Lead on Purpose

Promoting Leadership Principles in Product Management

How do you reduce the customer churn rate?

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Guest post by Ryan Harrison

SaaS (software as a service) sales teams often focus on bringing in new clients; however, they often miss the key fact that existing clients pay more dividends in the long run. The blog ForEntrepreneurs.com reports that 5-30 percent of a business’ revenue comes from the initial sale. Renewals and upsells account for the other 70-95 percent. Businesses that struggle with a high churn rate lose out on these compound dividends.

Churn rate measures the number of customers leaving a business over a specified period of time. For any business with a subscriber-based service model, churn rate can mean the difference between profit and bankruptcy.

Clients will come and go; it’s a natural part of business. How you manage the amount of clients that leave, and attract new clients to your business, will determine whether or not your SaaS business survives. Businesses have three solutions to solve the problem of churn rate: Gain more clients than they lose, stop clients from leaving, or get more money from customers that stay.

Customer churn is a natural part of any business model. Companies that cater to startups and small operations often lose clients either because those businesses grow out of their services or go out of business. Small business accounting solutions provider Intuit is a prominent victim of this ‘leaky bucket’ syndrome. QuickBooks, Intuit’s flagship product, provides expense reports, account statements and invoice templates. QuickBooks is an inexpensive solution geared toward small businesses, but when companies get bigger, they move on to more advanced accounting solutions. Fortunately, word of mouth and reputation earns QuickBooks new customers at a higher rate that it loses them. If you can find an efficient way to reach out to new customers, you can live with a high churn rate.

Long-term clients pay more than new clients over time, so businesses can offset their churn rates by getting the most out of their biggest clients. SaaS businesses can use variable pricing, which generates more revenue for clients who are willing to pay more. In practice, variable pricing often comes in the form of various service editions. A company may offer a basic edition, a pro edition and an enterprise edition at different price points. As clients grow and become attached to your brand, they will be more likely to invest further in your services.

The last option to prevent churn rate from sabotaging your business is to lower it all together. A 2010 Harvard Business School case study explored churn rate in depth and identified the clients that businesses should seek to retain. This model has two steps: a method that estimates the propensity for each customer to defect, and a method that targets potential churners with retention incentives. In simpler terms, find out who usually leaves and offer them something of added value to retain them. If you find that one new feature can significantly affect your churn rate, it’s worth the investment in your software.

If you are a SaaS provider, getting a handle on customer churn rate is of utmost importance. Take steps now to manage and improve the cancellation rate of customers. While selling is crucial for your business, ensuring that customers remain customers is arguably more important.

Ryan Harrison runs a small business consulting firm with his wife Tiffany, where they assist clients in a wide range of industries. He is also a marketing strategist with entrepreneurial drive and experience. Ryan enjoys helping people make the next jump in their business ventures.

The Product Management Perspective: Product managers play a significant role in customer retention. You need to spend ample time communicating with your customers and making sure your products provide the value they expect. Things change very quickly; do not get caught in the trap of thinking you know your customers based on last year’s efforts. Make customer communication a consistent weekly, monthly and ongoing activity.

One thought on “How do you reduce the customer churn rate?

  1. Reducing churn is something a SaaS company wants to work on regularly. Another great way to reduce churn: customer success. If you’re looking for a deep dive into SaaS customer success, we just posted a blog you might get a lot of of: “SaaS Customer Success: The secret to reducing churn & increasing MRR”

    Love to hear your thoughts!

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