Using the Churn Rate Formula to Enhance Your SaaS Strategy

When it comes to SaaS (Software as a Service), keeping customers is just as important as getting new ones. Did you know that cutting customer turnover by just 5% can make your business 25% to 95% more profitable? This shocking number from Bain & Company shows how important it is to understand and use the churn rate formula for long-term growth. Whether you’re in charge of a new SaaS company or an established one, the first step to keeping customers is to accurately calculate and act on churn metrics. The churn rate formula can help you understand and improve your SaaS strategy. Let’s look at how it can be used.

How do you figure out the churn rate?

It’s easy to understand how the churn rate formula works:

Churn Rate (%) = (Number of Customers Lost During a Period / Total Customers at the Beginning of the Period) / 100

Businesses can use this formula to find out what percentage of customers stop using their service within a certain amount of time. The maths is easy to understand, but the insights it gives are very useful. It helps SaaS companies figure out how well they’re keeping customers and find patterns or issues with how happy their customers are.

The churn rate for a company in a given month is 5% if they start the month with 1,000 customers and then lose 50. Even though this number may not seem like much, even a small churn rate can have big long-term effects on revenue in a SaaS market that is very competitive.

Why is the rate of churn so important?

More than just the number of customers, the churn rate has a direct effect on your business’s growth and revenue. High churn can mean that users are unhappy, that your onboarding process isn’t working well, or that your product doesn’t meet their needs.

You should pay attention to the churn rate for the following reasons:

Predictability of revenue: A stable churn rate makes it easier to predict future sales, which is important for growing the business and getting investors interested.

Costs to Get a New Customer (CAC): It can cost five times more to get new customers than to keep the ones you already have. If you have a high churn rate, your CAC isn’t working as well, which cuts into your profits.

Lifetime value of a customer (CLV): CLV is a metric that shows how much money a customer brings in over the course of their relationship with your business. Churn rate has an opposite effect on CLV. Less churn means higher CLV, which increases profits.

Using the Churn Rate Formula to Make SaaS Plans Better

1. Separate and study your customers

The first step to lowering churn is to figure out which customers are leaving and why. You can find trends and their causes by dividing customers into groups based on things like how they use your service, their demographics, or the number of subscriptions they have.

For instance, if your churn rate formula shows that small businesses are leaving at a faster rate than enterprise clients, this could mean that you need to change your pricing, features, or customer service for that group. Customer analytics tools from HubSpot can help you keep track of these behaviours and give you useful information.

2. Pay attention to onboarding and engagement

A bad onboarding process is one of the main reasons SaaS customers leave. Making sure users know the value of your product from the start will help you keep them for a long time. Check to see if better onboarding leads to lower churn rates using the churn rate formula.

One more important factor is engagement. Totango did a study that found that companies can cut customer turnover by up to 15% if they make customers 20% more engaged. More loyalty can be built through regular communication, personalised suggestions, and proactive customer service.

3. Find the best prices and value propositions

Price sensitivity is often a big reason why people leave a business. If the churn rate formula shows that cancellations go up around billing times, you may need to rethink your pricing strategy or do a better job of explaining how valuable your services are.

You could offer different levels of pricing to meet the needs of different customers, or you could offer discounted annual subscriptions to get people to commit to a long term deal. Customer surveys can also help you figure out if your product’s users think it’s giving them enough value.

4. Keep an eye on feedback and act on it

Feedback from customers is a great way to keep them from leaving. To figure out why customers are leaving, use interviews, surveys, and Net Promoter Score (NPS) scores. Combine this qualitative data with the results of your churn rate formula to come up with specific solutions.

For example, if customers say that not having certain features is why they are leaving, putting those features at the top of your product roadmap can show that you are listening and keep customers from leaving in the future.

5. Use analytics for prediction

Predictive analytics are being used more and more by modern SaaS companies to keep customers from leaving. By looking at past data, you can find early warning signs like dropping usage rates or late payments, and then take steps to get customers who are at risk to return.

Example from Real Life: Slack’s Story of Success with Churn

Slack, a well-known SaaS company, shows how useful it is to use the churn rate formula correctly. During its early stages, Slack had trouble keeping customers. The company learnt from churn data that teams that sent more than 2,000 messages in their first month were less likely to leave. This made Slack focus on getting people more involved during the onboarding process, which greatly reduced its turnover rate and sped up its growth.

How HubSpot Can Lessen Customer Loss

Data is the most important part of any strategy for reducing churn. HubSpot has a set of tools that can help SaaS companies get useful information about their customers and use it well:

Customer Analytics: HubSpot’s advanced analytics tools let you divide customers into groups, keep track of how engaged they are, and find trends that are linked to customer churn.

Automating work processes: Keep users interested and happy by automating things like email campaigns, customer surveys, and follow-ups.

Feedback Collection: Use HubSpot’s feedback tools to get direct feedback from customers and use that information to shape your strategy.

Reporting on your own: Make customised reports to keep an eye on changes in the churn rate and see how they relate to specific projects or strategy changes.

By using HubSpot’s features, SaaS companies can do more than just figure out the churn rate formula. They can also use data to create solutions that keep customers longer.

Take the First Step to Lessen Customer Turnover

Are you ready to use data to stay in business longer and make your SaaS business bigger? Our HubSpot expert, Ale, can show you how HubSpot can change the way you keep customers by setting up a demo. Today, learn how to use what you’ve learnt from the churn rate formula to make plans that you can put into action.

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