For SaaS startups, customer acquisition may seem like the Holy Grail. Getting new customers in the door is vital to building a viable company, after all.
And fast-growing startups can see increasing their customer base as the key method of boosting revenue as quickly as they—and their investors—want.
But what then?
SaaS startups in particular need to think further ahead than the moment a buyer clicks “purchase.” It’s essential that those buyers stick around for a good long time. The monthly revenue from ongoing subscriptions is a far better income stream to count on than new customers attracted via costly acquisition strategies.
No SaaS company’s going to survive—much less thrive—without continuous revenue from satisfied customers. This is why churn is Kryptonite for these startups.
Customer churn is a key metric investors and others use to assess the health of a SaaS business. At a basic level, it is the rate at which subscribers cancel their services. Calculating churn is more complex than a simple equation, however, especially for new startups that are in the ramp-up acquisition phase and still working to achieve product-market fit.
But whatever stage your company is in, you should be thinking about the following strategies for reducing churn as much as possible.
1. Listen to your customers
Soliciting feedback from your customers—and really listening to it—is probably the most important thing you can do to reduce churn, especially in the early stages when you’re actively working to find product-market fit.
Ensure that your customers have easy methods to ask questions and voice concerns, and that someone is tracking those communications and working to respond and implement solutions. Reach out to your customers with questions of your own if you feel something isn’t working as well as it could be.
2. Focus on onboarding
Customer success consultant Lincoln Murphy came up with the phrase, “seeds of churn are planted early”—if onboarding doesn’t bring customers their initial desired outcome, as they define it, then churn is much more likely over time.
Asking customers to identify the initial outcome they seek and then working to communicate with them as they reach milestones along the path to this outcome is an excellent way to ensure that their experience of using your service will inspire them to stay.
3. Consider your natural switching costs
One way to discourage customers from leaving is to build natural switching costs into your system. Oftentimes a high cost of switching has to do with how much data a customer has inputted into your system, according to Joel York, CEO and founder of Markodojo.
Encouraging a customer to add more and more data to the system through a gradual process of “application discovery” makes the costs of switching higher over time, thereby encouraging customers to figure out how to make the system work for their needs instead of abandoning the subscription in search of a different service.
4. Look for warning signs
There are clear early-warning signs that a given customer is moving toward cancellation. A customer’s subscription may be at risk if their daily use starts tapering off or if they aren’t using some of the features that are integral to robust delivery of value. Other at-risk customers are those who report difficulty using the software or seek help as they struggle to fit it to their unique needs.
There are various applications that can help track signs of trouble. Intercom, Totango, Gainsight, ChurnZero, and ClientSuccess are all good options to help you keep tabs on customer activity so you can figure out how to intervene constructively.
5. Encourage annual contracts
One obvious way of reducing churn is getting customers to sign on for a full year instead of going month by month. The trick is to entice commitment via discounts for those who pay upfront for 12 months. This not only reduces churn, but also gives you more on-hand cash to invest in your company (though the discounts eat into your revenue).
Danan Margunson, General Counsel of Tune, Inc., says that there a lot of myths about annual contracts that keep companies wary of this solid option. He believes the reality, however, is that “annual commits are virtually always better for your company, and often better for your customers, too.”
Indeed, doing whatever is better for your customers should be the North Star for SaaS entrepreneurs aiming to reduce churn. The more dependably and robustly your service meets your customers’ needs, the more likely they’ll be to stay with you over the long haul.
Want More SaaS Metrics?
This guide explains the core metrics used to measure SaaS company success. Using simple examples, we’ll show you how to calculate each metric, and describe why specific indicators are important to investors.