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In the SaaS and B2B industry, the C word is often heard, and has plagued the minds of many companies, especially in these turbulent economic times.
Churn is a big concern for every business owner, and it is especially troublesome for SaaS companies who are trying to appear attractive to venture capitalists and investors. Reducing your churn rate and increasing your profitability is obviously not only good for your business, but it will give you an exponential advantage over your competitors who see slow growth and negative returns.
This article will go over 3 important concepts, but they are in no way the only things to consider. Rather, they are a starting point for you to look hard at your onboarding process, and fix the holes in your funnel. Let’s get started!
1.Does your product have an easy learning curve?
This is a crucial component to consider with your SaaS and product, that many may not know about or be implementing.
What is your onboarding process like? How easy is it to learn your product? Can your customer get some sort or result quickly or within the free trial period? These are all important questions that will help you reduce your churn rate.
The reason the learning curve is so important, is because it will dictate your customers motivation to stick with your product. There are so many different options of softwares nowadays, and it only takes a cancelation and free trial sign-up to move onto your competitors.
So how do you ensure that your product has an easy learning curve, and an effective onboarding process?
Pulkit Agarawal of the SaaS company Chameleon, wrote an interesting article on the Amplitude blog, about what he found to be an onboarding stack that drives retention.
According to him, there are 5 key components to consider:
- Know your users
Make sure you have key information on the demographics and psychographics of your users beforehand. The better you understand them, the better you can tailor the whole process as close as possible to what they prefer, and avoid what they dislike.
- Guide them
This means that when your customer first opens your product or software, you need to hold their hands and guide them through each step of the process toward the result they are after.
- Easy and open communications
Having an open line of communication today means having a visible chat option available for customers who need immediate help. Ideally you should have a real person to help your customers, but the ability to leave a message and then get quick help a few hours later can potentially work as well.
Offer your customers an online user manual that can explain how to use your product. The simpler it is to understand, the better.
You can’t manage what you don’t measure. Make sure you are being attentive to what your analytics are showing you in regards to your onboarding process. If you aren’t already measuring its effectiveness, you need to start now.
Through implementing an easy learning curve, you will most likely see an increase in your MRR, and a reduction in your churn rate. According to Baremetrics, they found that a churn rate of 5-7% is a normal churn rate, so if you are getting more than this number, consider looking into your onboarding process.
2.Make sure you are strategic with free trials.
Free trials are definitely a useful marketing tool for your SaaS and business, but even though many use this method, it doesn’t guarantee growth and a subscription.
When implementing this strategy, you must make sure that you are assessing what your software can offer, and implementing the right things at the right time. So let’s get into the specifics…
One of the most important things to consider, is whether or not your product can deliver a result within a free trial period. This is crucial, because it will largely determine the motivation of your customer to purchase when the free trial ends. You have to know what results your customer is after, and if you can’t deliver on it within a 7 or 14 day trial, what incentive is there to purchase a premium subscription?
This is exactly what Wayne Mulligan of Crowdability emphasizes in a post he did on Quora in 2012; this principle still holds today. He also goes on to explain that you should optimize your free trial period, according to how long it would take your customer to make an informed buying decision.
According to a study by Marketing Sherpa, the conversion rate for most SaaS companies is around 7%, so if you are getting lower than this percentage, your free trial or onboarding process could be the problem.
The reality is, 7-14 day free trials are common, but you need to also consider your specific customer, and their needs. Ask yourself, ‘’What is the shortest amount of time needed for my customer to see the value of my product?’’.
3.Don’t settle for monthly subscriptions, ask for yearly payments first…
This is a method that many SaaS companies are catching on to, and you should as well if you aren’t already.
A key way to reduce your churn rate is through emphasizing a yearly payment, before settling to a monthly subscription. When your customer purchases the yearly subscription, you are removing the possibility of monthly churn because of the bulk payment.
Seems obvious right?
But you have to realize that there’s a reason why so many companies are opting into this strategy. Not to mention, a bulk payment creates a higher commitment, and therefore will filter out potentially troublesome customers.
The name of the game with churn really comes down to your Average revenues per user (ARPU). If you think about it, monthly churn isn’t the most crucial metric, because if you retain high paying customers and lose the low paying ones, you can still come out on the other end with a higher average recurring revenue.
This was validated from a study by Patrick Campbell of Profitwell entitled, ‘’The World’s Largest Study on SaaS Churn’’.
In his study, he found that the higher the ARPU for a SaaS company, the lower the churn rate. He also goes on to explain that if your Average revenues per user is of around $500 or more, you will likely see a churn rate of 2-6%. If you are $100 or under, expect 3-16%.
This likely plays into the psychological concept of commitment and consistency, that psychologist and marketer Robert Cialdini spoke so often about.
Human beings have a tendency to be consistent with past commitments, especially if they are large commitments.
The sunk cost fallacy probably plays into this as well, because the longer your customer has stayed with you, and the more they have invested upfront, the more likely they are to continue being with you; not to say that you are a bad option for them, but you get the point!
So to wrap up…
Now that you have read these 3 important concepts, you now have a good starting point on what needs to be considered when reducing your churn rate in 2020 and possibly beyond.
Remember to ask yourself:
- Does your product have an easy learning curve?
- Am I being strategic with free trials?
- Did I offer a yearly subscription before settling for the monthly option?
Once you have adjusted your strategy to these questions, you will be better equipped to reduce your churn rate. Although MRR (Monthly recurring revenue) is important, you must also remember that your ARPU (Average revenues per user), is far more important, as it has been found to be correlated with a lower churn rate.
Hopefully this article gave you a good starting guide to further research and diagnose the issues with your SaaS.
Best of luck on your increased success!