Reducing Churn Rate: Proven Tactics for SaaS Companies

As a SaaS business owner, you know how hard it is to grow in a market that is already very crowded and competitive. But did you know that 70% of SaaS companies fail in the first 20 months after getting their first funding? One common reason is that people don’t understand or keep track of important financial metrics like Annual Recurring Revenue (ARR). Figuring out your ARR is more than just numbers; it can help your business grow in a way that lasts. Let us break it down so that you can make good use of this useful metric.

What is ARR, and why does it matter?

ARR, which stands for “Annual Recurring Revenue,” is the steady flow of money that your business gets from subscriptions every year. It’s the beating heart of any subscription-based business because it shows how healthy, stable, and likely to grow your income stream is. ARR gives you a clear picture of how well your SaaS business is doing, and if you do it right, it can:

Help People Make Decisions: ARR lets you plan for future growth by showing you what’s working and what needs more work.

Bring in investors: Investors use ARR to figure out how profitable and scalable your business is.

Re-Engage Customers: You can find churn risks and deal with them effectively by keeping track of ARR by cohort or segment.

ARR calculation is hard for many SaaS founders because they forget about details like refunds, discounts, and different price tiers, even though it’s very important. Let’s make things easier for you so you can keep growing your business.

How to Figure Out ARR: A Simplified Formula

ARR is the total amount of money made from recurring subscriptions over a year. This is how it works:

ARR equals (Total Monthly Recurring Revenue) times 12.

Even though this seems simple, there are a few things to keep in mind:

Leave out non-recurring income: Don’t include setup fees, consulting fees, or services that don’t happen again and again. ARR only shows income that can be predicted.

Take Discounts Into Account: If you offer discounts, you should figure out how much money you actually made after the discounts.

Deal with upgrades and downgrades: Include changes to subscription plans when customers move up or down in the plan.

Think about refunds: Take any credits or refunds away from the total.

Such as: If you run a SaaS company, let’s say you track the following:

50 clients who pay $100 a month

10 customers who pay $200 a month (premium tier)

Your recurring monthly income (MRR) would be:

MRR = ($50 x $100) + ($10 x $200) = $7,000.

To find ARR, multiply $7,000 by 12 to get $84,000.

If you figure out ARR correctly, you can see how your business is doing financially.

Why figuring out the ARR isn’t just a number

Figuring out your ARR isn’t just about finding out how much money you make; it’s also about getting information that can change your business:

Management of Churn: Over time, high churn rates can hurt ARR. Regularly keeping track of ARR can help you find customers who are likely to leave and take steps to keep them.

Predicting sales: ARR helps you make more accurate revenue predictions, which in turn helps you better use your resources.

Divide customers into groups: You can figure out which groups of customers bring in the most money and make your marketing more effective by breaking down ARR by group.

Researchers have found that companies that regularly track and act on ARR trends grow 1.5 times faster than those that don’t. This shows how important it is to not only figure out ARR but also use it as a main tool for making decisions.

Problems that often happen when figuring out ARR and how to avoid them

ARR can be hard to figure out, even for experienced SaaS business owners. If you want to avoid making these mistakes, read on:

Including Non-Recurring Revenue: Make sure that your ARR calculation only takes into account revenue from subscriptions.

Not Paying Refunds: Even small refunds can add up and throw off your ARR numbers.

Overlooking Expansion Revenue: ARR goes up when you upsell or cross-sell to existing customers. Don’t forget to add these gains.

Not Making Changes for Churn: Cancellations by customers have a direct effect on ARR. Keep your calculations up to date to account for these changes.

By staying away from these mistakes, you can keep an accurate and useful picture of how your business is doing financially.

Getting Customers Again Getting ARR Insights

ARR is more than just a way to track sales; it also tells you something about your customers. It could be a sign of churn risks if you see falling ARR in some cohorts. In the same way, rising ARR in other segments could mean that there are chances to cross-sell or upsell.

This is where tools like HubSpot come in handy. You can act on ARR trends with HubSpot’s detailed information about customer behaviour, engagement, and satisfaction. By connecting ARR data to HubSpot’s CRM, you can: Find customers who are likely to leave and send them targeted campaigns to get them to stay.

Tailor your upsells to people based on how they’ve behaved in the past and their subscription level.

To keep relationships strong and cut down on turnover, automate workflows.

HubSpot’s data-driven approach makes sure that you don’t just keep track of ARR, but also make it better.

HubSpot: Putting ARR Insights to Use

Managing ARR is very important, but the key to growth is understanding how customers act. HubSpot gives SaaS business owners power by linking ARR data with insights that can be used right away. By giving you tools for email marketing, customer segmentation, and automation, HubSpot helps you:

Re-Engage Customers: Use ARR insights to find customers who aren’t interested in your business and get them back.

Sell more smartly: Look at the data to make offers that are specific to what the customer wants.

Optimise Retention: To keep customers happy and keep them from leaving, automate workflows.

Want to learn more about how HubSpot can help you improve your ARR strategy and make your business grow? Today, set up a demo with Ale, our HubSpot expert!

Drop us a line here, and let’s understand how we can help you.