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:
Let’s look at why churn is so detrimental to recurring revenue companies:
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:
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 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.
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.
Make it your baseline mindset that there’s no excuse for losing subscribers to involuntary churn.
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.
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