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    By Chris Strandin September 7, 2022

    Beating Churn in SaaS Sales

    In Saas sales, Recurring Revenue is the name of the game either annually (ARR) or monthly (MRR). Churn refers to the customers that drop off of the service because they either no longer see the value of your solution, or found an alternative they find more attractive for some reason.

    Let’s talk briefly about how churn is calculated, and the impact it can have on your business. Let’s say you have 100 customers buying a SaaS product that costs $100 per month, and a current monthly churn of 5%. Assuming no new customers for this example, you would make $10,000 in month 1, $9,500 in month 2, $9,025 in month 3 and so on. The average subscription time at 5% churn is 20 months, making the average customer value $2,000 before factoring in customer acquisition costs (CAC).

    If you were to reduce churn to 1%, your average customer would stay subscribed for 100 months and have a lifetime value of $10,000. For these 100 customers, the difference between 5% and 1% churn is the difference between $200,000 and $1,000,000 in lifetime value. This multiplier effect is the reason SaaS companies are so focused on the concept of reducing churn.

    The majority of SaaS companies today are able to keep their churn below 7% per year, but every percentage lost will add up quickly. 

     

    The Problem

    The problem is that churn is really expensive, not just in terms of lost revenue but of added customer acquisition costs to replace the lost customers. Not only is it more expensive, but upwards of 70% of companies agree that it’s more difficult to replace a customer than to keep one subscribed. The takeaway is that churn hits your revenue, costs you time and money, and reduces company valuation.

    When looking to reduce churn, an important question to ask is “where do the customers go? Many SaaS solutions have alternatives in the marketplace, and the growing popularity of easy-to-configure and browser-based solutions has dramatically reduced the “stickiness” of traditional software solutions. At the same time, the customer may have gotten excited at the sales pitch and found out later that it doesn’t really fix their problem, so they just drop off completely. Another option is that the buyer is still excited about it months later, but the team that is supposed to use it simply never adopted it so they aren’t experiencing the benefits.

     

    What We Learned

    Having encountered all of these problems consulting for SaaS companies solving a myriad of problems, we’ve learned a lot about what causes churn, how to identify the chief causes, and most importantly how to proactively prevent it.

    Let’s start with alternatives. The selling era we live in today has changed because buyers enter the sales funnel more informed than ever thanks to the widespread information available online, and ability of marketers to provide information on every screen you look at. If a customer isn’t happy with your solution, they can likely get a free trial of your competitor, talk to their sales team, and make a decision to switch before you have any idea they are unhappy. How do you defend against customer ghosting?  

    We also see that some growth-minded salespeople oversell your product, or your prospect heard what they wanted to, but either way the prospect doesn’t need what you sell. The problem here is that you’ve invested in marketing to this prospect, selling to this prospect, setting up their account, and limited value was really exchanged. The problem is that the prospect wasn’t well qualified, your team didn’t ask the right questions, and a lot of everybody’s time got wasted.

    Lack of adoption is another killer for long-term SaaS relationships. Too often the buyer gets excited about a solution, but that excitement doesn’t get passed on to all the users who need to adopt it. The customer may have done no training on it, the internal messaging was poor, they didn’t take the time to implement it correctly, whatever the case may be. The problem is that your sales team wasn’t able to directly train users, or at least coach the champion on how to roll it out for the best chance of success.

    Even if the solution is working fine, what happens when the CTO turns over and brings with them a bias for their favorite system? If you only have one champion in the account who leaves for greener pastures, there may be very little you can do to stop your solution from being replaced. The problem is that your sales team put the account at risk by only having one or two contacts, they didn’t invest in the long-term account relationship.

     

    The Solution

    Reducing churn isn't a quick fix, but it is a big problem if it's not under control. Through implementing the Winning Sales Foundation™ with many SaaS clients, there are many approaches to reducing churn because it is the culmination of many simultaneous problems. Here's a few things that we know work:

    Sales Playbooks train sales reps to better qualify prospects to be longer-term customers, ask better questions to get prospects more excited about the solution, coach prospects how to drive adoption in their organization, and proactively defend against competitive attacks. 

    Sales Process in SaaS typically starts with marketing, proceeds through the sales cycle, and continues on once the customer begins using the product. A tight sales process ensures that every step is followed so that sales builds on the marketing message, explains the value and handles objections, then helps to bolster adoption and retention after ink dries. Missing one of these steps can cause confusion in the prospect's buying process which leads to half-hearted implementation and adoption which causes churn. 

    Account Management can be proactive or reactive, and if you're reactive you're going to leave money on the table. A great example of proactive account management one of our clients leverages is taking advantage of usage metrics in customer instances to identify poor adoption, and reaching out before they can decide it's not working for them. This allows them to provide value (low usage), and offer solutions to improve adoption and get more value from the product. Other tactics include business reviews, account plans, and training.

    Rigorous metrics management is another way to help reduce churn. Firstly, it can help you identify that you have a churn problem by looking at your internal metrics. Next, segmenting your customers into groups (size, industry, department, days to convert, rep, etc.) can help identify the roots of the churn problem so you can begin to solve it. 

     

    Conclusion

    There are a lot of reasons for churn, and solving it requires a dedicated effort. We find that an outside perspective helps not only identify the causes of churn, but dramatically speeds up the time to build and implement fixes that save customers and revenue from slipping through your fingers. Contact us today for a free consultation, and let's start tackling this problem together. 

    Topics: SaaS / Technology

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