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The 16 signs, symptoms and causes of customer churn in SaaS
For many SaaS companies, the cost of acquiring a customer exceeds the initial revenue it earns in any given deal. If a customer leaves before a product is implemented, the company doesn’t just take a hit on the top line—the deal is a net loss as well.
Customer retention also has a significant financial impact later too. For example, companies that keep their customers month after month, and year after year, begin to see double-digit margins baked into their business model.
As the smart folks at SaaS Capital put it, retaining customers “has a powerful compounding effect on growth for SaaS companies.” All this goes to show that keeping close tabs on customer churn is crucial to building and scaling a SaaS business.
What is customer churn?
Customer churn is the inverse of customer retention. Simply put, if you have 100 customers and keep 98 of them at renewal, your customer retention rate is 98% which means your churn rate is 2%.
As defined in our Churnopedia, the churn rate is the rate at which you lose customers or revenue within a time period, usually monthly or yearly. You can calculate churn rates based on your customer count or recurring revenue. Exclude new customers or new recurring revenue won during the period.
Primary ways to calculate customer churn
The churn rate as described above is an easy way to calculate churn. This is typically referred to as the churn rate by customer count. Mathematically the equation to calculate churn rate by customer count is:
Churn rate = the number of customers lost in the period / the number of customers at the start of the period.
If we plugged the numbers from the example above into the equation, it would look like this: 2% = 2 ÷ 100
However, there’s an important nuance in customer success metrics. In this case, looking at retention by customer count may overlook revenue loss for those businesses with tiered subscription levels.
For example, if the average contract value (ACV) is $100, but the two customers we lost are in a higher tier subscription—say $300 each—the impact on revenue is higher. In that case, a more fitting equation is to calculate the churn rate by revenue:
Churn rate = recurring revenue lost in the period / recurring revenue at the start of the period.
If we plugged the revenue numbers into the equation it would tally up this way: 6.1% = $600 ($300 x 2) ÷ $9,800 ($100 x 98)
As you can see, these details can make a big difference. The churn rate by revenue (6.1%) is significantly higher than the churn rate by customer count (2%).
Top 16 causes of customer churn and suggested solutions
Churn in SaaS, as experts have pointed out, tends to snowball. That is to say, churn picks up mass as it rolls downhill. So, while the churn rate is an important metric, it’s also a warning signal, not a diagnosis.
Customer success teams need to be on the lookout for the signs and symptoms of churn—and then act quickly to diagnose a potential issue. To that end, here are the top 16 causes of customer churn and suggested solutions.
1. The customer has dwindling product usage
The root cause of dwindling customer engagement can vary, but it suffices to say, if the customer isn’t using your product, they are at risk of churn.
Solution: Set up alerts to warn you when product usage fluctuates. Reach out to the customer as soon as you notice a downward trend so you can learn the root cause. Sometimes they aren’t aware of all the capabilities available to them, so look for opportunities to highlight new features – or those they aren’t using.
2. The customer is facing budget cuts
In good times and bad, businesses are always looking for ways to reduce expenses. Don’t be afraid to ask your customer how their business is doing and stay on the lookout for signs of layoffs or restructuring in the news and on social media.
Solution: Customers facing budget constraints will likely have to make a business case all over again at renewal time. Revisit the initial pain points they expressed for purchasing your product. Next, help them quantify the results to enable them to justify the budget anew. Put together discounted pricing or downgrade options that will help them get through the tough times.
3. The customer’s progress has slowed or stalled
Sometimes customers get started with a product but for some reason, progress slows or stalls. As with dwindling engagement, there could be a lot of different reasons why this happens, such as a change in internal priorities or team members.
Solution: Address the progress level and ask if there’s something you can do to help. Often this will lead to a conversation that uncovers the underlying cause. If a customer is feeling overwhelmed, help them to break the process down into manageable tasks, and compliment their successful completion of tasks.
4. The customer runs into serious product issues
Most customers will run into product issues at some point. Usually, these are easily fixed with product education and support guides. However, be on the lookout for customers that encounter serious product issues that prevent them from achieving their goals.
Solution: Listen carefully to the customer’s description of the issue. Ask lots of questions and aim to understand the complete scope of the problem. Empathize with their position and outline what you will do to resolve the matter. Don’t be afraid to escalate an unresolved issue.
If a solution requires development, provide the customer with regular updates until the resolution has been deployed.
5. The customer says they are too busy to use it
Once in a while, a customer purchases a product but then is too busy to use it. They always seem to be working at a frantic pace but can never quite get ahead.
Solution: Be a persistent source of friendly assistance. Help them to prioritize the key tasks that will help reduce their workload in the long run. Offer to schedule a regular cadence of short meetings to help them stay on track.
6. The customer feels neglected
When you really need support, it’s easy to feel neglected. This happens to customers as well. Often, it develops slowly over time. For example, a longtime customer that knows their way around the product starts to experience issues, while customer success is focused on helping new customers get started.
Solution: If it’s been a while since you’ve connected with a particular customer, take a look at their account and product usage. Schedule a meeting to review things and make a point to ask them if there’s an area on which they’d like to focus. Strive to put regular check-ins with a customer on the calendar moving forward. Don’t forget to have a plan to engage new users even after your customer goes live.
7. The customer is stuck
Customers can and do get stuck in certain phases of the customer journey. For example, they get bogged down during onboarding, implementation, training or product adoption.
Solution: Map the customer journey so you can monitor and track their progression at every stage. Develop a plan for reaching out to customers that are falling behind and help them remove any roadblocks. If you start to see multiple customers getting stuck in the same stage, you may need to modify your company’s processes.
Download our Journey Workbook to get everything you need to map your customer journey.
8. The customer goes “radio silent”
The word “ghosted” has entered the business lexicon in the last few years. In customer success, it describes a customer that goes dark: they stop responding or communicating.
Solution: The best approach is to simply keep trying. Keep a positive attitude and refrain from guilting your customer into responding to you. Instead, vary your outreach time, day and channel. In the most challenging of cases, mailing a handwritten note has a nice personal touch and can go a long way toward re-establishing communication. This may also be a good chance for an executive sponsor to reach out to the customer at a different level in the organization.
9. The customer is courted by the competition
Competition is a fact of a free market and there’s no shortage of competition in SaaS these days. Your customers will get solicitations from rivals hoping to woo customers away.
Solution: You have the advantage of knowing your customer better than your competition. Keep their goals and challenges top of mind and endear yourself as a trusted resource. Use engagements to learn what your customers like about your product, and what they’d like to see improved. Monitor net promoter scores (NPS) as a signal of waning customer satisfaction.
10. The customer is a “bad fit”
A “bad-fit” customer is one that won’t get value from your product or service due to a mismatch of current needs and offerings. Often this is an effect of selling to a company outside your ideal customer profile (ICP). And that happens when there’s pressure to grow sales—especially at early-stage companies.
Solution: Identify a bad-fit customer as soon as possible. Be honest in your assessment. Most customers will respect you for helping them make informed decisions. It’s often best to let bad-fit customers churn. Trying to satisfy a customer you have little chance of pleasing will drain resources, hurt morale, and potentially damage your company’s reputation in the market.
11. The customer’s company merges or gets acquired
Merger and acquisition (M&A) transactions bring a lot of uncertainty. Staffing, brands, budgets and tools all get scrutinized—and are all subject to change.
Solution: Reach out as soon as you hear about M&A and aim to proactively assess the risks. There will be a lot of unknowns during this transitory period but aim to get introductions to new decision-makers on your customer’s team. Focus on relationship building and offering help rather than making requests. It’s also a good idea to inquire about business process changes that might unfold so your invoices don’t go unpaid.
12. Your customer champion leaves
Market research shows that when a customer champion leaves, there is a 51% chance that your account will churn within the next year. That number rises to 65% when the champion lost is a senior executive.
Solution. Establish a cadence of regular check-ins and personalized communications. These engagements will help you to systematically look for signs a key customer contact is leaving. As soon as you hear a customer is leaving, send a personalized note to the new contact and offer to host a call when they are ready. Then review the account history before the call and do more listening than talking on that call. Follow up by email within 24 hours reiterating what you heard, remind them of commitments they made, and outline steps you are taking to resolve any identified issues.
13. The customer is resistant to change
There are times when you’ll have a customer that puts up a defensive front when faced with change and new ideas. This can make advising and training more difficult, especially when it comes to introducing new features or ways of getting more value from the product.
Solution: Change management is one of the hardest aspects of customer success to get right. However, it should go without saying that you should avoid arguing. Instead, make it a point to let them know you value them as a customer. When you present information, share it as best practice and let the social proof do the convincing. If the customer isn’t interested, that’s okay too, but your job is to always leave the door open to a conversation.
14. The customer faces unforeseen adversity
Customers will buy your product with the best intentions of being successful. However, sometimes along the journey, they face unforeseen adversity that makes the likelihood that they’ll have success with your product much harder.
Solution: Help them keep their original objectives in mind. Consider offering a “restart” where you adjust the subscription, provide credits and both sides agree to redouble their efforts to implement the product. A personal site visit, for those in a physical office, can go a long way toward giving the customer the confidence you are right there with them.
15. The customer is affected by a black swan event
A black swan event is usually something that’s unpredictable and catastrophic. In legal parlance, this is referred to as “force majeure.” Chances are your contracts have a force majeure clause. For example, a pandemic (COVID-19) or an abrupt financial crisis (financial crisis of 2008-2009).
Solution: Be proactive and empathetic with customers affected by a black swan event. This will help inform your plan of action. If possible, provide relevant resources or timely features that might help address the issues they are faced with as a result. There are many stories from the recent pandemic where SaaS companies made generous concessions to help customers in trying times, rather than allowing the account to churn. This approach yields incredible customer loyalty when the black swan event eventually passes.
16. The customer is traveling against economic headwinds
Anyone that’s flown between New York City and San Francisco knows that those two trips can vary in travel time, depending on whether you’re flying east or west. In one direction the jet stream pushes the plane along, while in the other direction, headwinds slow you down.
Something similar ebbs and flows with the economy. When the economy is good, many companies strive to grow at all costs as the economy pushes business along. When the economy turns south, cash-efficient growth becomes the priority as we face “economic headwinds.”
Solution. Customer success teams are well-positioned to face headwinds. Managing customers well is not a ‘nice-to-have’ in a downturn—it’s essential. The key is to continuously demonstrate value—to your customers, your team, and your company. Know your metrics, own your numbers, look for signs of customer churn and develop CS playbooks for dealing with the major issues. At some point, the headwinds will subside and you’ll see just how far you’ve come.
A more proactive approach to reduce churn
ChurnZero helps customer success teams fight churn. Our customer success software gives you a complete view of your customer health and satisfaction. By providing you with an advanced warning of customers at risk of non-renewal, you can prioritize your outreach and take proactive steps to prevent churn.
See the product in action for yourself by scheduling a demo of ChurnZero.