SaaS: Secrets of Churn Revealed
In today’s business world, technology, specifically software, is ubiquitous in the business environment. It can help track shipments across continents, manage large numbers of employees and control inventories.
For years, companies have relied on software to run their own computer networks and internal structures. But in recent years, the traditional software license purchase has become old fashioned. Many customers and vendors are migrating to a SaaS (Software as a Service) business model.
SaaS is a web based software application delivery system. The SaaS model is simple; the enterprise vendor operates and hosts clients over the internet, and the client enjoys access to all business activities online. Customers pay the vendor monthly fees (annuity payments) (and are usually not required to buy extra equipment or software licenses for using the application).
Unlike traditional consumer oriented web host software, SaaS literally encapsulates the enterprises. This is why the demand for software licenses has remained flat, while SaaS has experienced a big boom. This demand is due, in large part, to its low costs. Business enterprises save on the costs incurred by IT related investments. SaaS fosters innovative ways to be efficient with tasks. It also offers a considerable decrease in deployment time.
Two Types of SaaS
SaaS is of two types; business application and development tools. Business application SaaS entails the software that helps businesses accomplish their tasks accurately and quickly. Examples include client management, such as CRM systems (customer relationship management) and marketing automation. Business Applications are very competitive and very specific. You can find a SaaS provider to satisfy your most complex or unique demands.
The Development Tools SaaS, covers a large industry that aims to provide software for product development and management. Examples include financial and accounting systems, UI (user interface) tools and disaster recovery tools.
In order to stay relevant and profitable, SaaS businesses are ‘on top of it.’ SaaS vendors work hard to develop their product; they do not use intuition to determine performance. They look to reports and numbers that highlight meaningful growth or weaknesses in the system.
SaaS owners should always seek to understand, test and apply key performance indicators. There are many SaaS business metrics that can be used to suit any given business. The 5 most common key metrics used in measuring business performance include; monthly recurring revenue, cost per acquisition, average revenue per customer, lifetime value and churn.
- Monthly Recurring Revenue serves as a primary benchmark for progress. It is the steady cash flow from client sources, such as monthly subscriptions (measured by subscription monthly revenues owed by a customer over the duration of the months).
- Cost per acquisition is used to determine the amount of money spent in acquiring the customers and the viability of the process. It is measured by adding the marketing and sales expenses over the average cost per new customer to the business.
- Average revenue per customer is more straightforward. It is used to determine the revenue already received from customers.
- Lifetime value of a customer, in essence, is his or her economic value to your company. This figure is determined in different ways, depending on your business model.
- How many customers does your business lose per month? How many come back for your services? This is defined by churn. Churn measures the percentage of customers that your business loses over a specific duration of time.
A little More about Churn…
The total number of months that a customer stays with the business before cancellation can be determined using churn. SaaS customers often repurchase services every month, making it easy to calculate churn rates. Others purchase services a few times a year and so the churn has to be calculated annually.
Churn rates vary greatly depending on the type of SaaS business; at startups, the total churn is small and the customer base usually grows. When it comes to established companies, if no credible innovations and business adaptations are undertaken by the business, the growing customer base could mean an increase in churn. The higher a company’s churn rates, the longer it takes to break even and turn a profit.
The type of SaaS you offer – and the industry of the SaaS product – have a direct effect on churn. For example, an invoicing application is something crucial to business. Once implemented into a company’s system, there will most likely be a low churn rate. On the other hand, a SaaS entertainment application is more dispensable, so it attracts a higher churn. When budgets become too tight, this will be the first type of service to be cancelled.
A high churn, usually double digits, is a wakeup call for businesses; the product they are offering is not meeting the customer’s expectations. At this point, they should no longer focus on marketing or growing the product. The priority is diagnosing the problem and fixing it- in order to avoid losing any more customers. SaaS providers can easily pin point the problem via feedback; by talking to their customers and asking for suggestions, they can improve the quality of their product.
For those customers who have cancelled; analyze why the customers have left or opted to use a competitor’s product. For potential customers ; approach via surveys, focus groups or test studies, and ask for their opinion on the product.
Getting the churn rate under control is detrimental in sustaining a SaaS business. Thrive to get customer feedback and maintain a good one-on-one relationship. Take the proper measures to retain customers and increase the client base; offer low competitive rates while offering quality services.
‘SaaS MRR churn‘ is an extension of SaaS customer churn rate. As the name suggests, it focuses on the erosion of SaaS ‘monthly recurrent revenue’ lost. This loss is the result of customers not renewing their contracts with a SaaS vendor.
Churn is always expected to happen no matter how good a SaaS product is. Most experts consider 3% or lower to be an acceptable churn value. Business owners should not worry themselves too much as long as this rate is maintained.
SaaS is the most popular software option available today. The successful operation of a SaaS business is dependent on a number of factors, one of the most important factors being churn rate. If you keep your churn under control, your business will be well on its way to a profitable future.
By Roy Saar,
Roy Saar is an Angel investor & Venture Capitalist with Mangrove Capital Partners, a bold but patient venture capital firm helping innovative entrepreneurs start and grow global, disruptive companies was involved in the launch of Wix and Polaris Solutions. Roy was also the founder of Sphera Technologies (sold to Parallels in 2007), which was one of the very first software platforms for SaaS providers. Roy seats on the boards of: WIX, PlanetSoho, WalkMe, RFcell & Polaris Solutions.”