10 Ways to Reduce Customer Churn for Your SaaS Business

While it’s hard to see customer churn as anything but negative, just as lemons can make delicious lemonade, churn can benefit businesses in unexpected ways.

When businesses thoroughly investigate the cause of churn —both voluntary and involuntary— among their customers, and consider the impact of churn in a data-founded way, they are better equipped to optimize their systems, sales, and customer service approaches to reduce churn, improve retention, and increase their overall revenues.

Churn Impact on Business Revenue

Churn impacts revenue, and retention might be more valuable than acquisition

The statistics on churn are daunting: if a business loses even 1% of their customers to churn each month, they can experience as much as 17% in lost revenue over the following five years. If churn for the same business is 5%, it can lose an astonishing 55% in revenue over the same period of time.

Let’s face it: churn is to be avoided. The marketing and sales teams may feel it the most as they rush to replace the customers lost to churn.

The costs of acquiring new customers cannot be made up for several months, or even years. It’s only with successful retention that a business will see significant returns; one study showed that a 5% increase in retention rates may lead to a profit increase of up to 95%. Long-standing customers are more likely to upgrade, sign on for longer contracts, and to advocate your product to others, via word-of-mouth marketing.

The bottom line: customers become more valuable over time. Your most loyal customers are also your most profitable. So your retention efforts should be top-of-mind when forming your approach to sales, marketing, and customer service.

Can businesses rely on “expansion revenue” to offset high churn rates?

Many SaaS businesses make the mistake of thinking they can offset churn rates by getting their customers to up-sell, cross-sell, or use other expansion methods where even if a business loses some customers they get more annual revenue from the ones that stay. However, not only do the acquisition costs offset a portion of this expansion revenue, it’s tricky to achieve the magic combination of pricing models that achieve a reliable level of expansion among your current customers.

In short, retention is always going to be cheaper, and churn is always going to have more of an impact over time than businesses might estimate. Keep reading to learn how to reduce churn:

Tips to Reduce Voluntary Churn

Let’s start by defining voluntary churn. Voluntary churn is intentional on the part of the customer; they’ve made the choice to cancel their subscription. A 2Checkout survey revealed the most common reasons a customer will voluntarily churn:

• Subscription bill charges they were not expecting (72%)
• Not using the service as much as they had hoped (63%)
• Too costly (60%)
• Customer service is not meeting their needs (56%)
• Option to pause subscription isn’t offered (45%)
• No incentives or discounts are offered (36%)

Fortunately, there are several ways businesses can combat voluntary churn. The key is to constantly listen to your customers’ needs and wants, and look to optimize your product, client communication and flows. Learn why activity churn and payment churn happen and adapt accordingly. Following are some tips:

1.   Track Behavior that Predicts Customer Churn

Be attentive to and track customer behavior, especially when it consistently leads to churn. Some examples of pre-cancel behavior that businesses can watch for and react to in a preemptive way:

•         Users who stop logging on or lower engagement levels with your product or services
•         Customers with frequent complaints and problems they share with customer support
•         Customers who want more from your product or service that you are not currently able to offer
•         Customers who don’t update their payment details

Deep dive into analytics to understand what the biggest causes for churn are and focus on those.

2.   Streamline Your Renewal Process Accordingly

With regards to the payment churn piece, don’t just assume your renewal process is optimal— take a deep look at the way you notify your customers about renewals, including your templates, pricing, and timelines. Analyze your communications campaigns; and look at your shopper support process to see what’s working and what isn’t. Make it easy for customers to contact you, and answer their questions in a timely manner. All these steps will likely lead to higher retention rates and fewer chargebacks and refund requests.

To help prevent churn further, optimize for geos and offer as much localization as possible, even by providing local payment methods.

3.   Offer Your Customers Flexibility to Get What They Want and Need the Most

Give customers a range of package choices, and let them pick and choose features and options based on their needs.  

This is closely related to your packaging strategy. Most SaaS companies offer a range of plans – introductory, standard, enterprise, and so on. What goes into each package and the flexibility you offer is the key here. 

Focusing on your core differentiators and offering differentiated products to specific target users, even at above-average rates, gives you a better chance at purchase and renewal, because the offering has been designed with users in mind. 

A practical way to achieve this is to offer a tiered structure for your plans, based on key metrics related to product usage, number of users, or whatever value metric makes sense for your product.  Including a tiered structure helps increase the customer’s perceived value of your product. Create a flexible structure, empowering prospects to make the decision that best fits their needs.

A word of caution here: the strategy is that the low package users should eventually scale up to higher plans as their needs grow and they realize how much value you provide them. So even if you use the flexibility of the packaging to prevent churn, the ultimate goal is to demonstrate value and get your customers to move up the package ladder.    

4.   Use Email Marketing to Remind Your Customers to Renew

Remind your customers via strategic messaging that their renewal deadline is coming in order to build their trust and encourage prompt renewal (as well as discourage voluntary churn). For manual renewals, reminder emails should be sent 30 days, 7 days, and then one day before expiration.

5.   Encourage Your Customers to Switch to Auto-Renewal

Highlight the convenience of auto-renewal to your customers so they understand they’re guaranteed uninterrupted service and access to their stored preferences, products, account information, and payment details. Transitioning these manual customers to auto-renewal accounts via your email renewal reminders will give you a significant uptick in revenue for very little cost.

6.   Give Auto-Renewal Users Looking to Churn a Reason to Stick Around

For customers who may want to disable their auto-renewal, offer incentive offers. Customers are less likely to disable if they are offered a discount on a certain number of billing cycles, for instance.

7.   Give Your Customers a Second Chance When Things Go Wrong

For customers with manual renewals, and even for auto-renewals, it pays to offer a grace period. This means that you don’t cut them off completely when they forget to renew, or when their card has expired, or their bank account has insufficient funds. Continue their access to your product and give them some extra time to update their payment information.

8.   Make It Easy for Customers to Cancel

It might seem counterintuitive at first glance, but customers want to feel in control. They’re more comfortable knowing it will be easy to cancel at will. Having “cancel flows” or clear paths worked into the relationship gives customers reassurance that they are not trapped.

However, this should always be balanced by communicating the unmatched benefits of your service and the ways it will power their growth (which they will miss if they cancel). You can also offer discounts or incentives—free or discounted upgrades for “loyal customers”—or a discount for switching to a recurring billing plan.

9.   Let Your Customers Pause their Subscription as an Alternative to Canceling

2Checkout has found that 10% of customers would just as soon pause their subscription than cancel, and especially during the COVID-19 pandemic; this can be a legitimate way to keep customers on board. Offering this option can not only reduce churn rate, it can also help customers who are having payment issues or give them the opportunity to temporarily downgrade. It can also give you the chance to learn why your users want to pause and how you can optimize various aspects, including packaging, pricing and promotions, to keep them post-pause.

Tips to Reduce Involuntary Churn

Involuntary churn occurs when a customer’s payment attempt fails, leading to their subscription being canceled. It can be more frustrating than voluntary churn because it mostly occurs due to technical issues. But with the right payment tools, you can easily salvage a big portion of it.

 Involuntary churn can happen for a number of reasons:

• The customer’s card has expired and payment information has not been updated
• Payment results in a “hard decline,” which happens when a card has been lost or stolen, the bank account is closed, etc.
• Payment results in a “soft decline,” when a credit card has reached its maximum balance, or when processing failures such as timeouts have occurred, etc.
• Banks can decline the card for other reasons. For example, the renewal may not have been flagged as an exception in a PSD2 scenario, and it hasn’t been approved by the client in a timely manner.

Offer Smart Payment Tools to Prevent Involuntary Churn

Look for payment providers that offer out-of-the-box tools that help prevent churn among both acquisitions and renewals, as these are shown to recover by around 20% of recurring revenues.

Here are some smart payment tools for new acquisitions:

• Multi-Currency Management offers access to local billing currencies and can help increase authorization rates by up to 25%.
• Intelligent Payment Routing matches or routes card transactions to the best available payment gateways. It also retries authorizations using a failover or back-up gateway.

• Dynamic 3D Secure positively influences authorization in specific countries, and also reduces the risk of chargebacks and fraud. In the EU, 3D Secure 2 (3DS2) compliance is mandatory, under the new PDS2 regulation. However, the implementation of these new rules is paramount. For example, there are exemption rules that can be leveraged under the 3DS2 technology to protect an online business from declined payments and low conversion rates.
  Low-risk, low-value, recurring payments are part of exemption flows, reducing friction between customers and authentication process, with cardholder and merchant-initiated transaction frameworks triggering 3DS2 only when necessary.

Some additional smart payment tools for renewals:

• Account Updater Service automatically updates cardholder information when it changes or goes out of date. The service ensures billing continuity for active subscriptions, and can lead to a retention rate of up to 40%. The service is available from major card schemes such as Visa, Mastercard, Discover and AMEX for certain countries, with the list expanding year over year.
• Expired Card Handling identifies and updates expired cards, increasing authorization rates by up to 4%. This is usually an internal service available from the payment processor, and it is complementing the external account updater service offered by the card schemes.
• Configurable Retry Logic will retry a renewal up to six times when authorization fails due to a soft decline, recovering up to 20% of failed transactions. Soft declines are temporary authorization failures which may be successful after subsequent attempts: insufficient funds; card activity limit exceeded; failures due to system, technical or infrastructure issues; expired cards.
  Combined with expired card handling, the retry logic service achieves 40-50% authorization rates for expired cards.

•  Dunning Management is used in the case of hard declines. These are permanent authorization failures that cannot be recovered: stolen or lost cards, invalid credit card data, account closed, and range from 10- 20% of total declines. Dunning can be done through several channels, a cost-effective one being through automated emails, with an expected authorization rate uplift of 1%.
  

Conclusion

Customer churn is undeniably one of the principal challenges of every SaaS business, and a real threat to your bottom line. Retention strategies are key to keeping customers happy and on board with your product, but some churn is inevitable. Luckily, you can fight churn efficiently with marketing, commerce, analytics and payments tools, to ensure that your business offsets high churn rates and sees higher retention and increased revenues. Start making lemonade!

About the author

Marius Baraitaru – Product Manager at 2Checkout (now Verifone)

Marius is Product Manager at 2Checkout (now Verifone), being in charge of Subscriptions. He optimizes the development of features to provide maximum value for the product by understanding market needs, coming up with the most efficient solution and evaluating the impact that it makes after its release.

Abdur Rahman

Abdur Rahman is the Magento whizz at Cloudways. He is growth ambitious, and aims to learn & share information about Ecommerce & Magento Development through practice and experimentation. He loves to travel and explore new ideas whenever he finds time. Get in touch with him at [email protected]

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