Updated June, 2021
The SaaS business model has created new marketing and sales avenues, that’s for sure. When it comes to growth and long-term success, SaaS businesses look at both customer acquisition and customer retention (keep in mind that the sustainability of a SaaS business is inextricably tied to customer SaaS renewal rates).
It’s a pretty simple formula in theory, but much harder to pull off in practice.
When it comes to customer retention in particular, there are many reasons you could have issues. Is your product priced too high? Is your customer service lacking? Are there issues with your product? It can be tough to pinpoint why your customers are bailing if you don’t know where to look, and if you don’t know what’s broken, you can’t fix it.
But first, let’s get a better understanding of SaaS renewal rates and why you should include this metric in your reporting.
The renewal rate is the percentage of your subscribers who decide to renew at the end of the subscription period. From this simple definition, it’s clear that a higher renewal rate is a strong indicator that a SaaS business successfully delivers on its product promise to customers.
There are several types of renewal rates, including customer renewal rate, revenue renewal rate and monthly recurring revenue (MRR) renewal rate. You can use any of these, depending on the maturity and goals of your SaaS business. Customer renewal rate can be calculated weekly, monthly or yearly (depending on what insights your business needs and when) using the following formula:
(Number of customers who renewed during a specified period / Number of customers who could renew during that specified period) * 100
In terms of benefits of measuring the renewal rate, we already mentioned how a high renewal percentage can indicate a healthy SaaS business, while a lower one can be a red flag that something is not working as it should, either on the product side or on the customer side. The customer renewal rate can thus provide a clearer picture of customer satisfaction and help businesses proactively target accounts on the verge of canceling their subscription to better accommodate their needs and secure another renewal.
Now, every business has different reasons for customer churn, but here are some reliable ways to find out why customers are churning and begin to improve subscription renewal rates.
Data is your best friend. Gathering the right data can give you the most honest and helpful insights into your SaaS business and what causes customers to churn — and, conversely, to renew.
But what kind of data should you be looking for?
It really depends on your business, but a few simple user behavior metrics can be enormously helpful in telling you who is most likely to churn. Once you have that data, you can target those customers more closely to help them find solutions to the issues they’re having with your software.
For example, Groove divided its customers into two groups: those who canceled after 30 days, and those who didn’t. They discovered that there was a huge difference between the two groups in the length of their first session was and how often they logged in: predictably, those who canceled were far less active. They were then able to send targeted emails to those less active users in the first few weeks of their subscription, to try and increase customer engagement and therefore reduce the likelihood of cancellation.
Research revealed that lack of usage is the main driver for churn, so it pays to know as soon as possible which customers are the least active so that you can target your efforts at those most likely to cancel.
Target Likely Churners
Once you’ve identified those customers who are most likely to quit, you can send them targeted communications to see what’s going wrong and whether you can fix it.
It may simply be a matter of more clearly showing these customers the value they can get out of your solution. Or, perhaps they’re having trouble with one aspect of their account setup. No matter what it is, you need to find out the problem and work with the customer to find a solution. Your Customer Success team will play an instrumental role in identifying these likely churners and proactively engaging and guiding them towards their desired outcome with your product.
When you’re trying to increase renewal rates, it’s not cost-effective to offer promotions to all of your customers for taking actions like renewing early, for instance. Targeting the customers who are most likely to cancel is a better use of your resources and can give you insights into the customer experience that can decrease churn on a larger scale.
Survey Your Best Customers
Your best customers are one of your greatest resources. Tap them for insights on the reasons they do business with you, their top priorities, the future improvements they’re looking for, and their biggest issues, and offer special promotions for their time.
Customer feedback can help in your customer acquisition efforts as well. Those first-hand insights will guide you in tailoring your offers so as to attract more customers who have similar priorities and needs as your best customers. You’ll also increase the likelihood that those excellent customers will refer others to you, and customers who have been referred by someone tend to have higher renewal rates.
Not sure who your best customers are? Look for accounts that renew often, don’t file a lot of support tickets, and who have a high LTV (lifetime value) and high scores in the Net Promoter survey. It’s crucial to make sure that you’re satisfying these existing customers and making your business more attractive to them over time.
Survey Your Customer Support Team
No one knows the ins and outs of your business better than your customer support team. They interact with your customers every day and can tell you about common problems, alert you to trending issues and offer insights into common feature and improvement requests from customers. All of these are critical to maintaining a healthy and happy user base.
Plus, if your customer support team knows that you value them and their inputs, they’ll feel more involved in the company and will provide better support to your customers. Enlisting them in retention efforts a win-win-win.
Provide Incentives to Renew
Of course, checking in with customers, ensuring they are satisfied and constantly streamlining your product and offer based on their feedback are important steps to take in order to secure sustainable renewal rates. In addition to these, you may also take advantage of time-limited offers and discounts in order to lock yet another renewal.
Deals and discounts appeal to most of us – it’s part of our psychological makeup. There are several ways in which you can leverage deals. On one hand, you could provide such incentives a few days before the expiration date of the subscription. FOMO will most likely work its magic on some customers who would otherwise churn. On the other hand, you can leverage incentives to re-engage customers who’ve already decided to cancel their subscriptions altogether. However, make the best use of your resources by carefully employing this retention strategy. This is where the customer data will come in handy, once again – because you cannot target all churners, you should identify those who are more likely to respond positively to your retention efforts.
Fight Involuntary Churn
As opposed to voluntary churn (which happens when a customer willingly decides to cancel their subscription or downgrade to a free version of your solution), involuntary churn occurs in the background, mainly due to technical issues and payment failures: when a customer’s card has expired and payment information has not been updated, for example. In addition to these, there are soft declines (caused when a card has reached its maximum balance or has insufficient funds) that can be easily recovered upon subsequent authorization attempts. There are also hard declines, which (in contrast to soft declines) are permanent authorization failures triggered by stolen or lost cards, closed accounts, etc. All of these declines are bound to negatively impact your renewal rate and bottom line in the long run, but fighting them can drive up to 20% revenue uplift.
Fortunately, there are tools you can use to optimize authorization rates. Much like the involuntary churn scenarios, you can conveniently use them in the background of your SaaS business, without disrupting the customer experience. These include Account Updater Service which automatically updates cardholder information (in case changes occur) and Expired Card Handling that identifies and updates expired cards. Soft declines can be addressed using Configurable Retry Logic that will retry a renewal up to six times when authorization fails. Dunning Management, on the other hand, is used for hard declines. One of the most effective channels through which dunning can be conducted is via automated emails, with an expected authorization rate uplift of 1%.
There’s also Multi-Currency Management, providing access to local currencies and ultimately helping increase authorization rates by up to 25%. Finally, Intelligent Payment Routing allows switching between multiple payment processors around the world to ensure the highest possible authorization rates.
Reducing churn is both a science and an art. Gathering data is crucial, but you also have to use that data effectively to work with customers who need help getting value out of your solution. With the right insights, you can target your efforts in a meaningful way that will maximize renewal rates by showing your customers you’re paying attention to their needs.
To learn more about evaluating your company’s ability to retain its customers, make sure you check out this eBook on SaaS retention and renewal metrics.