For SaaS startups, customer acquisition may seem like the Holy Grail. Getting new customers in the door is vital to building a viable company, after all.
And fast-growing startups often see increasing their customer base as the key vehicle for boosting revenue as quickly as they — and their investors — want.
But what happens then?
SaaS startups in particular need to think beyond the moment a buyer clicks “purchase.” It’s essential that those buyers stick around for a good long time, because the monthly revenue from ongoing subscriptions is a far better income stream to count on than new customers that come with a higher price tag.
No SaaS company is going to survive — much less thrive — without continuous revenue from satisfied customers. This is why churn is Kryptonite for startups.
Customer churn is a key metric investors and others use to assess the health of a SaaS business. At a basic level, it is the rate at which subscribers cancel their services.
Analyzing churn is more complex than doing a simple calculation, however, especially for new startups that are in the ramp-up acquisition phase and still working to achieve product-market fit.
No matter the stage your company is in, consider the following strategies for reducing and minimizing customer churn:
1. Listen to your customers
Soliciting feedback from your customers — and really listening to it — is probably the most important thing startups can do to reduce customer churn, especially in the early stages when you’re actively working to find product-market fit.
Ensure that your customers have easy ways to ask questions and voice concerns, and that you're tracking those communications, responding to customers, and implementing proactive solutions. Reach out to your customers with questions of your own if you feel something isn’t working as well as it could be.
2. Focus on customer onboarding
Customer success consultant Lincoln Murphy came up with the phrase, “seeds of churn are planted early” — if onboarding doesn’t bring customers their initial desired outcome, as they define it, then churn is much more likely over time.
Ask customers to identify the initial outcome they expect and then communicate wins with them as they reach milestones along the way. You'll head off potential challenges ahead of time, reinforce the value you're delivering, and inspire them to stay throughout their experience.
3. Consider your natural switching costs
One way to discourage customers from leaving is to build natural switching costs into your system. Oftentimes a high switching costs have to do with how much data a customer has stored within your system, according to Joel York, CEO and founder of Markodojo.
Encourage customers to add more and more data to the system through a gradual process of “application discovery” to make it more difficult to switch to a competing solution. Customers will have more incentive to figure out how to make your software work for their needs instead of abandoning their subscription and finding a different service.
4. Look for warning signs of churn
There are clear early-warning signs that a customer is thinking about cancellation. That revenue might be at risk if their daily use starts tapering off or if they aren’t using some of the features that are integral to robust delivery of value. Other at-risk customers will report difficulty using the software or seek help as they struggle to fit it to their unique needs.
There are various applications that can help you track signs of trouble. Intercom, Totango, Gainsight, ChurnZero, and ClientSuccess are all good options to help you keep tabs on customer activity so you can intervene constructively when necessary.
5. Encourage annual contracts
Another way to reduce customer churn is to get customers into full-year contracts, instead of month-to-month subscriptions. The trick is to entice commitment via discounts for those who pay upfront for the year. This not only reduces churn, but also gives you more on-hand cash to invest in your company (though the discounts will eat into your revenue).
Danan Margunson, General Counsel of Tune, Inc., says that there a lot of myths about annual contracts that keep companies wary of this solid option. The reality, he believes, is “annual commits are virtually always better for your company, and often better for your customers, too.”
Indeed, doing what's best for your customers should be the North Star for SaaS entrepreneurs who need to reduce churn. The more dependably and robustly your service meets your customers’ needs, the more likely they’ll be to stay with you over the long haul.
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Using simple examples, we show you how to calculate each metric and explain why it's important.