Customer churn is a business’s worst nightmare. First, you lose your customers, then your revenue.

An increasing number of churning customers indicates that you are not satisfying your customers—maintaining product quality or providing efficient customer service.

Make sure you calculate your customer churn so that if you are losing customers, you correct the problems immediately.

In this blog post, we’ll discuss how to anticipate potential customer churn and the consequences of not reducing your customer churn rate.

How Does a Customer Churn Rate Affect an Engine of Growth?

Let’s first talk about the engine of growth.

An engine of growth is the mechanism a SaaS entrepreneur uses to achieve long-term growth and build the fastest-growing companies. The three engines of growth are sticky, viral, and paid. Let’s look at each of them.

#1 – Sticky

A sticky engine of growth is all about retaining your existing customers month over month and in the long term.

#2- Viral

When your existing customers bring new customers to your SaaS business, it’s a viral engine of growth. Your product grows virally and your customer base compounds. Instagram is an excellent example of a viral engine of growth.

#3 – Paid

In a paid engine of growth, you gain new customers through paid ads. With more profits from each paid customer, you will be able to re-invest in more paid advertising.

The paid engine of growth usually starts after sticky and viral growth is established. Otherwise, the expense can be inefficient. Choose the right engine of growth at each phase to make an impactful difference in your net profits.

Here’s how your customer churn affects each engine of growth:

#1 – Sticky – Negatively Impacts Your MRR

Customer churn degrades your MRR every month. In the long term, churn can reduce your net revenue.

If you spot a consistent decline in MRR, your product success is at risk as it is failing to satisfy your customer.

#2 – Viral – Affects Your Brand’s Reputation in the Market

When your existing users are not satisfied with your services, they will not recommend your SaaS product to anyone. Worst case, they might even talk negatively about your product through word of mouth or by posting negative ratings and feedback on the internet.

Prospects who might think of using your services will notice and believe your product is no good.

Imagine your friend telling you that X phone is terrible – it often hangs or comes up with frequent technical errors. Will you want to invest your money in this phone?

There you are. Customer churn can negatively influence your brand’s reputation.

#3 – Paid – Exhausts Your Marketing Revenue

If you acquire a customer through paid advertising, you should be generating a profit greater than the customer acquisition cost (CAC) for that customer. But, if this customer churns, all the money and marketing efforts you’ve put into gaining this customer is lost.

If many customers churn, your SaaS company will pay the price in lost revenue and an exhausted paid ads budget.

If you are a startup at its early stage, you might even go into debt, unable to repay your paid ad marketing loan.

It’s important you prevent customer churn in the early stages by identifying the lagging and leading indicators.

Lagging vs. Leading Indicator

A lagging indicator points backward. It tells you about the events that already took place. For example, customer churn or revenue churn.

A leading indicator points forward. Leading indicators for customer churn are the “red flags” that indicate the possibility a customer may churn in the future. Indicators might be customer dissatisfaction or less user activity with your SaaS product.

You can calculate lagging indicators easily, but changing them is difficult. In contrast, leading indicators are difficult to calculate but comparatively easy to change.

You can spot past failures or progress of your business with lagging indicators. In contrast, leading indicators can help you predict future outcomes for your SaaS business.

Lagging indicators are triggered when an event occurs, like customer churn. And, they are helpful for measuring your SaaS business KPIs like sales, MRR, and LTV.

Lagging indicators are unchangeable and are usually accurate.

Leading indicators aren’t completely reliable, and their status may change in the future. For example, you can nurture dissatisfied customers and convert them into premium subscribers.

Leading indicators tell you the direction your SaaS brand is going. You can still change the direction if you take action promptly.

Both lagging and leading indicators are important to measure and manage your SaaS performance over time.

While there can be multiple leading indicators of customer churn, a few of the most important are:

  • User interface
  • Product quality
  • Ability to upgrade
  • Seamless customer service

Keep your eye on both lagging and leading indicators to maintain your company’s growth, and then focus on expanding your customer base.

What Are Some Leading Indicators of SaaS Customer Churn?

Let’s begin with an example. You discover a much-hyped game Y. You decide to try it out. When you begin playing the game, you find it fun and spend 3-4 hours on it daily. But, within a week’s time, you realize that the game is going nowhere – it’s monotonous and similar on all levels. Your excitement has worn off. What will you do next?

You might spend fewer hours on this game, and gradually stop playing it. This is the point where you will churn.

As a SaaS entrepreneur, you must look out for such indicators, and take action in time to prevent the churn from happening. Let’s look at some leading indicators of customer churn:

Less Customer Engagement with Time

This happens for a variety of reasons. Perhaps the customer lost their internet connection or experienced a health problem. But usually, they are engaging less because they don’t find your services compelling enough.

Look out for these warning signs:

  • The customer spends less time on your site
  • If they are paid customers, there are discrepancies in their payment date
  • The customers raise issue tickets more frequently
  • They downgrade to a lower paid plan

Higher Prices

Your customers may compare the cost of your services with your competitors – even if your services offer a solution to their problems.

Most people look for cheaper options since your SaaS product is not the only thing on their spending list, is it?

If your customer finds your services expensive for the value they receive, or if your competitor is providing the same services for a lower cost, they might churn.

While you work on your product and marketing strategies, keep an eye on your competitor. Compare which services your competitors provide in their paid plans, and tweak your pricing models or marketing strategies. For example, you could offer a 10% discount to price-sensitive customers.

You can also analyze the services your competitors are offering, and see if there are any weak spots in their performance. If there are, try to address them through your SaaS product.

If your product is working well, you don’t want your paying customers to opt out because of pricing issues, do you?

Change in Business Needs

If the industry trend shifts or your SaaS business services are not in much demand, your SaaS product’s value will decrease. In that case, if you don’t lower your prices, your customers won’t find any reason to stick around with your product.

On the other hand, if your customers’ business needs change, and it doesn’t align with your services, the customers will churn.

If your client’s business has a change of staff and the new team members prefer a different software, they might abandon your product.

Understand how your customers perceive your product, and try to address their needs.

Myths about indicators of churn in SaaS

Myth 1 – Zero Churn Is the Ideal Goal

A zero churn rate sounds great.

Consider this. As a SaaS business, a low churn rate is your goalpost, and you plan your customer retention strategies to hit this target.

But despite your endless hours of hard work, a percentage of your customers still churn. How does that make you feel?

No, you are not a failure.

Let’s face it – customer churn is inevitable. As we have already covered in how does churn rate affects your business?, even a billion-dollar company like slack loses its customer. Then what’s the deal here?

Myth Debunked:

Set realistic expectations for your SaaS business. Even though your product and marketing strategies are going great, getting excited and setting a zero churn goal will only disappoint you. It will also affect your motivation to keep going.

Every customer is different and has different expectations from your SaaS business. You want to satisfy every single customer, but you may miss some of them. That’s okay.

Aim to reduce your current churn rate by 4-5%. Focus on retaining as many customers as you can, and you’ll eventually reduce your churn rate.

Take these steps to reduce your customer churn:

  • Target hyper-segments of your customers by using Glance.
  • Make a personal connection with your customer through a solid customer service team. Empathize with their needs, understand their feedback, and surprise them with discounts and vouchers.
  • Analyze how your customer interacts with your SaaS product. This is a good place to spot any leading indicators for customer churn.

Myth 2 – Your Product Is the Only Highlight of Your SaaS Business

No, it’s not. Your product is important, but you can’t solely depend on it to make a fortune.

Thousands of great SaaS products are lying on the internet. They provide great services but have failed to catch their target audience’s attention. Why?

There can be many reasons including scarce reach, not having a market for their services, reaching the wrong audience, or a lack of capital.

Myth Debunked:

Don’t rely on your product to sell itself. Build your success by focusing on the right areas. Here are some actionable steps you can take:

  • Work with a great technical expert team
  • Focus on your engine of growth
  • Do extensive market research before working on your SaaS product
  • Perform a competitive analysis
  • Keep a plan B ready, in case your product doesn’t sell
  • If you lack funding for marketing strategies, consider talking to an angel investor

Myth 3 – You Must Focus on All Customer Data to Reduce Customer Churn

You have boatloads of customer data at your disposal. And you might think all this data is important. You might spend a lot of time evaluating each point without finding any meaningful clues. Chances are, you might never identify the right data to empower customer growth.

Myth Debunked:

You need to dig into these heaps of data and pick the most important data to work upon. When you use Glance’s services it singles out the churn risk opportunities and offers you content suggestions to reduce your customer churn and level up your SaaS growth.

How to Analyze and Measure Customer Churn for Your SaaS Business?

New customers are important to scale up your business. But at the same time, keeping your existing customers for the long term also matters. You need to focus on both aspects – more customers entering through the front door and fewer customers exiting through the back door.

You can experience both voluntary churn and involuntary churn. At times, you may experience good churn. What is a good churn? The customers who aren’t your target audience may exit your SaaS product on their own.

For example, a customer looking for a regional content streaming platform may accidentally register on an English content streaming platform. It will do no good for either the provider or the customer. The customer might realize this and churn.

Good customer churn helps you build a database of valuable customers.

To do a churn analysis, measure your churn rate using the following formula:

Churn rate = [(Number of customers lost in a time period/Number of customers at the start of the time period)*100]%

You can set the time period to a week, month, quarter, or year.

Then, come up with solutions to:

  • Support your customers through their pain points.
  • Improve your customer acquisition strategies
  • Update your SaaS product if there is a need for it, depending on your customer data.

Identify Your Customer Churn Indicators and Increase Your Customer Retention with Glance

Glance helps SaaS businesses like yours to understand the customer journey for your product and capture relevant metrics and data to keep churn levels at a minimum.

Register for a free trial of Glance (we don’t ask for your card details), put in some details about your SaaS business, and get your churn analysis report in your hand.

We also offer you hyper-segments based on your SaaS context, and content suggestions to improve your business growth.

Let your SaaS growth journey begin!

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