Subscriber Retention: SaaS Blessing or Curse?
Subscription and SaaS business models are relatively simple. In every subscription-based business, there are several critical variables to pay close attention to. They broadly fall into three buckets related to the various stages of the ‘funnel’.
Customer Acquisition Metrics - (Account Sign-Ups, Free Trials, Trial Conversion, Customer Acquisition Cost ‘CAC’)
Engagement/Loyalty Metrics - (Customer Retention, Customer Churn, Revenue Churn)
Yield - Business Monetization Metrics - (Average Revenue Per User ‘ARPU’, Lifetime Value ‘LTV’, Margins, etc.)
There are many important ratios describing the interactions between some of these key metrics, but for the purpose of this post, we’re going to focus on what is definitively THE MOST IMPORTANT measure of the health of your subscription / SaaS business - Subscriber Retention.
Subscriber Retention is the percentage measure of subscribers which remain paying subscribers through a period of time (whether monthly, quarterly or annually). Subscriber Churn is the percentage measure of subscribers that cancel or fail to renew their subscription during the same period.
Importance of Measuring Subscriber Retention and Churn
Businesses with low Subscriber Retention (i.e., high Subscriber Churn) rates have underlying problems which need to be understood and addressed quickly. Otherwise, every other area of the business will suffer and ultimately implode. It is quite literally the most important single indicator of the underlying health of a SaaS / Subscription business model.
Businesses offering a well-designed product or service at the right price point are perceived to deliver real value to their customers over time. Customers gladly renew and remain loyal over longer periods of time. The time period is the ‘T’ in ‘Lifetime Value’ (LTV).
Importance of Addressing Subscriber Churn
Subscriber Churn can be an indication of any number of different problems (or more likely a combination of underlying issues). As noted above, high Subscriber Churn forces every part of the business to work less efficiently, which is extremely taxing. Ultimately, other critical business functions (i.e., Customer Support) will begin to fail under the pressure.
(You’ll note that the slope of the retention curves get progressively steeper with each monthly cohort.) This example demonstrates how churn can impact many other areas of the business. One can assume in this example that Subscriber Churn was a multi-faceted problem. For example, if it were simply a pricing problem, or a product problem, the slopes would have remained concerning, but relatively constant.
What Can Be Done?
1) Talk to your departing customers! - ‘Exit Interviews’ are the most valuable source of information you can possibly gather. When customers are leaving you, they are most inclined to tell you why they think your service sucks. It is important to understand the context behind their decision to depart.
- Why are they leaving?
- Where are they going? What is their planned solution?
- How/Where did the service not meet their expectations?
- Which aspects of the service worked well for them. (serves to isolate the issues)
While those comments are not always fun to read, they provide extremely valuable nuggets of wisdom for you to act upon. These survey results will also help inform the internal debates which are commonly based on internal speculation.
2) Talk to your existing customers! - This is one of the most often overlooked opportunities in companies of all sizes. These discussions provide a great opportunity to gauge the level of satisfaction, and share plans for the roadmap ahead. This is also an opportunity to gather requirements and to understand the relative importance of features you’re planning on building to make sure that you’re on the mark with your product/engineering investment.
3) Talk to your customer support team - Customer support interactions provide a wealth of knowledge and data as a critical source of feedback. Here at Recurly, we all relish our ‘This Week In Customer Support’ emails we receive at the end of every week. Our Support team synthesizes a valuable breakdown of feature requests, customer sentiment, emerging topical trends, and known issues to prioritize along with valuable data. These data points help to inform our internal discussions ranging from feature prioritization to technical debt.
One of the greatest benefits of gathering internal data from your customer support team is that it helps correct for ‘sample bias’. Sometimes happy customers don’t want to bother speaking with you. This coupled by the fact that you might always hear from your most annoyed customers, thereby missing the most representative sample of customers in the ‘center of the bell-curve’ which are extremely valuable to hear from.
4) Know who you should listen to - Understand sources of feedback in relation to monetization. In addition to understanding all of the sources of satisfaction and discontent, it is extremely important to cross-tab those findings with the actual monetization of those customers. This is why ‘Revenue Churn’ is such an important metric to watch. It will tell you whether you’re losing your most valued or least valued customers. If you are going to take corrective action, you want to make sure that you’re prioritizing the feedback in a way that will satisfy and therefore attract more of the best kinds of customers for your business.
We take pride in helping our customers to better understand the underlying health of their business. Subscriber retention reports are part of the Recurly dashboard offering to customers on our current pricing plan.
If you have any questions about your data, don’t hesitate to contact our Customer Support team.