Reducing Gross Churn Starts with Customer Onboarding

Reducing gross churn has become increasingly critical for SaaS businesses, as new business has slowed. Customers are taking much longer to make decisions on technology investments, and in many cases, these investments are much smaller than historical contact values. Gross churn is arguably more important to the vitality and longevity of software businesses.

But what exactly is gross churn, and why should it be at the top of every organization’s mind? Let’s dive in.

What is Gross Churn?

Gross churn refers to the total loss of customers or revenue due to customers either leaving or reducing their investment in your product or service over a given period. Unlike net churn, which might be offset by new customer acquisitions or expansions within existing accounts, gross churn paints a clearer picture of pure losses — customers who no longer see value in your products or services and who are cutting back their spending.

For example, the diagram below outlines how to calculate overall gross retention. By taking your beginning period annual recurring revenue, or ARR, you can subtract contraction, which is customer revenue that has shrunk. Then subtract the overall churned ARR to get your ending ARR or Gross retention rate.

If it is not obvious, the less contraction and churn your business experiences, the stronger your ARR growth rates and new business impact. Many businesses focus the lion’s share of their efforts on growing the beginning ARR value via top-of-funnel revenue. These are usually the most costly efforts for the business, as large Sales and Marketing budgets are tied to this number.

The stakes are higher than ever — losing existing customers is not just a setback, it’s a significant threat to your business’s survival and growth.

The magic revenue number you cannot afford to ignore is Gross Churn!

Factors Contributing to Gross Churn in SaaS Businesses

Several factors can drive gross churn in SaaS businesses, making it a crucial metric to monitor and reduce:

1. Poor Onboarding Experience: Customers who struggle to understand or use the product from the outset are likelier to abandon it. Effective onboarding ensures customers see value quickly, reducing the likelihood of early churn.
2. Lack of Continuous Value: SaaS products must continually demonstrate their value. Customers who don’t perceive ongoing benefits may stop using the service, leading to churn. Regular updates, periodic business reviews with customers, new features, and clear communication of value can help mitigate this.
3. Inadequate Customer Support: Slow or unhelpful customer support can frustrate users, especially if they encounter issues that prevent them from using the product effectively. This dissatisfaction can lead to increased churn.
4. Product-Market Misalignment: If the product doesn’t fully meet the needs or expectations of its target market, customers may seek alternatives. Understanding and adapting to customer needs is essential to reducing churn.
5. High Customer Expectations: Customers often have high expectations in a competitive SaaS landscape. If a product doesn’t deliver as promised or doesn’t meet the level of service they expect, customers may leave for a competitor.
6. Pricing and Contract Issues: Misalignment between the pricing structure and the value customers receive can lead to churn. If customers feel they’re not getting their money’s worth, or if contracts are inflexible, they may choose to cancel their subscriptions.
7. External Economic Factors: Economic downturns or changes in market conditions can lead customers to cut back on non-essential services, including SaaS subscriptions. This is especially true if customers are facing budget constraints or financial uncertainty.
8. Competitor Actions: The entrance of new competitors or improvements from existing ones can lure customers away, especially if they offer similar products at lower prices or with better features.
9. Internal Changes at the Customer’s Organization: Changes in leadership, mergers and acquisitions, budget priorities, or company strategy at the customer’s organization can also contribute to churn. For instance, a new decision-maker might prefer a different tool or software, leading to cancellations.
10. Lack of Product Engagement: Customers are more likely to churn if they do not actively use the product. This could be due to a lack of useful features, poor user experience, or simply not being reminded of the value the product provides.

Read a relevant article on the 5 Customer Onboarding Metrics You Should be Tracking.

What is a good gross churn percentage for SaaS businesses?

The average gross churn rate in a business-to-business operating model can vary significantly depending on the industry, the type of product or service, and the company’s maturity.

However, there are some general benchmarks that can provide guidance:

1. Low Gross Churn (0-5% annually):
   • Typically seen in B2B businesses with high customer loyalty, such as those offering mission-critical software or services.
   • It often includes businesses with long-term contracts or high switching costs.
2. Moderate Gross Churn (5-10% annually):
   • Common in well-established B2B companies with strong customer relationships but facing some market competition.
   • These companies might have a mix of long-term and shorter-term contracts.
3. High Gross Churn (10-20% annually):
   • Often observed in highly competitive industries or with products that are more transactional in nature.
   • Businesses with a significant number of small or mid-sized customers might experience higher churn rates.
4. Very High Gross Churn (20%+ annually):
   • Seen in B2B businesses with rapidly changing markets, highly commoditized products, or lower customer loyalty.
   • This is also common in younger companies still establishing their market fit or those with a large base of smaller, less committed customers.

For SaaS (Software as a Service) companies, particularly in the B2B space, the benchmark is often cited as around 10% annual gross churn, with best-in-class companies achieving less than 5%. Gross churn has grown over the past five years as businesses are under pressure to trim down operating costs to match the slowdown in new business growth.

It’s important to note that gross churn can be influenced by several factors, including the quality of customer onboarding, customer support, product-market fit, and the competitive landscape. Reducing churn often requires a focused strategy on customer success and continuous value delivery.

Why Customer Onboarding is Key to Reducing Gross Churn

For many companies, the risk of increased gross churn is dire. When customers leave or reduce their spending, it affects your immediate revenue and your ability to grow in the future. With new customer acquisition harder and more expensive than before, retaining your current customers is crucial. Furthermore, the most sustainable path to new revenue often lies within your existing customer base — through upsells, cross-sells, and expanding existing relationships.

Many of us know Gartner’s research over the years, citing that it costs between 5-10x to acquire a new customer compared to keeping customers happy… and growing. Businesses need to evolve and move resources — people, processes, technology, and investments — down the funnel to support customer retention. This includes adding sales, marketing, and digital experiences to the customer journey. The post-sale journey always begins with onboarding.

Reducing gross churn starts with a robust customer onboarding process. Effective onboarding sets the stage for a long and fruitful relationship by ensuring that new customers quickly see the value of your product or service. When done well, onboarding can significantly increase customer sentiment, strengthen relationships, and build a strong corporate reputation.

The Benefits of a Strong Onboarding Process

1. Higher Customer Sentiment: A seamless onboarding experience leaves customers feeling positive about their decision to choose your product, which can lead to increased satisfaction and loyalty.
2. Stronger Relationships: By guiding customers through the initial stages of using your product, you build trust and establish a strong foundation for future interactions. Not only are you building trust, but you are also ensuring the adoption of your technology, which is critical to the longevity of your relationship.
3. Faster Time to Value: Customers are more likely to stick around when they quickly experience your product’s benefits. A well-structured onboarding process accelerates this time to value and gives your teams a direct line of sight into where your solution is adding value.
4. Longer Customer Lifetime Value (CLTV): Satisfied customers are more likely to stay with your company for the long term, increasing their lifetime value.
5. More Revenue Growth Opportunities: Happy customers are prime candidates for upsells, cross-sells, and organic growth, providing additional revenue streams without the cost of acquiring new customers.
6. Increased Referrals and Recommendations: Satisfied customers are more likely to recommend your product to their peers, acting as advocates for your brand within their networks.

Reducing Your Gross Churn

In a world where it’s harder than ever to land new business, you simply cannot afford to lose customers. The pathway to sustainable revenue growth lies in your existing customer base, and it all starts with effective customer onboarding. By investing in a strong onboarding process, you can reduce gross churn, foster stronger customer relationships, and unlock new growth opportunities — all while building a more resilient and successful business.