How to Handle High Churn Rates

As with all great things, SAAS is not without its share of obstacles; From shifting technological standards to changing practices to fluctuating trends, there are many obstacles to overcome… especially the big one – churn rates. Although most of these obstacles can easily result in positive results, Churn rates, are purely and simply a bother.

I would love to say that there are time tested, guaranteed solutions for the problem of churn rates, but that wouldn’t be the truth. That’s not to say, that measures can’t be taken to control it, abate it and get on top of this issue, but I will come to that shortly.

In order to truly understand why churn rates occur, and how to combat them, we must first understand the nature of the problem. Permit me the pedantry of defining churn rates (although the definition is already known by most). With each subscription service, which is a given with all SAAS providers, there is a phenomenon whereby existing customers vanish, ceasing their subscriptions. Churn rates are unavoidable, but a successful SAAS provider will gain enough customers per fiscal period to vastly out-scale this loss, resulting in not just stability, but in ongoing net gains of profit and equity.

The problem is that as the average amount of customers at any time increases, these churn rates have a tendency to creep up. A 5% churn rate per 100 customers is fairly common, but in some cases, the creep with customer gain can result in a thousand customers running parallel to as much as a whopping 50% churn rate. This happens very frequently, but that doesn’t mean you need to accept these statistics. The problem is that when a system becomes popular enough to acquire a thousand subscribers or more, you end up with a number of additional factors that can cause mayhem.

The first factor is that with the greater customer count, there is a greater unspoken percentage of people who are not absolutely sincere about long term use of the service. In all groups of users, there are a handful of people who will become curious by a product, begin using it and then regret their purchase. Eventually, buyer’s remorse will set in, and these customers will depart, looking for the next, novel thing to spend money on. In most cases, these short-lived customers don’t actually constitute viable demographics, meaning they alone do not account for such a large increase in churn (while there exists only a small increase of customers).

The other major problem is that a service which has become popular will see competition rise, (if it did not already exist). When a service shows itself to be popular, and begins garnering significant mention – in literature, web content and other public outlet sources – the capitalizing attitude of interested SAAS developers will push them to jump on the same band wagon. This is not wrong on their part, but it is worth mentioning that sudden emergence of competition will usually take the form of vastly cheaper (and vastly inferior) alternatives to the products/services in question.

Unfortunately, many customers will not weigh in all of these factors and will, in the heat of the moment, migrate to the cheaper, but inferior service. They will often discover that these nascent, cheaper alternatives are inferior to the original, but will be unwilling – for whatever reason- to migrate back. As long as the inferior, cheaper alternative functions within its own claims, the price will dictate the outcome.

In some cases, this can be something as simple as a customer’s ego, but is often also the result of penalties for terminating and renewing subscriptions.

Unfortunately, we can’t stop fly-by-night operations from offering cheap, lower quality SAAS solutions, and we can’t really change the minds of the insincere customers who are just out for novelty and curiosity. However, what we can do is appeal to the reason and emotion of the rest of the customers – the ones that migrate with the intent of saving money – and who are unwilling to migrate back when they discover the mistake they have made.

There is no guaranteed golden solution to churn rate, but there are some measures that will definitely work, within reason. Some measures have even proven to reduce a 50% rate at one thousand customers to only a 20% churn rate, which is actually pretty impressive.

The first measure to take is to be proactive and aware of the community. Keep a watchful eye out for competitors who wish to capitalize on the popularity of a service. Study them closely, and find the flaws in their design, flaws that your ‘superior’ service does not have. (These flaws are absolutely there, they are simply waiting to be found).

When you find the flaws, work them into your marketing strategy and your white papers; Show how your service is vastly superior, more efficient and more reliable than existing or new competition. Show potential customers – right away – that they are making the right decision, so that down the line, they won’t be tempted by the illusion that competitors with lower prices are superior.

Taking this a step further, the tactic of incentivizing customers, by rewarding loyalty, is very powerful. Customer loyalty programs have proven themselves to be incredibly effective over the course of hundreds of years, regardless of the business or economic climate of the time. In recent decades, loyalty programs with car rentals, travel agencies and airlines have become popular for their lavish rewards for frequent, long-term, customer relationships.

Naturally, a SaaS provider is not expected to be quite so lavish with their rewards. The reason customer loyalty rewards work, in general, isn’t entirely due to how valuable the reward is, but rather in the gesture of a ‘reward’ itself. Always remember that in marketing, regardless of the field or industry, it is important to appeal to both logic and emotion when reaching out to customers. This is true with SaaS as well. Customers value the sensation of feeling appreciated. A customer who feels valued and respected by a company is going to have a natural compulsion to continue a relationship with this company, even if an inferior service provider can save them significant money.

Unfortunately, offering incentives and clearly illustrating the superior services of your company are not going to prevent every migration of this type. Some people won’t read the addendums to your white papers and marketing material, especially if they were made after their initial sign up. Others will simply be unable to pass down the illusion of savings that the competitors put forth.

Luckily, all is not lost. It’s just a matter of looking at what prevents companies from rectifying their mistakes and rectifying the problem itself. This may sound difficult, but it’s actually not.

The first thing to do is be certain that subscription termination or renewal fees are nonexistent. Given the nature of SaaS, such fees are unnecessary, so taking these measures won’t entail losses. Without these fees, an existing customer will feel less wary about coming back… They’ll discover that the sirens which have lured them away were serpents in disguise.

Another strategy that can play into this idea is a show of confidence to your customers. This strategy is slightly risky, but if you’re on top of all of the other issues and their solutions, it’s a guaranteed bet.

You should point out, along with documentation, what makes your service superior to the competition and – vis a vis – worthy of the higher price. Play on this tactic: Encourage your customers to go try the competition if they’re curious, and offer them an extra incentive if they come back within a fixed amount of time.

This show of a lack of greed alongside an incredible confidence in your product, will say a lot to the customers. Show them that you’re even willing to reward them for shopping around and coming back. They will interpret this as a sign you have no fear of competitors, and that you stand by your product for the service it can render to mankind, not for the profits it reaps them.

You will find that fighting churn rates isn’t so much about combatting fiscal statistics and logistics, as it is about having a flair for sociology and psychology, as is often the case with marketing.

While some SaaS providers will strive to keep their churn rates at an absolute 5%, regardless of their growing customer base, competition and so forth … it is important to realize this is practically impossible. As a customer base grows, the ratio of serious customers to passing customers will forever fluctuate, so even if every serious customer remains for the duration of a customer life cycle (as defined by your business), a 20% percent churn rate is about as low as it can get. Very few, even among the most successful, ever get close to such low numbers.

 

Roy Saar  is a partner at Mangrove Capital Partners, a bold but patient venture capital firm helping innovative entrepreneurs start and grow global, disruptive companies. was involved in the launch of Wix. Roy was also the founder of Sphera Technologies (sold to Parallels in 2007), which was one of the very first software platforms for SaaS providers. Roy seats on the boards of: WIX, WalkMe & RFcell 

 

Roy Saar