This sponsored post is produced in association with Preact.
Everyday, software companies spend significant amount of time, resources, and funds to acquire new customers. Once they obtain them, the goal is to keep their new customers happy, engaged, and loyal.
Reducing customer churn (also referred to as attrition rate or customer defection) is a perennial problem that companies and businesses across a variety of industries face on a daily basis. And companies whose business model is focused around the concept of Software as a Service (SaaS companies) — offering their customers a software license on a subscription basis for recurring revenue — are especially vulnerable to churn. The entire success of the SaaS business model is tied to keeping the churn rate as low as possible.
The evolution of the SaaS economy
The world of SaaS has changed dramatically over the past decade. Traditional enterprise companies grew their businesses by individual sales reps. Things were much simpler then — sales reps leveraged customer relationship management (CRM) software like Salesforce to go from one new business opportunity to the next. Once a sale closed, that was the end of the sales interaction with one customer and the rep simply moved on to the next potential customer.
Today we live in an era where recurring revenue is king and a sales rep’s job doesn’t end after closing a new customer lead. The sustainability of successful (and scalable) SaaS companies is focused on a modern sales process of closing new customer leads, quickly followed by an integrated company-wide approach across success, product, and engineering to ensure that new customers are happy and continue to pay, renew, and purchase additional services. It’s a trend affecting all SaaS companies and is now taking center stage.
Plus, as software companies become more mature and growth rates slow from the 90+ percent rate, organizations must put much more focus on customer retention.
Defining and calculating SaaS customer churn rate
What is customer churn? The short answer is the number of customers or subscribers to a service who cut ties with the company or service during a given time period. A customer signs up for a contract and at the end of that contract, despite a company’s best efforts, decides not to renew their contract.
Customer churn affects B2B enterprise companies as well as B2C-focused SaaS companies like Netflix or Pandora. For example, if you sign up for an ad-free monthly Pandora music streaming subscription and at the end of the second month, you decide not to renew your subscription, Pandora’s churn rate just increased for that month.
Calculating customer churn rate is done by dividing the number of customers who cancel during a given period (week, month, quarter, year) by the total customers at the start of that same time period. There are specific formulas based on different SaaS business models but this is the basic formula for customer churn calculation. This is not to be confused with revenue churn, which can be misleading based on the occasional high-revenue customer churns (both positive or negative).
The power of data to evaluate churn
Churn offers us a bird’s eye view of a very strategic metric: “How many customers did we sign up and how many did we lose?” That’s what matters to your CEO and that’s what churn will tell you. However, that’s a long-term approach and, while very important, doesn’t allow you to be as nimble as you could be in order to pivot when necessary to manage and control your churn rate.
There are short-term metrics that we’ll call ‘Proxies for Churn.’ Cloud-based customer success systems like Preact allow you to track these proxies to identify unhealthy customer behaviors that, when married with the use of data science, can steer business leaders towards a healthier retention rate.
Here are a few customer behaviors that are key to understanding your potential customer retention rate and how you can keep your company’s churn rate to a minimum.
- Software on-boarding: This is one of the most critical points in the customer retention process. Customers who complete the SaaS on-boarding process are more likely to renew than those who don’t. If you’re tracking customers that aren’t completing or finishing your on-boarding process, you need to reach out to those customers immediately and assist them with the process. Quite simply put, you can’t renew a customer that hasn’t been able to use your service.
- Platform stickiness: If your customers are requesting reporting and leveraging site analytics, it means that they are receiving a benefit from your service and are likely to stick around longer than those who never leverage your platform utilities. It means your service is sticky. Sticky is a good thing. So promoting these services is also a good thing.
- New functionality: Track how many customers are using new functionality introduced on your service. What’s the usage rate after the first week, the first month? That will tell you the value of the new functionality and whether that is helping you lower your customer defection rates.
- Customer engagement: How is your customer engaging on your application and platform? Are they clicking through on content and communication that you are sending them?
Relying too hard on intuition
“This is what I believe is a healthy customer.” Sound familiar? One of the most common mistakes in addressing customer churn is relying too heavily on your personal intuition and experience to dictate a company’s short and long-term strategies. Fortunately we live in an age where you can leverage data science to decode customer behavior and use your intuition as part of the final equation.
Best practices to minimize your churn rate
By mining and analyzing all your customer behavioral data, you can gain better insights into your customers’ needs and preferences. This information will enable you to develop a customer success strategy that ultimately will enable you to better serve your customer base.
Here are some best practices to keep your churn rate to a minimum.
- Perfect your on-boarding process: Ensure that the on-boarding process is simple and easy. The customer should never be intimidated to begin using your service.
- Put the proper near-term metrics in place: Align your short-term goals and metrics in order to ensure that you can pivot as needed to keep your long-term churn rate in a downward spiral.
- Customer journey: As marketers and business leaders, you need to be able to understand and create a continuous and measureable customer journey and process. From the moment they see your initial ad, sign up for your service, go through (and hopefully complete) the on-boarding process – how you make that a seamless and frictionless process is what will ultimately drive customer churn down and keep it down.
- Ask outgoing customers why they are leaving: Ask outgoing customers why they cancelled or want to switch to a competitor. Use that data to better understand your customers and adjust your service and offerings accordingly.
- It’s ultimately a combination of art & science: Leverage the power of data science along with your business intuition on your customer base to get a 360-degree view of what their behavior is telling you. Use this holistic approach to create an integrated strategy to engage your customers and help them solve both their immediate and long-term business challenge.
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