One of the best ways to tell if your business is running successfully is by calculating its churn rate. Churns are unavoidable in the SaaS industry; so, understanding your firm’s rate can help you make the right decisions.
Retaining customers is a crucial part of any business. If you find an accurate way to predict the churn rate, you can devise the right strategies to target people who are leaving your service. Thus, you may from time to time end up asking yourself, what should your firm’s churn rate be.
If you’re wondering about the top tips to maintain a sustainable churn rate, you’re at the right place. Stick around because we dive into what a churn rate is, how to calculate it, and some tips that could help you understand your customers better.
What is a Churn Rate?
Before we head any further, you need to understand what a churn rate is. The idea is simple; a churn rate calculates the number of customers who have canceled their subscriptions over a certain time period.
Since you can’t force your customers to stay with you, your SaaS business is bound to have some level of churn. However, you don’t have to worry if it isn’t too bad. Calculating a churn rate could be tricky because there are a number of different methods that take different KPIs into account.
Average B2B SaaS Churn Rate
The average B2B SaaS churn rate varies by industry, business model, and customer demographics, among other factors. According to a study by Recurly, the median churn rate for B2B SaaS companies is approximately 6.5% per month or 2.5% per week. However, this number can vary widely based on factors such as company size, customer acquisition channels, pricing strategies, and product complexity.
It’s worth noting that while 6.5% per month may seem like a small percentage, it can have a significant impact on a company’s bottom line over time. For example, a business with 1,000 customers and a 6.5% monthly churn rate would lose approximately 65 customers per month or 780 customers per year. This could represent a significant loss of revenue and a significant setback to the company’s growth.
As such, B2B SaaS companies should strive to monitor and improve their churn rate as part of their overall customer retention strategy. By identifying the factors that are driving churn and implementing targeted strategies to address them, businesses can reduce churn and increase customer lifetime value.
What is B2B SaaS churn rate Benchmark?
THE B2B SaaS churn rate benchmark refers to the typical or expected rate at which customers of a business-to-business (B2B) Software-as-a-Service (SaaS) company cancel or do not renew their subscription to the service, usually over a given period of time, such as annually or monthly. This benchmark is used to assess the performance of a company’s customer retention strategy and its ability to keep its customers satisfied and engaged with the product or service.
Benchmarking the churn rate against industry standards and best practices helps companies understand how well they are doing compared to their competitors and identify areas for improvement in their customer retention efforts.
Factors to consider
B2B SaaS churn rate benchmarks can vary by industry, but there are general patterns that can be discerned from data analysis. Understanding these benchmarks is important for assessing the success of a company’s customer retention efforts and identifying areas for improvement. While there is no fixed average churn rate, benchmarking against industry standards can provide valuable insights into a company’s growth trajectory.
Here are some of the potential factors that could influence the churn rate in B2B SaaS businesses:
Company size is one of the factors that can impact the churn rate in a B2B SaaS business. In general, smaller companies tend to have higher churn rates than larger companies due to their greater sensitivity to changes in their business environment.
Smaller companies may have limited resources, which can make it more challenging for them to provide high-quality customer service and support. Additionally, smaller companies may be more vulnerable to market fluctuations and economic downturns, which can cause customers to cancel their subscriptions or switch to a competitor. As a result, smaller companies may need to focus more heavily on customer retention efforts to keep their churn rates low.
Larger companies, on the other hand, may have more resources to invest in customer support and retention initiatives, as well as greater brand recognition and market share. This can make it easier for them to attract and retain customers, resulting in lower churn rates. However, larger companies may also face challenges related to bureaucracy and slow decision-making, which can negatively impact customer satisfaction and retention.
Voluntary or Involuntary churn
In the context of B2B SaaS businesses, churn can be classified as either voluntary or involuntary.
Voluntary churn refers to when a customer actively cancels their subscription or chooses not to renew it when it expires. This can occur for a variety of reasons, such as dissatisfaction with the product or service, lack of perceived value, or a switch to a competitor’s offering. Voluntary churn is generally seen as a more concerning form of churn, as it suggests that there are underlying issues with the product, customer support, or other aspects of the business that need to be addressed.
Involuntary churn, on the other hand, refers to when a customer’s subscription is canceled or expires due to external factors that are out of their control. For example, this could happen if a credit card on file is declined, if the customer’s business closes, or if they experience technical issues that prevent them from using the product. While involuntary churn is generally less concerning than voluntary churn, it can still have a significant impact on a company’s revenue and customer base.
Involuntary churn can be caused by a variety of factors, including world events such as the Covid-19 pandemic. The pandemic had a significant impact on the B2B SaaS industry, with some companies experiencing increased demand due to the shift to remote work and online collaboration, while others serving in-person markets saw a decline in business and higher churn rates.
How to Calculate a B2B SaaS Churn Rate
Calculating a churn rate isn’t difficult; however, it does require a lot of attention to detail. There are multiple ways to calculate a churn rate. Each technique is unique and will require you to look at different metrics.
Here are three of the most popular ways to calculate a churn rate for your business.
Customer Churn Rate
This particular churn rate is usually best for SaaS subscription-based services since it tells you if your customers are staying on board. To calculate your customer churn rate, you will need to divide the total number of customers churned by the total number of customers.
For example, if your business has 1000 customers and 100 of them cancel their subscriptions with your company, your customer churn rate is 10%. Hence, understanding why your customers are churning is vital to evaluate the success of certain B2B SaaS strategies.
Revenue Churn Rate
Another way to calculate churn is by taking a closer look at your revenue. A revenue churn rate is a great metric if you’re trying to understand your financial position and future. A revenue churn rate shows you the revenue that you’ve lost or gained during a certain month.
To calculate a revenue churn rate, you will have to divide the net revenue dropped from existing clients in a given time period by the total revenue at the beginning of the time period.
Net Logo Churn
The last churn measurement we’re going to discuss is the net logo churn, and it is perhaps one of the most precise calculations you could make. This metric takes into account various factors, including the number of new customers you’ve gained over the chosen time period.
Top 3 Tips to Reduce Churn
Reducing your churn may seem tricky at first. While no business in the world has the ability to keep all of its customers, there are a few steps you can take to reduce the number of people leaving. Do you know that replacing a new customer will cost you 16 times more than retaining one?
The cost is staggering, which is why you’ll need to do your best to ensure your customers aren’t leaving. Here are a few steps you can take to reduce your churn.
#1 Determine the cause
The best way to determine the cause of your churn is by figuring out why a customer has decided to end their subscription. While it may sound silly, this is the best way to get valuable insights into what customers feel about your product.
While many websites resort to feedback forms, a better way to reach out to clients is by reaching them over the phone or through live chat. Most customers ignore user feedback forms or may choose to move on hastily by filling in random information.
Communicating with your clients is the best way to reduce churn. In fact, in many cases, you may resolve a few problems and retain the customer!
#2 Offer longer contracts
Another great way to retain your customers is by offering longer contracts. Many SaaS businesses offer their services through subscription-based models that require frequent payments. Instead of weekly or monthly payments, move on to larger periods, such as a 3-month subscription plan.
Most customers will not get the best out of your product in a short time span and will need more time to make the most out of it. Thus, a good strategy would include a small discount for opting for a longer plan, which could reel in a lot of customers.
#3 Target the right audience
If you’re trying to retain clients that don’t have any use for your subscription, you’re fighting a lost cause! You could try the best marketing strategies; however, they will all go in vain if you target the wrong audience.
If your product doesn’t provide the customer with what they’re looking for, they’re going to churn. This doesn’t mean you’re doing something wrong; it just means it wasn’t a right fit for them.
Instead of spending your resources on an ongoing strategy, focus on delivering your products to clients who’ll actually make the most out of it. Finding the right audience may require a lot of research; however, the time and resources you spend will be worth it when you aren’t churning as much anymore.
Churn is unavoidable in the B2B SaaS industry; the best course of action is to reduce it as much as possible. There are a few tried and tested methods that you can use to retain more customers and reduce churn. Some of these effective tips have been mentioned in this article for you to incorporate into your strategy.
What is the average churn rate for a B2B SaaS company?
The average B2B churn rate is typically lower than the churn rate for B2C businesses. According to data, the average B2B churn rate is 5.00%, compared to the overall subscription business churn rate of 5.60%. This suggests that B2B businesses are generally more successful in retaining customers compared to B2C businesses.
However, it’s important to note that the average churn rate can vary depending on the industry, business model, pricing strategy, and other factors. Therefore, businesses should benchmark their churn rate against industry standards and continuously monitor and analyze their churn rate to identify areas for improvement and implement targeted strategies to reduce churn.
What is the ideal churn rate for SaaS?
Saas companies typically experience an average monthly churn rate of 3-8% and an average annual churn rate of 32-50%. To avoid revenue loss, it is crucial for companies to continuously improve their product to ensure customer satisfaction. Consistently seeking feedback from customers can help companies identify areas for improvement and retain customers.
What is a good B2B SaaS retention rate?
According to our research, B2B companies that conduct annual surveys of a single contact typically have a median retention rate of 44%. However, those who survey multiple contacts multiple times a year have a much higher retention rate of 82%. This suggests that regular engagement and feedback from multiple contacts can significantly improve customer retention in B2B settings.