Bringing new customers in the door is important for any business. But holding on to customers you already have is arguably even more important for SaaS companies, which follow a business model heavily reliant on ongoing customer relationships.
This is why a metric called logo churn is among the most important things that SaaS companies should be tracking. Logo churn is a measure of the rate at which a company is shedding customers over time.
What is logo churn?
Logo churn looks at how many customers cancel or decline to renew their subscriptions during a set period. This type of churn is distinct from monthly revenue churn rate (MRR churn), which focuses on…you guessed it, how much revenue is lost (or gained) due to contracts canceled during a set period.
How to calculate logo churn
To calculate logo churn, take the number of customers that you lose during the given period you’re measuring, and divide it by the number of customers you had at the beginning of that period.
The resulting number will be between 0 and 1, and is most often expressed as a percentage. For example, if you started out a given year with 1,000 customers and you lost 100 of them over the course of the year, your logo churn would be 0.1, or 10%.
Analyzing your SaaS logo churn
Your logo churn rate gives you important insight into how well you are satisfying your customers. Even if you are gaining new customers rapidly due to effective SaaS marketing, if your churn rate is high it means you’ll struggle to grow your company over the long term.
According to a meta-analysis of studies about churn by Ryan Law, cofounder of cobloom, established SaaS companies that are on track for an exit should aim for an annual churn rate of 5-7%. Earlier stage companies and those targeting small and midsize businesses (SMBs) will likely have much higher rates – closer to 5% per month.
Regardless of your logo churn rate, it’s important to realize that churn during a given time period isn’t as salient an indicator of your company’s prospects as the change in your churn over time. Law clarifies this, saying:
“As your product continues development and your business model matures, you should get better and better at closing and retaining good fit customers. In other words, your churn rate should improve over time. Absolute churn rates aren’t as important as changes in churn rates.”
How to improve your SaaS logo churn rate
A high logo churn rate likely indicates some problem with how your customers are engaging with your product, whether they simply aren’t using it well or they are not the right customers to begin with. Consider these methods of improving this issue.
Think through your user onboarding process. If customers don’t feel comfortable with the product from the start, they are unlikely to become consistent, ongoing users. A streamlined onboarding process that encourages customers to take ownership of the product will increase long-term retention.
Review your sales and marketing messages. It’s possible that you have high logo churn because you’re attracting the wrong kind of customers who aren’t a good fit for your product. Review how you’re conducting your sales and marketing — have you defined your ideal customer profile to ensure are you targeting the right audiences? Are you making it clear what problem the product solves?
Improve the product. Creating a product that better responds to the needs of your customers is another way to make sure there’s a tighter fit between your users and your product. You may need to increase spending on research and development (R&D) to shift your product positioning and offer the features that will really satisfy your customers.
Move toward annual contracts. One source of logo churn can be people failing to renew their monthly subscriptions. This may be solved in part by pushing people toward annual contracts. One advantage of annual subscriptions is that the higher commitment will cause people to better self-qualify as being a good fit for your product.
Target a niche audience. Niching down is a way to create a better fit between your product and your audience. If you can solve very specific and pressing problems in a particular area, those who need that solution are likely to stick with you long-term.
Measuring your SaaS logo churn and identifying how to improve this metric are excellent, strategic business moves. Keeping the customers you’ve already got is one of the best things you can do to ensure a long and thriving future for your company.
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