As we all know SaaS is one of the most talked about and trendy keyword in the Internet Software Domain today. Since the last couple of years the IT world witnessed many well known desktop solutions and turnkey applications launching there SaaS Versions to get a sweet share of the pie.
The advantage of SaaS are many. With SaaS, a customer can get the customized instance of system up and ready for his business in no time, as the software is already deployed and pre configured. The relatively low cost factor is a prime attraction as well. As the Infrastructure for the SaaS is managed by the Vendor, it can scale beyond hardware limitations of the user to match with his growing business needs. With all these advantages and many more, there is no wonder businesses and individual opts for the SaaS to get there job done and this opportunity initiated a wave of SaaS based Start ups.
As it creates more possibilities, the ROI and Revenue model in SaaS also need to be planned carefully. With relatively very low initial subscription costs, it needs a lot more customers to cover the profit rather than selling the software. It is equally important to make sure that the customers stay with the platform and continue there subscription. Because of so many relative influencing factors like this which adds up uncertainity, it is much more important to validate the revenue model of the platform with parameters more than basic traffic or signups.
'Churn' as a keyword gains significance in this scenario. In basic terms churn is a measure of attrition or loss. Churn is the ratio of the signed up customers to the customers who cancel there subscription at the end of the term. If you have 10 customers signed up and 7 renew there subscription after 1 year the churn will be 30%. As like MRR (Monthly Recurring Revenue), Churn also gives indication about the health of a SaaS Startup and thus catches attention of potential investors as well.
Though with promotion and marketing the traffic or signups can be proportionally increased, churn cannot be influenced much. Churn will be less if the service is a real value addition to the customer and helps him to fulfill his requirements and also if the customer 'still have the need'. This makes churn a much more realistic measurement of the revenue model and health of the business and thus helpful while considering long term investment with it.
Churn however cannot be kept at zero even if the software is really good and best for the business since it depends on external factors like customer's business also. A value around 3% to 5% is considered acceptable by the business standards. However if the churn is in double digits it is a wake up call for the business and immediately needs an action.
As it is important to keep a steady rate of new customer acquisition, it is equally important to followup with the lost customers. A discussion/communication with the leaving customer can help to identify the reason why he prefers to leave the system. The product enhancement strategy can be slightly altered based on such aggregated customer feedback and if this helps in bringing back the churn to an acceptable level, it is a very strong positive direction.
Negative Churn
Another important way to counter the churn is to increase the negative churn. If churn is the rate of loss, negative churn normally refers to the increase in revenue made to the system to compensate the churn rate. High negative churn is to some extend a positive factor in short term and a boost to the business.
The first method is to upsell or increase the new subscriptions corresponding to the users leaving. This balances the revenue loss. However disadvantage here is, if the churn is due to a flaw in the business model or functionality model, the new users also can churn which is a double negative when they leave creating an even more revenue loss.
A better and safer option to improve negative churn is by 'Revenue Expansion'. This method is to get more revenue out of existing customers to compensate the revenue loss due to churn.
To clarify this further here is an example. consider a customer signs up to the system with $10 subscription fee. At the 6th month, he may purchase an additional service or upgraded his account with $30. Here even if another basic user leaves after first year it is balanced with the first user paying $20 extra while your loss due to churn is only $10, by expanding his subscription amount.
This is a much more stable situation for the business and infact a good direction. An upgraded user finds value in the system and is willing to pay more for additional services and thus might have less chance to leave the system.
To summarize the topic, while planning for a SaaS based startup, it is important from the entrepreneurs part to give enough thought and planning towards the churn and negative churn factors. Even once the system is in early production syage, a constant monitoring and change management based on these metrics will help in setting the directions right for the business.
