Dealing with churn, is one of the most important elements of building a subscription business. While some churn is inevitable over time, too much churn indicates a more fundamental problem: customers aren't finding value in your product.
I wrote an article over at GigaOm on this subject including some examples about how to reduce churn from my experience at MySQL and Zendesk.
Having churn is like rowing a leaky boat. After a while, you spend more time bailing water than moving forward. By contrast, organizations that focus on reducing churn will find that their revenue grows every quarter.
To accurately measure what’s going on, you should begin by breaking out churn (customer cancellation) from contraction (a downgrade in spending). Measure downgrade and churn separately from upgrades and expansion; otherwise, your net growth numbers will mask problems that are bubbling below the surface. If your SaaS product has different editions (e.g. Basic, Pro, Enterprise) you should watch for downgrades that suggest customers are not seeing the value in the higher-end features.
It’s also worth paying attention to churn and contraction by customer segment. In most SaaS businesses, churn is highest in low-end customers — some of whom will inevitably be acquired or go out of business. Over time, if you move upmarket to larger SMB or Enterprise customers, low-end churn becomes less significant. Customers who spend a lot of money usually have greater commitment and resources for working through any speed bumps during implementation. They’re also far less likely to switch to another vendor with newer features.
Hopefully this article will spark some other ideas and discussions in your company. You can read the full piece at GigaOm.
- GigaOm: How to Lower You Churn Rate