Practical SaaS Retention Strategies That Move The Needle (Part One)
Editor’s Note: This article is part one of a two-part series outlining strategies to improve retention.
I don’t know about you, but it pains me to see customers cancel. Every time I see the notification in Slack, I get a sick feeling in my stomach.
Why are customers canceling? How do we reduce churn? What can we do to improve retention?
Sometimes you might just want to throw your hands up and throw in the towel on your efforts to get more customers to stay.
Working with over 800 startups, many of which I’ve formed personal relationships with, has taught me a lot about what actually moves the needle to improve retention.
Below are 7 retention strategies that can assist you in retaining as many customers as possible:
- Choose the right activation model
- Craft a delightful onboarding experience
- Incentivize and encourage annual plans (or other longer-term commitments)
- Follow up with delinquent customers
- Gather qualitative feedback on why customers cancel
- Implement proactive support
- Don’t be afraid to upsell, cross-sell and promote upgrades
But first, in order to improve retention, we first have to be able to measure it.
After all: “What gets measured gets improved.”
These are the three retention measurements I usually start with:
- The “How would you feel if you could no longer use our product?” survey
- User Churn and Revenue Churn
- Quick Ratio
Sean Ellis, who ran growth in the early days of Dropbox, LogMeIn and Eventbrite benchmarked nearly a hundred startups with his customer development survey.
The most critical question the survey asks is, “How would you feel if you could no longer use the product?” Customers given the survey could answer with “Very disappointed,” “Somewhat disappointed,” or “Not disappointed.”
Companies that struggled to find growth (and thus couldn’t acquire or retain enough customers) almost always had less than 40% of users respond “Very disappointed,” whereas companies with strong traction (i.e. strong acquisition and retention) almost always exceeded that threshold.
On a more tangible level, both user churn and revenue churn serve as staples to measure retention as they directly measure the number of customers who cancel within a given time period as well as the revenue associated with each lost customer.
While it’s not impossible, it will likely be very hard to grow, and continue growing, if your churn rate is above 10%. Ideally, both metrics should be in the single digits, if not below 5%.
And the Quick Ratio tells you at a glance if your business is growing or contracting. It essentially divides all your positive MRR inputs (new, expansion and reactivation) and divides it by your negative MRR inputs (contraction and churn). Above 1.0 means you’re growing, below, and you’re contracting.
The Quick Ratio, unlike other metrics, tells you how dire the situation is.
Take an audit of how you’re doing in these three metrics to grasp your room for improvement.
Now, without further adieu, let’s look at the first 7 retention strategies you’ll wish you’d have implemented a year ago.
1. Choose the Right Activation Model
Most marketers and entrepreneurs optimize their activation model—how you get users into the product—for lead volume or lead conversion rate. But at the end of the day, customers that all that matters.
Find the activation model that results in the most customers long-term. Again: Not the most leads, the most customers.
The five major activation models I’ve categorized are:
- Freemium (e.g. Mailchimp)
- Free trial (e.g. Baremetrics)
- Paid trial (e.g. Ahrefs)
- Money-back guarantee (e.g. MeetEdgar)
- Consultation (e.g. Uplaunch/Superhuman)
And believe it or not, price actually doesn’t have very much to do with your activation model.
The perfect example of this is Superhuman. Superhuman costs $30/month, but does that mean that you can sign up and get started for free? Nope!
They meet and onboard every single customer. In fact, you’ll probably have to wait in line to even book a meeting to sign up. Because that’s what they’ve found results in the happiest customers.
— Rahul Vohra (@rahulvohra) April 12, 2019
Superhuman requires some training and practice, so they help you configure your inbox, practice keyboard shortcuts and review what you need to know to really see the value of the product.
For Databox, offering a free trial cut their churn in half because customers were already treating their first month essentially like a trial anyways.
Calling all low-touch SaaS experts,
.@databoxhq churn rate in first 2 months w/ and w/out a 14 day trial.
No trial: 8%
Any user can buy month to month. Thus, the early churn.
What would you do to reduce it to 0%?
— Peter Caputa IV (@pc4media) September 21, 2019
Notion’s secret weapon is that you can use the product completely for free until you become a power user—right when you’re ingrained, hooked and invested—which in their case is represented by a certain number of “blocks” you use in the app, and then they ask you to upgrade to a paid account.
Evernote’s lost opportunity is in their model. They couldn’t successfully monetize Scott because he could do everything he wanted to for free.
I’ve had Evernote for 5 years and didn’t pay for it.
I’ve had @notion for 5 months and just paid for it.
The value is (nearly) identical, Notion just did a better job at implementing PQLs where I felt the need to purchase when I felt value
ps their PQL is 1,000 “blocks”
— Scott Tousley (@sjtousley) September 9, 2019
How do you know if your activation model is serving retention well? With the right activation model, you should see healthy retention in the first 30-60 days of a customer’s lifetime with you without any major drop offs.
2. Craft a Delightful Onboarding Experience
Onboarding—also a part of activation—is closely related to retention because it determines how well you can enable someone to use your product, and ultimately, the value they get from using it.
You can’t expect someone to be a perfect driver if they’ve never had driving lessons before. You can’t be good at a game if you don’t know the rules.
This is where onboarding comes in.
Fullstory is a great example of technical onboarding, where the main challenge is getting a code snippet installed. By giving users multiple options — setting up with Google Tag Manager, copying the code snippet, and sending instructions to someone else — they decrease the likelihood of someone rage quitting.
Storychief guides users with a friendly checklist that makes it crystal clear what you should do next.
Since Quickbooks can be used by a huge variety of different people and for many different purposes, they start by asking users what the end goal is so they can prevent confusion, frustration, or wasted time doing something that leads to the wrong outcome.
It’s a good idea to mix in a combination of both scheduled, educational emails as well as triggered, action-oriented emails to keep users engaged, educate them about the product and make sure they’re completing the necessary steps to find value.
Here are two examples of these different kinds of emails we send for Baremetrics:
3. Incentivize and Encourage Annual Plans (Or Other Longer-Term Billing Commitments)
For most self-serve products (i.e. signup and start using the product without having to interact with a human being), monthly billing has become the default standard billing period. The lack of commitment can reduce friction to get more new customers in the door, but can also spell trouble in more ways than you might be aware.
Let’s say you had a very respectable monthly churn rate of just 3%. After a year, you’ll have lost 30% of your original customers. If you started with 500 active customers and your ARPU is $100, that’s $15,000 in lost MRR.
However, if 30% of your customers convert to annual billing instead of monthly, you’ll only lose 20% of your original customers over the course of a year, reducing your monthly churn by a whole percentage point to 2%.
Not only that, but you also get more cash upfront to reinvest in the product and support, a minimum 12-month commitment and a long-term mindset and buy-in from customers.
In order to get more annual adoption, it’s common to discount plans by 15-25% and show annual pricing on the pricing page, when upgrading, via an email 2-3 months into the customer’s subscription, and at year-end when the expense can be counted towards that year’s tax filing.
You may even consider giving larger discounts on the plans you want to get more annual billing adoption. You can also use a larger discount to kickstart or increase the number of total customers adopting annual billing like in the example below.
4. Follow Up With Delinquent Customers
When we crunched the numbers on our customers, we found that on average, 9% of your MRR is at risk to be lost to failed charges and delinquent customers.
9% is a huge number! It varies, obviously, but this is an area that most businesses have room to improve.
We’re firm believers that every SaaS business needs a dunning solution. It’s a no-brainer. And the magic is that you can just set it and forget it.
In fact, this is the reason why we built Recover to help with this exact problem. It’s a full suite of dunning tools that allows you to send automated emails to your delinquent or soon to be delinquent customers both before and after a payment has failed, send them straight to a credit card capture form that’s proven to convert to get them to update their payment method, and it even has an in-app reminder and paywall as well.
You don’t want to leave it to fate for your customers to discover there’s been a problem and hope they figure out how to update their payment method. You also don’t want to do it manually and waste valuable time and money on an unscalable, untimely system.
Crunching the numbers on the ROI revealed that customers recover 38x more revenue than what they pay for the product on average.
Sometimes, this alone can cut churn in half.
5. Gather Qualitative Feedback on Why Your Customers Cancel
Here’s a novel idea…
When customers cancel, ask them why! A lot of companies guess why customers cancel. They hear things here and there and then make assumptions about what customers are saying and who said what.
Guessing is a bad strategy.
If your customers could tell you exactly what to do in order to reduce churn, wouldn’t you want to know? Similarly with Recover, we saw a need in the market for a product that could help with this and built Cancellation Insights.
You could technically build this yourself or hack it together if you had the time and resources, but we recommend that you at least have a way to:
- Capture qualitative feedback in the cancellation process or immediately after via email
- Have a way to track which reasons are most common
- Calculate the revenue associated with each reason given
Sometimes what you’ll find is that the loudest customers are the worst customers. They were paying you pennies and had a 90% discount, but still find something to complain about.
You might find a reason that’s unexpected or maybe not even the most common reason, but it’s causing the most lost revenue. In that case, you can focus on what’s going to save the most revenue and prioritize your efforts.
By gathering qualitative feedback about why customers cancel, you can get straight to the source of your churn to figure out what it’s going to take to improve your retention and get to work on those changes.
6. Implement Proactive Support
We all know that support is an important part of retention, but how much of that support is reactive versus proactive?
Support is one of the things that gets people to stay and can also be one of the main reasons people leave.
There are lots of unknown and unpreventable reasons people cancel such as:
- There’s a big bug or outage
- They go out of business
- The team wants to move to something else
But there’s one reason that’s entirely in your control:
Minimizing the number of customers who leave due to support issues will make your retention that much better. We try to do proactive support where we’re actually asking to help people with the product.
This starts conversations, books meetings, drives conversions and builds loyalty.
One of the more innovative things I’ve seen done around support is offering to refund customers based on how much longer it takes you to fix something.
This builds trust with customers and also basically eliminates the excuse of bad support.
Frankly, pretty much anything you can do to retain a customer is worth it. The recurring nature of SaaS makes it so that it’s almost impossible to try too hard to keep a customer. You have to decide for yourself how far you’re willing to go, but a customer is always better than no customer.
Proactive support can also come in the form of a well-constructed knowledge base.
Help Scout (which also offers a SaaS product for knowledge bases) is a great example themselves, and have also written about other great knowledge base examples.
Similarly, user forums can provide a great way to cultivate community and enable users to help each other.
Webflow’s active forum has a large archive of answers to questions, tips and examples of how to solve specific problems. These are also indexed by search engines, which can help new users easily troubleshoot and find potential solutions to problems.
7. Don’t Be Afraid to Upsell, Cross-Sell and Promote Upgrades
Upselling, cross-selling and promoting upgrades increase retention for two reasons:
- Higher ARPU correlates with higher retention
- The more a customer uses your product, the more value they receive
While a low price can be a great reason for someone to choose your product instead of something else, it’s also a risk because it takes little thought to switch or cancel completely. Higher prices imply higher value and critical function.
And the more your product does for your customers, the harder you will be to replace. While you don’t want to intentionally engineer high switching costs (like holding someone’s data hostage for example) your goal should always be to become an indispensable tool for your customers.
A simple email, in-app message, pop-up, or button can be enough to get the conversation going and introduce an opportunity for an upsell, cross-sell or upgrade like the example below.
To take your retention to the next level, take an audit and consider implementing these strategies according to what works best with your business. There may be some you have fully implemented, and others that are completely new opportunities.
How disappointed would your customers be if they could no longer use your product? What’s your churn rate today? How about your Quick Ratio? Use these strategies to make your product more indispensable, improve retention, and build a healthier business.
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