If there is a single, essential factor for predicting the long-term survival rate of a SaaS company, it’s the churn rate. Even companies with truly explosive growth aren’t immune from the dangers of a steadily increasing churn rate. The greater the percentage of customers who decide jump ship every month or quarter, the bleaker the outlook becomes.
For SaaS companies seeking investment, a high churn rate can present a serious problem. Why should a VC firm take the risk on a business that can’t even keep its own customers around? Is this a startup with a fixable problem, or is it a sinking ship?
Reducing churn is a complex topic—everything from customer service to product to industry trends you have no control over can play a role—but the starting point for any meaningful churn analysis is the same: generating NPS and CSAT scores. Until these crucial slices of customer data are being regularly collected and analyzed, everything else is just guesswork. Let’s take a look at each of them in turn.
NPS is a measurement of customer loyalty, but it also serves as an indicator of churn risk. Customers are regularly surveyed on how likely they are to recommend a product or service to someone else using a scale of 0-10. Scores of 9-10 indicate a “promoter,” while any score of 6 or below is a “detractor.” Simply divide the percentage of promoters from the percentage of detractors, and you have your NPS. Scores range from -100 to 100, with 0 being the average and high positive numbers being the goal.
Customer satisfaction
While there are many ways to measure CSAT, the simplest is a one-question survey at the end of a support interaction that asks something like “How would you rate your experience with us?” Customers are given two options—”good” or “bad”—with the number of “Good” options being divided by the total number of surveys to provide the CSAT score. The higher the number, the greater the amount of overall customer satisfaction.
What to do with customer success metrics
Plotting these NPS and CSAT scores by cohort will begin to show you the driving forces behind churn. The customers who are clustered around low NPS and CSAT are those who are already on the verge of churning, and little can be done to change their minds. Those customers on the other extreme of high NPS and CSAT represent true advocates, with little imminent risk of churn. Everything else—every dot and cluster—represents those customers who will eventually veer towards churning unless their needs and concerns are addressed.
Breaking these metrics down by cohort will help you get more granular. Are your gold tier subscribers more satisfied than your freemium users? Do your bad CSAT ratings decrease as the cohorts get younger? Do your health tech clients love you while your government clients think you could improve?
On a qualitative level, NPS scores often come with written rationales on why the user gave the score he or she did. You can use these to pinpoint issues in your product or customer service and correct them. It’s also helpful for marketing purposes to know who your biggest promoters are. Maybe they’d like to give a video testimonial or participate in a webinar.
Armed with this knowledge, you can start investigating the factors that turn a moderately satisfied current customer into a dissatisfied ex-customer. By chipping away these negative factors, those all-important churn rates can be steadily and significantly improved. For a SaaS company seeking funding, that’s never a bad thing.
Want More SaaS Metrics?
This guide explains the core metrics used to measure SaaS company success. Using simple examples, we’ll show you how to calculate each metric, and describe why specific indicators are important to investors.