial services domain, a rate of less than 20% is ideal. SaaS startups serving SMBs tend to operate with higher monthly churn, somewhere between 2.5% and 5%. Saas companies operating within the mobile industry should aim for less than 30%.
Getting your churn rate to less than 1 per cent is possible but it requires more than one-time gimmicks like slashing prices by 50% or hiding cancellation charges. Regardless of what your current churn rate is at, the following strategies will help you lower it further:
- Listen to your customers– I can’t stress this enough… You must listen to your customers. This is key to keeping your churn rate low. Customers are 5.2x more likely to purchase from companies with great customer experience. Listening to your customers will help you understand their interest, motivations, and pain points. Asking the right questions will help you know your customers and their buying behaviour better. These insights are essential to creating a customer experience that your audience will appreciate. Every stage of the sales funnel, from awareness stage to actual purchase, must be developed from the customer perspective. Customer issues must be resolved swiftly to reap the benefits and enhance retention.
- Keep communication open at all times– Engage and communicate with customers proactively to make them feel they are valued by your company. Outreach to your customers to let them know that you are heavily invested in helping them find the optimal solutions to their problems. Proactively communicate to urge customers to explore more features and services that your company may provide. Engage with them across multiple channels. According to a recent report from Marketo, the most efficient customer engagement channels for B2B companies to reach out to their existing customer base is through email marketing.
- Educate your customers– You must provide essential information about your company and it’s products to generate interest, engagement, and familiarity. Offer free training, webinars, video tutorials, and product demos to make your customers feel comfortable and informed. Educating your customers will enable them to make the most out of their purchase, which will likely improve satisfaction and retention.
- Define your most valuable customers– There are monetary benefits in identifying and incentivising your most valuable customers. Segment your user base into groups of profitability, eagerness to leave, and their likelihood to respond positively to your offer to stay. Segmenting your customers in these parameters will help you predict churn rate. Separate your most valuable customers from the rest and go the extra mile to retain them. These customers are the ones that bring the most revenue to your business. So make sure that you take extra care of these valuable customers.
- Offer incentives– Offering incentives and discount offers is widely regarded as the most effective tactic in reducing churn. You have correctly evaluated whether offering an incentive is beneficial for you. That means you have to be sure that the costs of your retention program do not outweigh the profits to be gained from the customers you intend to save.
- Identify at-risk customers– It’s important to identify at-risk customers even before they cancel their subscription. Keep a lookout for engagement flags, such as less frequent website visits than before. For example, customers may go from using the service daily to weekly and then monthly. Track the drop in usage across the entire group and then send out re-engagement emails to these users to invigorate and encourage them to re-join.
- Improve the customer onboarding process– How you onboard new customers are one of the most critical factors that determine whether they stay with you or not. 40-60% of people who sign up for free software or SaaS application trials will use it once and never again. It’s most likely because they’re unable to see how they could benefit from the product. This is why you need to improve your onboarding process.
- Improve customer service– To reduce churn rate, you’ll need to provide exceptional service that makes existing users feel valued. Account managers must be trained to effectively create and maintain close relationships with their customers while addressing their questions and queries. Great customer service is key to building customer loyalty.
In conclusion
Churn can hurt your business’s bottom line. The trajectory of your company should be focused on reducing churn and enhancing customer retention. Simply put, it will make you more money than acquiring new customers.