Adobe Is a Symptom of the Biggest Weakness in SAAS – Churn

The US government’s lawsuit against Adobe for manipulative marketing practices will have many SaaS companies running for cover. The firm’s hidden charges for termination and ‘resist and delay’ tactics when users try to cancel subs have received heavy criticism from regulators and industry pundits – but let’s not pretend it’s an isolated case.

SaaS firms pay a heavy price for easy sign-ups and the promise of painless departures: churn. It’s a revenue and profit killer that makes product development, financing, and long-term planning incredibly difficult.

In a sector with at least 900 different segments and ca. 24,000 solutions to choose from, new entrants can arrive monthly, and customers can be easily lured away.

So, how can SaaS firms strengthen loyalty? We ask the experts if trickery and deception are here to stay – or if there’s a better way.

Table of Contents Table of Contents

1. Key Takeaways
2. Why SaaS Relationships Need to Last
3. The Problem of Churn
4. Why Do SaaS Customers Leave?
5. The Best Way to Keep Customers Onboard
6. The bottom Line
7. FAQs
8. References

Show Full Guide

Table of Contents

1. Key Takeaways
2. Why SaaS Relationships Need to Last
3. The Problem of Churn
Show Full Guide
4. Why Do SaaS Customers Leave?
5. The Best Way to Keep Customers Onboard
6. The bottom Line
7. FAQs
8. References

Why SaaS Relationships Need to Last

When America’s consumer watchdog opened its case against Adobe last week, it alleged that the software firm had hurt consumers for years by auto-enrolling them in its top-priced subscription plan while hiding fees for early termination – a tactic employed to ‘trap’ customers and keep them paying, the commission said.

Calling it “a powerful retention tool,” the lawsuit captures something almost any regular user of cloud software will have experienced at one time or another. From trial periods to full subscriptions, SaaS businesses employ measures designed to dissuade you from leaving.

In some cases, that means simply throwing up a message asking, ‘Are you sure?’ – followed by a reminder of the capabilities you’ll be losing, or even a discount or other incentive if you decide to stay. At the other end of the spectrum are the more aggressive tactics Adobe is alleged to have engaged in.

Whatever the approach, it’s designed to make the relationship sticky. And SaaS businesses need to try.

The Problem of Churn

Dr Amir Homayounfard, Assistant Professor in Marketing at the University of Nottingham, told Techopedia that churn “threatens the very foundation of SaaS businesses as they typically depend on subscription-based revenue models.”

The industry’s average churn rate – the rate at which customers cancel subscriptions – is between 5-7%, meaning a company with 1,000 customers might expect to lose 50-70 a year.

The numbers might not seem scary at first glance, but if you delve deeper, you can understand why companies like Adobe are inclined to fight back.

Customer vs. Revenue Churn

Those figures refer to the average rate of annual churn, not monthly. If you started a month with 1000 customers and finished with 950, your monthly churn rate would be 5% – a blow, but you’d recover. The real issue is how long the rate is sustained. If you keep losing customers at 5% each month for a year, you’d end up with around 460. That’s more like a hemorrhage.

Then, you need to consider revenue churn. If you have 1,000 customers in January and lose 30 by the end of December, customer churn rings in at an acceptable 3%. But if a Pareto-like distribution occurs and those 30 customers accounted for, say, 25% of total revenue, your revenue churn (i.e., revenue loss) would be eye-watering.

Why Do SaaS Customers Leave?

Amanda Holmes, Lead Consultant for SaaS and Fintech at Fox Agency, told Techopedia that SaaS companies “have a more complicated sales process than other companies. It’s not just about the initial sale. You’ve got a customer interested in your company, got them through the door, but you’re definitely not done yet.”

“SaaS businesses can fall down, if they fail to establish a programme for renewals and building consistent usage habits,” Holmes says. “SaaS companies typically spend loads of money getting customers in the door, but once they’ve covered their acquisition costs, these customers can often be allowed to lapse.”

It’s also true that people can be capricious. Some sign up to kick the tires and lose interest. If it’s a B2B customer the firm might go out of business, be acquired, or lay off some of the staff it purchased licenses for.

Common Reasons SaaS Customers Churn Out

• Poor Product Fit: The solution’s features and capabilities don’t align with the customer’s needs.
• Poor Onboarding: The process whereby users sign-up and learn to use the product doesn’t give them a full understanding of its value.
• Negative Experiences: A disappointing interaction with customer service or sales can sour users quickly on a product and send them looking elsewhere.
• Value Fails to Materialize: After using the product, customers find they aren’t getting enough value to continue their subscription.
• Product Glitches: If customers experience a bug and it remains unresolved, some will leave out of frustration.
• Transaction Issues: Customers may involuntarily churn out if their credit card expires or a bank transaction fails.
• Not Enough Features: While the core feature set may be solid enough at the start, some customers will find over time that they need additional or complementary functionality.

Raeann Bilow, a marketing strategist at Cascade Insights, says customer departures are particularly painful in SaaS due to the high cost of acquisition: “Upwards of five times the cost to acquire a new customer versus retaining an existing one.”

Additionally, Bilow says:

“Many SaaS companies adopt a ‘land and expand’ strategy, where they secure customers with a small purchase and then encourage them to progressively increase their commitment by expanding their usage of the product.”

If a SaaS customer departs unexpectedly, “it results in a dual loss.”

The Best Way to Keep Customers Onboard

Focus on Customer Experience

Homayounfard says focusing on customer experience (CX) is one of the most effective approaches for reducing SaaS churn and strengthening loyalty “as it directly impacts customer satisfaction and retention.”

For B2B customers, “persona development has always been an effective strategy to identify the right targeting approach, but improving CX is an ongoing journey, and certain elements should be regularly revised.”

Popular SaaS accounting software Sage offers a compelling success story. Homayounfard says the company “lowered its churn rate among small business segments by implementing enhanced onboarding, involving cross-functional teams (e.g., data science experts) in customer support, and conducting regular level-up sessions.”

Building & Updating the Brand Identity

Fox Agency’s Holmes points out that having an established brand identity definitely helps when you’re fighting churn. However, there’s more to loyalty than feels.

Homayounfard advises SaaS marketers to use knowledge exchange and training sessions to stay abreast of customer needs and improve the experience. For example, using what they learn to design better onboarding processes and regularly update support content such as step-by-step guides, tutorials, FAQs and webinars.

Implementing Customer Success Initiatives & Tracing KPIs

“They should also consider implementing customer success initiatives such as regular check-ins, personalized coaching, and proactive support.”

In a rapidly changing SaaS market environment, companies should closely monitor KPIs, including customer and revenue churn, but also “customer lifetime value, conversion rate, lead response time, pipeline velocity, cross-selling and upselling ratio, time to close, customer support metrics, and data accuracy and completeness.”

Secondary metrics can also be helpful for fine-tuning CX, he adds, including product adoption rate, product pain point interaction rate, resolution time, login frequency, session duration, and feature usage to understand how engaged customers are with the product.

Building User Communities

Holmes says creating communities for product users can also be effective: “They’re a great opportunity for prospects and users to self-serve FAQs, discuss user case studies, and build more engagement with the brand.

“Allowing users to share their use cases can spark interactions and new opportunities for users on lower levels of the product usage.”

The bottom Line

Customers come and go, but in SaaS that truism comes with a steep cost. There are positive and proactive measures however that can keep customers engaged and paying, without resorting to punishments or manipulations.

Fox Agency’s Holmes says the trick is to “get customers into your ecosystem through a free trial/freemium tier, followed by an introduction to advanced features, growing understanding of the value of the product, building habits around usage to retain these customers through renewals, up-selling and/or cross-selling more premium offerings.”

Instead of carrot and stick, think carrots followed by carrots … and then more carrots.

FAQs