For SaaS companies, customer attrition is one of the worst things that can happen to the health of your company. Granted, some attrition is inevitable, but minimizing this key factor will undoubtedly mean the difference between a successful business and a failed one. So, what exactly is customer attrition and how do you minimize it? In this post, we'll take a close look at this metric and how to manage it so your SaaS company's growth chart is moving in the right direction.
What is customer attrition?
Customer attrition simply means losing a customer. There are a lot of factors that can lead to customer attrition and a good analytics tool can help you identify those issues so you can take the proper steps to avoid them. There are also powerful tools that can combine with analytics to take a more proactive approach to stopping customer attrition. These tools minimize the amount of work you'll have to do on your own to avoid this revenue destroying problem. If your SaaS business is losing customers, you'll want to act fast to determine the causes and eliminate them.
In the SaaS world, customer attrition is also known as churn. You'll most likely see the term expressed this way when you use analytics tools or read about methods to improve the health of your SaaS business. As a metric, churn is usually expressed as a rate that indicates the number of customers you lose over a given period of time.
The harm of customer attrition
Everyone instinctively knows that losing customers is bad. Because customer attrition is inevitable, however, some SaaS companies simply accept it as a normal part of doing business. This is an unhealthy attitude. It may be inevitable that customers will churn, but it is a metric that can be managed with a little effort on your part. More importantly, taking the time to control it can result in a more solid product that will actually attract more users over time. So taking proactive steps to reduce churn will not only save you money, but will act as an effective strategy for new customer acquisition on top of that. Let's look at some ways that customer attrition hurts your business.
We'll start with the obvious. If customers leave, so does the revenue. In SaaS, monthly recurring revenue (MRR) is not only the lifeblood of a company, it's also an indicator of long-term viability. Customer attrition directly decreases revenue, so it is vital to keep it at bay. When a customer churns, you've also lost any ability to further monetize that customer.
Imagine you have product that you've convinced a single person to spend a million dollars a month on. If you do that, you're riding high for a while, but if you lose that one customer, you've also lost that million dollars. This is an extreme example, but it shows you the value of having as many customers as possible. It isn't just the revenue that having a large customer base provides, it's also the buffer it yields to help when attrition does happen. The more customers you have, the less losing one will hurt you. It goes without saying that in order to have a lot of customers, you need to minimize attrition.
Poor CAC: LTV ratio
Customer acquisition cost (CAC) is the amount of money that you have to spend in order to acquire a new customer. Your customer lifetime value represents the total amount of money you can expect from each of your customers throughout their time with your company. The goal, to maximize profits, is to have the lifetime value of the customer be significantly higher than the cost of acquiring that customer.
If you're spending to acquire customers and they churn before you make back those costs, then you're running a tough deficit. Churn increases your average CAC.
How to find your customer attrition rate
You can't stop customer attrition if you don't know how or where it's coming from. Let's take a look at how to calculate it. The first thing you'll have to do is to decide on the length of time that you want to measure. Most SaaS companies will measure by the month, but use whatever suits your data needs.
Where number of churned customers is how many people have left your service over the period out of the total number of customers you had during the period. For example, if you start the month of January with 500 customers and 5 of them leave during the month, your churn rate would be 5 divided by 500, or 1%.
Any good analytics tool, especially one designed specifically for SaaS like ProfitWell Retain, will be able to calculate your churn rate for you. These tools will make it easier to monitor the trends over time and ensure that you are moving in the right direction.
Retention vs attrition
Now we need to talk about keeping, or retaining, those customers. Customer retention is the opposite of customer attrition. By putting a sound customer retention strategy into place, you'll be able to minimize attrition and keep your company on the path to growth. To summarize:
- Retention — This is good. Retention keeps customers on board, gives you the chance to increase their customer LTV, keeps the revenue flowing, and gives you opportunity for expansion revenue, so your company can focus on growing r.
- Attrition — This is bad. By losing customers, you're losing revenue, plain and simple. Attrition is to be avoided at all costs.
The cure to attrition: bullet-proof retention
In order to stop attrition, you have to have a strong retention strategy. This starts with using tools like ProfitWell Metrics to closely monitor your attrition rate over time. The goal is to always be lowering it. Sometimes, this won't happen. In fact, a spike in attrition may be your first clue that something is wrong. Are there new bugs that you're not aware of? Is some new feature proving difficult for users to figure out? There can be many reasons for attrition, but noticing that spike is an indicator that you need to start looking for something that is causing that change.
The best way to stop attrition is to take steps to avoid it. This means making sure that you provide thorough onboarding that helps customers understand all the features of your product or service, providing them with an easy and fast way to get answers to any questions they have, and working hard to ensure a bug-free product. In addition, you can use powerful tools like ProfitWell Retain, which helps you identify possible churn and stop it before it happens. Retain's algorithms are constantly evolving to push your recovery rates up.
Customer attrition may be a part of doing business, but it should not be business as usual. A strong retention strategy is one of the only ways to stop attrition in its tracks, especially during difficult economic times—you want to hang on to your customers.