Like Harry Potter vs Lord Voldemort, SaaS and churn are fierce archnemeses. Potter represents life whereas the Dark Lord, death. New subscriptions give birth to new possibilities—churn mercilessly kills them.
But when you invent a ship, you also invent the shipwreck. SaaS and churn are two sides of the same coin. And no matter how good you are at tossing the coin, the odds are sometimes stacked against you.
If you pull up the industry stats, you will see that the average annual churn rate for smaller SaaS companies with less than $10M in revenue is about 20%. But even the best-in-class SaaS businesses have a churn rate of 5-7%. By every objective measure, it’s not that much of a big deal because it’s like losing a dollar $1 out of every $200 each month.
In SaaS, a big-scale churn is the definition of all hell breaking loose. Losing a few customers here and there is one thing—but what if a big account churns? It’s devastating.
Why churn matters
Acquisition vs retention is a hotly debated topic in SaaS circles, but there’s no denying that customer retention is the #1 source of revenue for most profitable companies. The graph below is one example of how retention typically impacts a SaaS company’s growth over time.
Churn is super concerning because most SaaS realize the compounding effect of net retention revenue (NRR) over a long time horizon. If you look closely, the graph above shows that there’s a 43% jump in retention revenue within just five years. It’s a crazy good reason to prevent churn at all costs if it means the NRR will get better with time.
But when a big churn takes place, it jolts your entire business. It demoralizes the spirit of everyone in the company—especially the customer success team because their performance is directly linked to the churn metric.
Of course, you can do a lot of things to prevent churn, but it will still happen. No amount of predictive AI tools, insights from customer success managers (CSMs), or new features can stop churn from happening. The sooner you embrace the fact about churn’s inevitability in your business, the better prepared you are to focus your energy in the right direction.
Late author and businessman Stephen Covey explains this kind of predicament in a concept he called circle of control vs circle of influence vs circle of concern:
In churn’s context, the circle of control includes everything that you can do within your capacity—hire talented people, invest more money and resources, rejig your internal processes, etc. If your churn analysis finds that customers are opting out of a certain plan because of the high subscription cost, for example, you can remediate it quickly by cutting down the price or by better communicating its value to your customers. It’s something you can directly control.
The circle of influence represents the actions you can take to potentially impact customer behavior. For instance—you can offer your customers discounts or other incentives, train your internal teams, and improve your customer marketing. It’s largely a safe bet—but it’s not as confident a move as the things you can do in your sphere of control.
As the circle widens, you will soon realize that there’s very little you can do about things that are beyond your control—and that is what makes up the circle of concern. Often, customers churn for reasons beyond your control, such as a change in the customers’ business environment or because they were bad-fit customers to start with.
Worry all you want but your concern might not take you anywhere except for spiraling down your team’s morale even further.
What to do when a big account churns
The first reaction is obviously to stop churn as soon as a customer breaks the news to you. Maybe you can offer incentives that can motivate them to reconsider the decision. Leave the offer out there for the customers to brood over without making your business look desperate about it.
But preventing churn is not always about the financial incentives—for you or the customers. Churn is also an opportunity for your business to learn how to improve your operations so that a failure of that scale doesn’t happen again. As a next step, put together a task force to carry out a regression analysis of the churn data and help your business avoid similar churn instances from repeating.
But if the damage is beyond repair, i.e., if the customers have made up their minds to break up and leave, there’s no point crying over spilled milk. Instead, here are five things you can do in the aftermath of a big churn to respond to the calamity in a way that’s mature, productive, and likely to avoid similar events from happening again.
1. Run an exit interview
If there’s one thing that you shouldn’t do when a customer bids farewell, don’t take it personally and maintain the composure that’s expected of a competent brand.
When someone wants to opt-out of your brand, you give them the kind of royal treatment they received when they became your customers for the first time. They deserve every bit of professional courtesy that you can extend to make the divorce less painful. That means your customer success team should schedule a formal interview to facilitate their exit process.
A well-structured exit interview helps you accomplish two critical things:
i. They avoid the customer from getting a bad aftertaste of leaving your brand
ii. They help you gather intel on the reasons that might have caused the churn
Customers who leave with a bitter experience are generally a bad omen for business. It usually comes back as karma in terms of negative reviews about your brand, bad press, or legal notices—if a particular customer’s experience has been the worst.
A thoughtful exit interview process can make your customers feel less guilty about leaving your brand or soften the blow if they hold any grudges against your brand. It’s an opportunity for you to own up to your mistakes, if any, or empathize with your customers—no matter their reason for leaving.
There’s some power in being honest, and customers will always see it if you boldly accept your failure. The experience might make them cherish their time and investment in your brand as a favorable experience.
It’s a standard norm for SaaS companies to run exit interviews through email or phone. But we would strongly advise you to schedule an in-person interview (if possible) or face-to-face video conferencing to make the most out of it. Most exit interviews over the phone or email require customers to check a set of boxes in a templatized form or answer simple Yes/No questions—which doesn’t tell you much about their rationale behind leaving your brand.
On the other hand, a face-to-face interview offers you a chance to read your customers’ body language, ask follow-up questions, and arrive at conclusive inferences, unlike interpreting vague data in the forms. If the customers give you clear signs that they are switching to a different vendor, for example, it helps your go-to-market (GTM) teams devise a tactical action plan to combat similar poaching in the future.
2. Share insights with everyone in your company
Customer conversations offer a treasure trove of data that everyone in your organization can benefit from. In the context of churn, giving everyone in your organization access to the customer insights gathered in the exit interview helps every team recognize the pitfalls that led to churn and acknowledge their roles in the process.
Here’s a likely scenario. Sales and marketing are usually the first teams to get in touch with the customers. And both the teams often do a great job of building excitement in customers during the deal negotiation stage—really selling them the upsides of using your product.
But when the customers sign the contract and start having a bad experience with your product or support team, the customer churns sooner than you expect.
This is exactly why exit interviews are critical: they give customers a forum to vent out their frustrations first-hand instead of broadcasting their negative experiences in a public forum.
But what’s more important is sharing the voice of customers (VoC) with everyone in the organization so that everybody has the same understanding about churn in hindsight. Call transcripts, meeting notes, all key customer conversations help you better understand the VoC and align every team.
Treat this process like a sales post-mortem, a debriefing opportunity for the involved teams to pinpoint what went wrong and what could you have been done to retain the customer for longer.
Churn can be a unifying tool to bring alignment across cross-functional teams. Organizing a dialogue between your marketing, sales, customer success, product, and engineering teams will drive sustainable change in the company and help you improve internal processes. Step it up by holding monthly or quarterly post-mortem recaps to discuss churn trends and address bottlenecks that might be stifling the customer experience.
We would recommend you to use a conversation intelligence software to record, transcribe, get summarized notes and analysis of all your churn conversations with the customer. More specifically, you can create snippets of key parts of these conversations and bring them to your team member’s attention.
You can go a step further and create a playlist of Churn Conversations and democratize it across your organization.
At Avoma, we have made it part of our process where people across the company can subscribe to these playlists. Everytime a new meeting or snippet is added to the playlist, all the subscribers are automatically notified via email.
3. Validate the churn data
When churn is caused for reasons you can control, for example, bad customer support, poor product experience—you can take immediate measures to avoid similar incidents from happening. But like we discussed earlier, a lot of times churn can happen due to reasons that are outside the sphere of your influence.
Regardless of what caused churn, you must address the problem and validate it with data.
Start by identifying customer accounts that are of the same size, same industry, and same contract value as that of the account that just churned. Let your customer success schedule a meeting with these accounts as part of the regular check-ins.
What’s important is that your CS team should try to tease out information from these top accounts to see if they share common pain points, friction, or complaints that the churning account reported in the exit interview.
We don’t recommend you share the news about a big account churning with them because it puts your brand in a bad light. The information is not relevant to them anyway—unless you have a strong reason to communicate such news in full transparency.
Talking to a couple of accounts will help you either validate the hypothesis that there is, indeed, a problematic pattern in your customer experience or discard the churn data as a one-off case that you couldn’t have stopped from happening.
4. Document churn signals
Even when you don’t find widespread churn behavior with other similar accounts, you should make it a practice to document possible churn signals that stood out in the data you gathered from the churned account.
Ask your customer success team if there were any warning bells in the way the customer behaved before they canceled their subscription? More often than not, at-risk customers exhibit one or more of the following behaviors that are tell-tale signals of an impending churn:
i. Declining product usage: It’s bad news when a customer gradually stops using your product or features.
ii. Delayed payments: When they default on their payment or delay their renewals repeatedly—it’s a big red flag.
iii. Behavior change: They will give subtle cues like canceling check-in meetings, not responding to your calls or emails, changing their communication style, etc.
iv. Pricing tier downgrades: Customers who downgrade their subscription plans are usually reconsidering your product or going through financial troubles internally.
v. Increased complaints: They start complaining about your price, products, or service quality.
vi. Poor ratings: They will give you low CSAT and NPS ratings or make excuses about participating in such surveys.
vii. Change of guards: Many times, churn happens when the leadership in the customer company changes.
If you can identify such behavior in customers who have churned, document such behavior patterns so that you can watch out for similar indicators in other at-risk accounts. Create playbooks and defined processes around quarterly business reviews (QBRs) so that the customer success team can take proactive steps to save churn from happening.
5. Focus on your best customers
You can’t be obsessed with a big-scale churn forever. At some point, you have to let it go to focus your teams’ energy and resources on other more important areas—namely, your best customers.
Yes, a big-ticket churn can be catastrophic to your revenue and employee morale. But most cases of churn are not as apocalyptic as it feels. In a post-churn event, your teams need to embrace a “growth mindset” and look at greener pastures in your business.
Most SaaS businesses earn about 70% of their revenue from 20% of their customers. Take stock of your happiest customers, pay attention to what’s working great for them, and double down on extrapolating the same experience to other smaller accounts with bigger revenue potential. Start by identifying your best accounts, build a key VIP account list, and create internal playbooks to offer them a more personalized, white-glove experience.
If your revenue has taken a severe blow due to the churn, identify alternative revenue channels to overcompensate for the loss. For instance, single out customer accounts in your monthly billing pipeline who recently gave you the highest scores in a recent NPS or CSAT test and encourage them to sign annual or multi-year contracts with your product.
But here’s a caveat—pushing customers to extend their subscription plan is a double-edged sword. It can backfire and lead to churn if you aren’t communicating the value of long-term contracts or offering them powerful incentives for doing so.
To fight churn, make NRR your best friend
Churns of significant magnitudes can rock your revenue pipeline and set you back by hundreds of thousands of dollars in recurring revenue. But churn can’t harm you if you focus your energy on just one key metric, i.e., the net revenue retention.
The average NRR benchmark across all SaaS businesses is around 100%—depending on the size of the annual contract value (ACV) that you can win. It can go up or down by 10-15% based on the market segment you operate in.
For instance, SaaS companies catering to SMBs generally have an average NRR of 90%, while enterprise SaaS has it at around 125%. Only a handful of outlier SaaS players like Snowflake can boast NRR earnings that beat the industry average. The NYSE-listed company recently reported an NRR of 178% (way more than the average in the enterprise SaaS space) and attributed their success to continued growth from our largest customers.
The takeaway here is—NRR is an antidote to churn. You don't have to worry about churn killing your business if you can earn an NRR that matches or exceeds the industry average. On the other hand, if your NRR is below the industry standard—it’s likely going to be a death by a thousand cuts for your SaaS.