Churn Rate For Monthly Subscription Service: How High is Too High?

SoftwareSuggest

SoftwareSuggest

Senior editor

Parul Saxena

Chief editor

Last updated: November 13, 2019

For software as a service (SaaS) businesses, the churn rate is the boogeyman. SaaS companies and their boards pay a lot of attention to the monthly churn rate as an indicator of the company’s health, but in our case, this was misguided.

Why a High Churn Rate for a Monthly Subscription Service Might Not Be the End of The World?

  • The Myth Of the Ideal Churn Rate

There are a lot of different numbers and metrics that get thrown around as the ideal churn rate. The figures largely depend on the size of the business in question, with smaller businesses being more sensitive to high churn rates. SMBs will always hear how they should be aiming for a 3-5% monthly churn rate and no more than 10% annually. On the other hand, enterprise-level businesses should constantly be targeting a monthly and annual churn of less than 1%.

Other SaaS commentators and experts cite 5-7% as the annual range to aim for. If a business with 100 clients has an annual churn rate of 5%, that means that they will lose five customers over a year. While in some niche business verticals losing a handful of customers is enough to sound the alarm, most of the time, it’s nothing. Even if the sales team is asleep for most of the day, they should be able to sign up enough new customers to cover the loss of 10 clients. This rate scales well to larger client bases too, unless your company doesn’t have enough account managers or salespeople to handle onboarding 500 customers annually. If that’s the case, you have a solution for your ‘churn rate’ right there – hire more salespeople.

In any case, a churn rate that’s higher than the ‘ideal’ is often treated as a sign of a serious issue. However, it alone is not what’s important.

  • What Really Matters?

When you measure the success or failure of your business goals, it is vital that you measure the right things first. You also need to avoid tunnel vision, where you place far too much emphasis on a single metric, instead of looking at the bigger picture.

For example, while churn is definitely useful for measuring certain aspects of your monthly and annual performance, it is not a metric that defines failure. A high churn rate tells you nothing about the viability of your strategy. It took us a while to beat this into our heads, but the real defining metric we use to measure failure and success is the monthly recurring revenue (MRR).

Think about it, you might have a relatively high churn rate, which would signify that you are losing customers, but if your MRR is still rising, then your business is making more money from fewer customers. Making more money from fewer customers lets you keep your infrastructure costs lower and reduce your overall upkeep. Or, your customer base might still be growing even with a high churn rate.

What I want to say is that a lower churn rate does not mean that your business is growing. You can reduce your churn rate and still be losing business overall. Your churn rate tells you a lot about customer satisfaction, but it does not directly tell you about your business’ financial health.

  • Focusing on Growth

Instead of viewing your churn as the target, think of it as an indicator. Your churn rate lets you know what your customer satisfaction is like. Customers who are satisfied with the service are less likely to leave. There will always be some level of attrition because people don’t only leave your business because of dissatisfaction; there are always going to be factors beyond your control that affect whether customers choose to stay with you or not.

It is more helpful to view your churn rate as a minor element of your growth and an indicator of how effective your customer retention strategy is instead of the most important indicator of your business’ health. Focusing on your MRR and growth instead of your churn rate will bring you a number of benefits.

First of all, if you are introducing a new product or service, or you are overhauling an existing service, you would expect your churn rate to increase. You need to give yourself time and space to grow and develop new products. There is only so much testing that you can do before any service goes live. And we all know that some issues won’t be discovered until you have already launched. Getting hung up on your churn rate can make you think minor issues are more serious than they actually are.

Improving your services will help your business to grow naturally. Make sure that the page on your website where customers can cancel their service also includes a form that invites them to leave some feedback about why they chose to quit your business. This will provide you with valuable insight into how to improve your services. You can also give customers who are leaving you the option of receiving updates about your business and services, in case it changes their minds.

The answers that you receive from your customers about why they are abandoning your service might surprise you. For example, it might just be that the market you are in is not very loyal. Most SaaS businesses are looking for long-term customers, but there are exceptions to this rule. Some online services will be used for a period of months before customers move on. In these cases, a higher churn rate is expected.

Your clients’ feedback will let you know whether making minor adjustments could significantly improve retention and churn. If your customers are leaving because they would prefer the option of quarterly or bi-monthly billings, this is something you can easily introduce and take advantage of.

Our Experience

Our own experience at Smartproxy is an example of the power of user feedback and why a high churn rate isn’t the end of the world. Our client base doubles every quarter while maintaining a quarterly churn rate of over 20%. Crazy, right? Unsustainable, even! At first, we thought so too and focused on the usual suspects to reduce churn we spent time on improving our product and user experience. But what we found most helpful was the user feedback we’ve collected.

What we did was we took a dozen or so customers from each business vertical we served and asked them about what their work looked like. What we discovered by doing this was that many of our clients were using the service on a per-project basis and would often have downtimes for up to a couple of months. What it meant was that our user base had a seasonality!

Once we realized this, we were able to introduce more flexible pricing options and subscriptions of different lengths. On paper, our churn rate remained high, with seasonal swings reaching 15%, but our focus had a profound shift. We focused on growth and customer service to make us the first choice for those seasonal customers again and again. And while our churn rate is still astronomical for the ‘experts,’ we continue to grow year over year and know that many of those customers who churn will come back to us for their next projects.

What we’ve learned from our experience is that not every SaaS can expect to have minimal churn. Some clients and markets just have their own natural ebb-and-flow. Even though some SaaS businesses will always have a relatively high churn rate, it doesn’t necessarily mean that they are in trouble. This is especially true for companies that work with SMB clients. For them, it is extremely important to consider their market qualitatively as well as quantitatively. If you are in this position, you need to focus on growth and combine the churn rate with other metrics to properly understand the state of your business.

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