The strategy you choose should be able to increase revenue to a point where it exceeds the amount lost due to churn, essentially you should aim for a net negative churn rate. This article explains negative churn , how to calculate and achieve it.
What is net negative churn
Net negative churn occurs when the total revenue from existing customers supersedes the revenue lost due to subscription cancellations and downgrades. Achieving a net negative churn leads to sustainability for SaaS companies.
MRR is the monthly recurring revenue a business obtains from clients through add-ons, upgrades, and cross-sells. Expansion MRR differs from churned MRR, the monthly recurring revenue lost due to subscription cancellation or plan downgrade.
Achieving negative churn is one of the major challenges facing most Saas businesses. Therefore, startup companies should aim to develop strategies that will help achieve a negative churn rate.
SaaS companies whose revenue increase without adding new customers are said to experience positive net revenue retention.
The three main drivers of net negative churn revenue include:
- Expansion revenue
- Cross-selling revenue
- Upselling revenue
The churn rate is one of the most important Saas metrics since it reflects and expresses customer success.
How to calculate negative churn
The net negative churn formula is
Note that you can only get a negative churn when the expansion MRR is larger than the churn MRR. It also indicates positive total revenue retention for the business.
Different SaaS analysts debate about the recommended churn rate. However, most of them conclude that 5% is the maximum acceptable churn rate regardless of the product.
What is the importance of negative churn?
Negative churn indicates high customer retention, thus showing an improvement in service delivery which is a key component for all SaaS businesses.
Negative churn translates to business growth, adding extra revenue from existing and new customers.
Strategies to achieve a net negative revenue churn
Below are the main strategies to help reduce revenue churn.
Use surveys to minimize churn
To reduce churn, it is best to identify the main causes. Identifying the reasons will help you understand why clients are canceling subscriptions. You can perform cancellation surveys to understand why users are canceling or downgrading.
The feedback can help you identify steps to improve your product, thus reducing churn. One can also contact clients directly and provide them with a product value.
Create an in-app support system
Businesses can also provide support channels to help understand a new product, solve their issues experienced while using the product. Some of the best ways include:
- Live chat
- Frequently asked questions page
- Video tutorials
- Knowledge bases
- in-app videos
- Guidance programs
Ensure high adoption
The above-mentioned strategies are effective in promoting customer success. However, it is important to consider customer demands to ensure high adoption.
Various factors, such as user customization and experience, can promote adoption. A good adoption rate is a key to the success of a SaaS company. Happy clients will likely refer others to try out your new product, thus generating extra income and reducing churn.
High adoption should be the main objective of the sales process from deployment to the continued use of the service. Businesses can promote high adoption by investing more time and resources in understanding the client's needs. High adoption reduces the likelihood of clients canceling subscriptions since they can find value in the expansion and add-ons of the SaaS.
A high adoption rate contributes positively to seat expansion. Therefore, the user count grows exponentially to the customer growth. Businesses can now promote linear purchases that relate to the product bought by a client. Seat expansion mostly applies to software industries where clients pay to use a certain program. The software company then asks the clients to pay for more licenses to allow more people to use it.
Companies that adopt this strategy usually provide additional features unavailable on normal licenses. Therefore, one needs to elaborate on the benefits of adding more users. The company should understandably frame the benefits to encourage users to pay more.
Encourage subscription upgrades
One of the easiest ways to achieve negative churn is to encourage clients to upgrade their subscriptions. Some of the main techniques used by SaaS companies to encourage clients to improve subscriptions include:
- Increased storage space
- Fast processing of transactions
However, increasing service provision is not the only factor encouraging clients to upgrade their subscriptions. Your sales team should learn how to identify how the added features will increase value for the customer. It may be hard to convince customers to subscribe to a certain feature if they do not need it. Trying to convince them without a better reason can lead to increased churn, which is detrimental to your business.
Resource upgrading occurs when clients wish to benefit more from a service they are already using. Churn reduces when the options provided are specific to each client. This strategy could also be employed in a price structure that includes a free mode.
Businesses need to craft different packages that enable customers to upgrade depending on their needs. Several online services provide the basic version for free. They will also provide enough incentive to upgrade to a higher tier if they want additional resources.
Adopt Strategies that Promote your Clients' Business
Offering tiering services that improve your client's business can lead to high adoption. These strategies will encourage existing clients to upgrade their subscriptions.
Upselling is vital in ensuring customer success. Ensure that the additional services help the customer attain their goals when providing a solution. Therefore, customers will always be ready to pay extra money for an upgraded product version that they already have.
Improve your Product Regularly
As a SaaS, it is important to ensure that your product or service is not stagnating. The business world is ever-changing, and SaaS companies must maintain ongoing relationships with their clients. Business owners should try and find opportunities to improve their products. One of the easiest ways is by incorporating clients' feedback and recommendations.
Providing a solution allows you to get feedback from your clients, which helps expand the business. Companies should work on improving communication with their clients. Without proper communication, most clients will cancel their subscriptions without expressing dissatisfaction.
Continuity in communication creates transparency allowing you to be open to any feedback. This move will help you retain clients for long periods. Good communication also improves business reputation, increasing negative churn by increasing the number of clients.
Continuously improving your product will keep you ahead of the competition. You are likely to gain new clients and retain older ones. People will move from other service providers who do not offer exemplary customer service in line with upgraded products.
Concentrate on Customer Success
The success of your business depends solely on your client's success. Customer success plays a major role in all strategies and helps achieve net negative churn. Successful clients are those that will not cancel or downgrade your service. They also include those who are willing to pay more for upgraded services.
Tracking customers' success is easy. Most SaaS companies offer services that form customer success automation. Using the right tools, one can monitor adoption rates, track customer goals and promote a collaborative relationship that ensues continued service delivery.
You can also take the initiative to reach out to the customers canceling or downgrading your service. Learn why they do so and use the information to enhance customer retention. Engagement levels also indicate the level of customer retention.
Businesses can create a database that stores log information to help business owners keep track of the number of times clients visit their online store.
Find the best way to reduce churn
Obtaining a negative churn helps SaaS companies witness positive growth. However, it is easier said than put in action. Obtaining a negative churn is impossible overnight. Any company that wishes to obtain a negative churn should aim at increasing expansion MRR, thus the need to deploy an effective strategy.
That is where our workflow software comes in. Our modeling software allows you to monitor the financial performance helping you create a financial plan, regulate burn rate, and forecast revenue. It does not involve the use of a complicated excel dashboard template.
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