Why SaaS Customers Churn

The Top 6 Causes for SaaS Churn

Summary

  • SaaS churn is a cancer to business growth and profits. And like any disease, it only gets worse left untreated.
  • Due to the compounding effect of annuity revenue streams, even small reductions in SaaS churn lead to significant improved MRR, ARR, customer lifetime value, referrals and company valuation.
  • Systemically reducing customer attrition requires a holistic process to identify the measurable reasons for churn, detect the underlying root causes, and swiftly adopt the proven methods to eliminate the causes at the source.
Johnny Grow Revenue Growth Consulting

Regardless of whether its called customer attrition, turnover, defection or churn, it's a business cancer for software as a service companies. And like a cancer, it often isn't detected until it becomes a serious problem.

It's near impossible to achieve a SaaS growth strategy if the company struggles to retain customers. However, before you can prescribe a cure for SaaS churn you need an accurate diagnosis. And that starts with understanding the specific reasons customers leave software-as-a-service providers. Otherwise, businesses risk implementing programs that don't fix the real problems.

The most recent research report, Customer Service Excellence, answers the question of why customers leave software-as-a-service vendors.

Causes of SaaS Customer Churn

See the research findings that show the top 6 reasons Software as a Service customers churn.

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1

Poor Customer Service

74 percent of survey participants that left a software as a service vendor cited poor customer service. But when we looked at the data more holistically we discovered that customer service was neither the cause of grievance nor the company's last line of defense.

The two overwhelming root causes requiring customers to contact customer service were challenges with the product or service and difficult business processes between the customer and vendor.

When customer service was unable to remedy the customer issue timely, and the customer perceived a feeling of indifference by the provider, churn was quick.

But here's the interesting thing. When customer service was unable to remedy the customer issue timely, but the customer believed they had a business relationship with the supplier, they were much more patient and permitted additional time to remedy the issue.

Customer relationships are the back stop to poor processes or frustrating customer experiences. Even when incurring poor customer support, the research found that customers are 3X less likely to leave a vendor if they have what they feel is a meaningful customer relationship.

Customer relationships are not a substitute for poor customer support, but they do afford the publisher additional time to make things right.

Resolving inefficient processes or poor customer service requires a holistic look at the contributing factors or root causes that bring customers to customer service in the first place. The company should also recognize that customer relationships are the last line of defense before attrition. When customer support disappoints and there is no meaningful customer relationship to withstand the discontent, that poor customer service leads to defection.

2

Poor or Declining Outcomes

Customers subscribe to cloud solutions to solve their pain. If that pain doesn't get resolved timely or at all, attrition is inevitable.

Sometimes this source of turnover occurs when software companies acquire customers outside their target market or ideal customer profile. This misfit has downstream consequences as the software-as-a-service provider invests more resources in customers that will likely never be successful. This also diverts resources from core customers who would benefit. Non-fit clients will consume the most company resources until they inevitably depart.

When removing pain or delivering business outcomes time is of the essence. That's why on-boarding can be extremely helpful.

Customers that churn quickly are quite often not able to figure out how to use the cloud solution for their needs. A customer on-boarding process can mitigate this problem by validating customer needs, setting realistic expectations, and providing instruction to achieve business outcomes.

A top metric is Time to First Value (TTFV). It measures the elapsed time between provisioning or activation and customer accomplishment. It is an essential key performance indicator to verify the effectiveness of the onboarding process and reduce attrition.

When technology providers solve their customers pain quickly and continuously, those customers are more likely to stay, upgrade, increase consumption, acquire more products and spread the word about your product.

SaaS Churn
3

Low or Declining User Adoption

Software as a Service success is entirely based on utilization. Consumption and churn are inversely related. When user adoption declines, customer churn rises.

SaaS subscription or user licensing is not enough to know if the solution is really being used. The software industry is notorious for shelfware. That is software procured but not used. Fortunately, SaaS user adoption and utilization can be measured with telemetry.

Nobody wants to pay for something they don't use. Low or declining user adoption is an early indicator that the service is non-essential and customer churn is predictable. When detected early, the company can revisit onboarding, training opportunities, or sales of additional products. The more invested customers are with your solution, the more likely they will view it as an essential part of their business.

4

Poor Quality

18 percent of survey respondents indicated poor product quality as a reason for defection.

The top two scenarios were repeated or extended downtime and lingering defects (i.e., bugs).

Customers rely on SaaS subscriptions to run their business. When the service is down, so is part of their business. Every extended outage is an invitation for the customer to shop for an alternative.

Some software bugs are understandable, but when those defects linger on for an extended period it's like death by a thousand cuts.

Customer service must be able to record, report and resolve software defects in a timely manner. This requires integration with R&D or product development. Customer service is responsible for the defect diagnosis, and offering workarounds for interim operation, while product development is responsible for remediation.

We have worked with some leading publishers that when confronted with software defects, such as after a new release or feature introduction, hold one- or two-day bug resolution hackathons to knock out a high number of defects in a short time.

When it comes to software quality, veteran software architects know that an ounce of prevention is better than a pound of cure. They sometimes cite the 1-4-8 rule, which essentially states that fixing a software defect in development is a baseline cost, while fixing it during QA costs 4X and fixing it after release to production costs 8X.

5

Superior Competitor

The technology sector is hyper competitive so there's always going to be disruptors offering innovation and new value propositions.

Fortunately, the research show that customers generally show little interest in the latest and greatest competitors unless they are incurring one or more of the previously cited frustrations.

Publishers can reduce competitor encroachment with highly specialized solutions but the most effective method to stave off competitors is to ensure customers are achieving their outcomes.

6

Involuntary Churn

Attrition from natural causes includes B2B customers that incur hard times or go out of business. It may also include customers that get acquired, although that can create an expanded selling opportunity.

When clients incur cashflow challenges any expense that is regarded as non-essential is a goner.

One method to mitigate this situation is the use of longer-term contracts. But the best method is to ensure your solution is achieving your customers business outcomes, and is therefore essential.

B2C customers incur delinquent turnover. This most often occurs with credit card failures. When consumers do not update their payment information and the card on file ceases to renew their subscriptions, they may be lost if not quickly contacted.

B2C publishers will find that about 11 percent of monthly credit cards will fail, and over half of those consumers will not be recovered.

Publishers should use automated techniques to identify credit cards or payment methods about to expire. They can then launch proactive reminders, dunning notifications or other outreach until the payment method is updated.

See the most effective SaaS retention strategies for additional methods to reduce customer attrition.