If you’re a SaaS finance leader, your churn rate (the number of subscription cancellations you receive over a given period) is one of your most valuable performance SaaS metrics to track and improve.

 

There are several reasons for this:

• It’s one of the central hinge points for your CLTV and other important KPIs.
• A low churn rate is a highly promising sign to potential investors.
• Lowering churn boosts your net revenue, allowing you to scale more quickly and effectively.

 

Let’s look at why churn is so detrimental to recurring revenue companies:

 

Churn’s Effects on Your Annual Revenue Retention (ARR)

It can be tempting to focus on accelerating growth above everything else. If you’re not careful, you could get a classic case of tunnel vision and fail to grasp the bigger picture at hand.

You also need to carefully examine the number of customers you’re losing to churn over different periods (monthly, quarterly, annually). Knowing this allows you to calculate your ARR, or how much subscription revenue you’re creating, and retaining, over time.

 

You can calculate your company’s ARR with a straightforward formula:

ARR = (Total Revenue – Churned Revenue) / Total Revenue 

 

Here’s a quick example using a fictional subscription revenue company:

 

Clarity is Power: Calculating Your ARR

An early-stage start-up’s new app is climbing to 500 signups per quarter, but they lost 350 of their existing customers that same quarter. They only netted 150 subscribers for that period. Let’s assume that pattern continues for four consecutive quarters.

Over that hypothetical year, the company would have gained 2,000 total subscribers. But it would have also lost 1,400 of those subscribers to churn.

If they charged $10 per subscriber for their services, they would have gained $20,000 for the year but lost $14,000 worth of subscriptions. So their ARR expressed as a percentage would be 30%.

In other words, they’re only retaining a small fraction of their revenue across time. Many top subscription companies have an ARR exceeding 100%. 109% is often cited as a high-performance benchmark for SaaS companies, and some platforms have even higher figures.

Now that you realise how quickly churn can wipe out your revenue if you’re not careful, we’ll look at the two kinds of SaaS churn to watch:

 

 

 

Voluntary vs. Involuntary Churn

Voluntary churn occurs when a customer purposely cancels their subscription. Maybe your app lacked some essential features they needed, or perhaps they decided your product was overpriced.

On the other hand, involuntary churn is typically the result of customer negligence. It primarily occurs when customers fail to update their billing info in your system after a credit or debit card expires.

There are other potential reasons for involuntary churn, however. The customer’s bank might have flagged your website and refused to approve the payment. It might have also happened due to an error in your payment processor during a high-volume period.

As a SaaS CFO, you’ll be tasked with tracking and reducing both types of churn. Luckily, there are established pathways to accomplishing that.

 

How Dunning Reduces Involuntary Churn

Involuntary churn is also known as passive churn because the customer is not directly involved. Dunning is one of your best bets for dealing with it effectively.

Although the word might sound strange, dunning is simply the term for communicating a billing failure to your customers. Even though the concept is relatively straightforward, there can be a learning curve to getting it right.

 

Here are a few best practices around dunning:

• Test different auto-retry schedules. Quite often, when a customer’s card fails, the problem can be resolved by simply trying it again a few times. Speeding up your auto-retry schedule will confirm whether it’s one of these cases.
• Make your dunning emails stand out. Going the extra mile to customise and brand something as simple as a payment failure email communicates a sense of professionalism to your customers.
• The vast majority of billing info updates happen on mobile devices. By ensuring that your billing page seamlessly transitions to a mobile experience, you’ll help your customers update their card details quickly and accurately.

Make it your baseline mindset that there’s no excuse for losing subscribers to involuntary churn.

 

Tactics for Cutting Down on Voluntary Churn Rates

One of the critical elements of cutting down on voluntary churn is to view it as a strategic opportunity rather than simply a threat. Many of the processes for understanding and reducing voluntary churn will also give you a better understanding of your customers.

 

Below are a few effective ways of simultaneously learning from and lowering voluntary churn that include:

• Use a text box or questionnaire to ask customers to explain their cancellation reasoning. The odds are good that they’re not the only ones with a specific problem or complaint.
• Invest heavily in quality customer support. If your users cannot quickly get a hold of someone who can help resolve their issues, they’ll be much more likely to churn.
• Stay engaged with your customers with occasional emails or texts asking for a review of your product. Doing so gives you a chance to track and address your customers’ complaints before they unsubscribe.

 

Remember that involuntary churn and voluntary churn can get out of hand and create ruptures in your ARR if you’re not diligent. Rather than prioritising one over the other, look at them as two equally important pieces of a larger whole.

 

The Akuna Solutions Team