An Ultimate Guide to Customer Churn and its Prevention

Blog by Priyadarshini Natarajan

Customer churn is a metric that is evaluated monthly or annually to know how many customers stopped using your service. Most SaaS companies calculate customer churn along with revenue gain. As they might have a profitable month but at the same time lose customers. The profit from new customers won’t sustain for a long time if you keep losing them the next month.

It costs 5 times more to acquire a new customer. It might be difficult to retain your customers when the world is full of choices for them. Yet, people are people and they still stay loyal to their brands if they’ve been treated with a great service. In B2B SaaS, companies with annual contracts have lower churn rates while month-to-month subscriptions can have a 14% of churn rate.

Most customers churn due to well-known reasons that are not associated with the product. This indicates that you are not putting effort to have a proper customer onboarding, implementation, and customer relationship system in place. If the product is the brain these three are the heart of your business.

Customer success mainly depends on the experience you give them during the project. You need to look at your current system from the customer’s perspective and revamp it with a customer-centric model.

What is a customer churn?

Customer churn is when customers cease to renew their subscription or stop using your SaaS product. It is also called customer attrition. Simply put, the percentage of customers you lose over a period of time matters.

Customer churn is one metric that every SaaS company expects to go down. They are not happy when the percentage increases. High customer churn means low revenue. Customer churn happens at every SaaS enterprise. The number or percentage of customers you lose matters the most.

Most SaaS companies define the churning moment in two ways

1. When the customer stops the renewal
2. When the customer cancels the subscription

However, the lack of renewal is considered to be the real problem. Since your subscribers would have already paid for the service or product they aren’t considered to churn out yet. You still have a chance to redeem yourself and make things right.

What is the churn rate?

Customer attrition rate or Customer Churn Rate (CCR) is used to calculate the percentage of customers you lose over a period of time (monthly/quarterly/annually). This calculation is very important for both startups and an established enterprise SaaS since this decides their future revenue.

The basic churn rate formula is

However, this formula lacks accuracy. Imagine you calculate the CCR for this month. You might have 400 customers at the beginning of the month. You might have lost 10 customers at the end of this month. These 10 customers are yet to renew their subscriptions. Meanwhile, you have 20 new customers and you add them to this calculation. This does not help you know the monthly recurring revenue (MRR). Since your calculation also shows revenue gain.

In the longer run, you will not realize the percentage of customers you are losing every month thinking your churn rate is 0 or negative which is bad for the company.

Hence, to calculate the accurate number of CCR this formula is used

This is the formula that most enterprise SaaS use to find accurate CCR. Why so much complexity in calculating CCR? And why is it so important to calculate the accurate percentage?

Customer churn serves as the base metric system that directly affects your revenue gain. Your ARR and NRR high depend on customer churn.

Importance of Customer churn

The reason that customer churn is given more importance are listed below

• Customer acquisition costs are higher than customer retention. From generating leads to passing through the sales funnel to marketing, to onboarding to implementation the time, energy, and resources spent are relatively high than providing service to an existing customer.
• A minimal 5 % increase in customer retention can help you gain 25% of your profit. As most customers who return have the tendency to buy more. They also bring in business by acting as referrals.
• Calculating the churn rate is not just a reflection of your revenue but also a reflection of the value you offer to your customers. It helps you know whether you are running a customer-centric Saas company or not.
• Information is wealth. Knowledge of customer churn gives you an opportunity to find problems that you can mend. The features of your product, team members, customer service, and customer behaviour are all important aspects that you need to analyze to reduce customer churn.
• Evaluating the churn rate will awaken you to research more on the market and your target audience. If you have been running a SaaS company for more than a decade now, this research would help you to know the current trend and adapt accordingly.
• Once you learn the market trends and your competitor’s work, you can work on improving your USP. You get the chance to remodel your business, service, or product by having a competitive edge.
• High CCR can impede your growth by chasing away investors. There is no use in offering a great product or service if you have no customers to subscribe to it. So the investors might hesitate to put their hard-earned money into a start-up that is losing customers.
• When you know that your high customer churn is going to affect your revenue you’ll try to cut costs. You will try to reduce marketing, sales, and customer acquisition costs. This helps you to lower the big dent in your revenue.

What are the reasons for customer churn?

Now that you understand the importance of calculating CCR, the next step is to deep dive and find the problems.

Wrong Customers

A customer needs to fit the right profile while doing business with your company. At times, customers sign-up for service without actually knowing your service. They might subscribe to your service and then realize that your product might not be the solution they were looking for.

It happens when the customer lacks knowledge of your service or your sales team has signed them off to reach their target for that month.

In either case, the customers will realize it in a month or less. They have no choice but to quit your service and look for something that will actually help them.

Poor onboarding

Customer churn majorly happens between two phases

1. Signing up for your service/product
2. Achieving their first success with your service/product

If you don’t properly onboard your customers then it is likely to witness high customer churn during this phase. A customer might not understand your product, features, or the value it adds. They might lose interest due to a lack of service.

Since most companies provide freemium for the first month, there is a high chance for the customers to cease subscription after the first month if you don’t prove to them the value you add to them.

Poor implementation

After customer onboarding, comes the implementation process. Your team might have given the initial success yet it is not enough. You need to achieve ongoing customer success by delivering their desired outcome all the time.

No customer is satisfied only with the onboarding, they have chosen your product to help them throughout their subscription. They will fully understand your product and key features only with time. So, it is your job to keep them engaged by showing constant progress. Any lack of interest on your part will make them switch to your competitor.

Poor service

A study published by Oracle, says that 9 out of 10 customers quit the brand due to poor customer service. Bad customer service is one of the main reasons that customers tend to switch brands. One week is all the time period that your customer can wait for a response, exceeding that will definitely cause customer churn.

In most cases, they make noise about your poor customer service. It might be to their friends in the industry or the whole world through social media. This not only affects your existing business but also rejects future prospects.

Poor value

Do not mistake value for the price. Price is the last criterion for customer churn. In fact, 55% of customers would be okay to pay more price for a better service.

You can have the best of the best products in town and yet add no value to your customer. It means your onboarding wasn’t efficient enough to educate your customers about the value it adds. Lack of customizing the product can also deliver poor value. You cannot sell the same service or product to every customer, especially in the B2B space. No customer wants to be one among the crowd. They all run different businesses and their needs are different.

Bad Communication

You can screw up by lack of engagement or over-engaging with the customers. You cannot totally disengage with your customers after onboarding. You need to keep them in the loop about updates and progress. Also, you cannot span their mail by sending loads of irrelevant information. An email about a new feature or sending coupons or discounts on the next service would interest them.

Lack of brand loyalty

Sometimes customers switch to your competitors when they feel that they gain more value from them. This indicates that you haven’t built a loyal customer base. They are looking for the right opportunity to jump for a better product or pricing. Again it all comes back to the value you deliver. Gaining loyal customers is done over a period of time by catering to all their needs. Otherwise, they won’t value your service enough to stay.

Product

This is the core need of your customer. Yes, they do equally value your service but they will not stay just because you offer a great service. They came to you looking for a solution to solve their problems in the first place, if that is not satisfied then you may experience customer churn.

If your product has bugs, glitches, or downtime, they might not hesitate to switch. If your product lacks features or has too many features that customers fail to understand then it is a problem.

Pricing

Pricing might be the least concern of your customers but it still is a concern. You cannot offer a higher or a lower price for your product. You need to have your price at par with the value you deliver. A customer might usually wait a couple of months to see value from your service if you do not provide that then there is a high chance that they might shift to a product with a lower price.

Natural causes

Sometimes it is not your fault or there is nothing you can do to reverse the customer churn. They are considered to be natural causes. They are

• Your customers might have a financial crisis. They might shut down. For example, many companies shut down during Covid and there is nothing you can do about it.
• Personality clashes between the team and customers can make them churn. Or vice-versa, when there is an operational or team change, the customer might not feel comfortable continuing your service.
• Your product or service is not enough anymore. They might be early adopters who had chosen you in the first place. But as they scale up they might look for a different SaaS that helps them to solve their new problems. This happens once in a while and you cannot do anything.

How can you avoid it?

If there is a problem then there must be a solution, right? So take a look at them and try to keep them in mind to reduce the churn rate.

Customer retention

As mentioned before, customer churn can happen for many reasons. You cannot keep working towards the customers that are about to churn or have already churned. You need to focus on existing customers and their experience as well to prevent them from churning. You might have customers who’ve been working with you for years and you cannot have a lethargic attitude towards them.

Evaluate churn rate

Use churn rate or analytics to your advantage. Think of it as the base for rebuilding your operational system. Analyze when and where your customers are dissatisfied with your service. Look into the segments or the stages where major churn happens. Identify the internal mistakes that keep occurring repetitively. Try to correct your mistakes.

Engagement

Consistent communication is an integral part of good customer relationship. Be proactive and communicate with your customers. From welcome emails to success celebrations customers need to be engaged regularly. Try to be transparent with updates and progress on the tasks. Do not make them wait for the weekly or monthly meetings to say that you need more time to finish the task.

Feedback

Feedback should be collected regularly to improvise yourself. Asking appropriate questions and working on the criticisms is a part of the evolving process that will help you increase your rate of customer success. Customers after a year ay have different requirements from your service and need not know whether you’d be able to provide them. They may remain silent until the competitor gives them the service that they’ve been looking for. If multiple customers are looking for a feature that can help them then you can try to include that as a part of your service. All these things will be known only through feedback.

Keep customers happy

Your customers are not looking for rewards or incentives. But it might not hurt to make them happy once in a while. Your customers are looking for an experience that will make them feel happy and satisfied. Discounts, rewards, and incentives are part of the package that might surprise them. Do it once in a while to make them happy.

Offer Good, no, A great customer service

Take responsibility to make your customers feel satisfied. They need to feel like their worries and queries are being addressed properly. Customer service is the top criteria that people look for in vendors. The way you address a mistake or the time you respond to ticket matters a lot. The customer is the king/queen and they need to be treated like one. You cannot make them wait. Have a team dedicated to customer service. Allocate a single person of contact for all the customers so that they can be responsible for solving the issues immediately. This helps to minimize customer service problems.

Automation

Automate your onboarding and implementation system. You can try software that predicts customer churns in advance. Having customer data and reports of the pending work can help you locate the problems and solve them before things get out of hand.

For instance, CogniSaaS is a customer onboarding and implementation tool that helps you to analyze customer churn, and ARR in advance. It also suggests which customers you need to focus on ASAP. You can solve them one by one to lower your churn rate.

Onboarding

The initial hook-up with your customer needs to be lit! It is an opportunity to make a great first impression. Most customers make purchase decisions during this phase. Your onboarding should customer training and genuine care. You need to know the customer’s requirements and deliver value accordingly. You need to make them understand your product and its features. This will make them use your product regularly.

Exceed expectations

Expectations are set during the onboarding phase. Do not over-promise and regret it later. Always promise them what your service or product can deliver. Delayed delivery or lack of value for delivery can cause customer churn. Try to deliver on time or even before. Exceed their expectations by delivering them more than you promised.

A simple hack would be to avoid explaining all the features to your customers during onboarding. Explain the important features and allow them to explore the rest by themselves. They are surprised and you’ve delivered them more than what they needed.

Lend ears

Do not assume your customers’ problems. Listen to them carefully. Don’t take them for granted. You may have theoretical knowledge of the industry and your product but your customers have practical needs. You cannot turn deaf ears to their needs and concerns. Customers came looking for a solution to their problems so try to help them resolve the issue. You have to customize your product for each customer based on their needs. Take their criticisms seriously.

Deliver value

Your product should deliver value to the price they pay. You should neither overprice nor underprice your product. Try to meet their expectations consistently. Be happy about their success. Respond to tickets and escalations immediately. Be available for communication. Keep your clients informed. Make them feel special by inviting them to your special discounts.

Onboard right customers

You need to identify the right customers. Use buyer personas to analyze the right customers. Your sales team might have pulled in customers by over-promising but that might backfire later. It is only going to cost you more. Your CAC and customer churn rate are going to put a huge dent in your revenue and brand name.

Prevent natural churn

Make sure your team and customers get along. Personality clashes are common but try to resolve them before it gets out of hand. Try to avoid changing teams in between a project since it can make your customer uncomfortable.

Payment issues are common. Sometimes the customer might forget or have payment issues. Make a reminder call. Many companies hesitate to do so fearing that they might end up canceling their subscription.

To Summarize

Now you know the importance of customer churn in a B2B SaaS. Focus on the existing customer more than acquiring new customers. Customer retention not only prevents loss of revenue but it also helps in gaining additional revenue. Try to use softwares that helps you analyze customer churn in advance so that you can focus on prevention.

CogniSaaS is one such product that works on customer-centricity. It focuses on customer onboarding, implementation, deliverance, communication and evaluating customer churn in prior.

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