Customer churn is essentially the rate at which a company loses customers each month. Most SaaS-based companies make their money through subscriptions, where the cost to acquire a new customer can be relatively high. The principal goal is to earn that money back month-over-month, each time a user signs up and pays for their subscription. However, if your churn rate is high, this means the company might not be making back that investment as customers and users leave.
This is a bit technical––but let’s try to break it down further:
Customer Acquisition Cost (CAC) is how much it costs the company to find new customers, and this may in large part come from paid ads.
Customer Churn Rate is how fast a company is losing customers/users.
Lifetime Value (LTV) is how much one customer is worth (in revenue terms) over the lifetime of their membership.
Understanding these three stats is important to the success of your SaaS business. When your churn rate is high, LTV is lower and you likely aren’t making back your CAC, which means you’re losing money or breaking even. The reverse (and ultimate goal) is when customer satisfaction and loyalty is high, you have strong customer retention, and in turn, your LTV is higher, your CAC is lower, and so is your churn rate.
So how can you increase your customer retention and satisfaction, and how will this impact these stats? While we aren’t pros at digital marketing and paid ads––we are experts in user experience (UX). Here are our thoughts on how you can make this formula more profitable:
Reduce your cost of acquisition through referrals, and
Reduce your churn rate with better UX
Strong UX and CX can Reduce Cost of Acquisition
One way to lower your cost of acquisition is to rely more heavily on referrals and word of mouth. This is when your existing customers are so happy with their experience that they tell their friends about it, essentially praising your product to others. The key in that sentence is “so happy with their experience.” If your product is easy to use, fills customer needs, and helps them reach their goals––and on top of that, you’ve got great customer support experience––your customers will stick around and shout from the rooftops about how great their experience was. They will become fans and advocates on your behalf. The next time they get into a conversation with a friend about what provider they use, they might even defend your product and put down your competitors. This is pure gold. It means you do not have to spend as much seeking out cold and warm leads––and your CAC will decrease.
Better UX can Reduce your Churn Rate
Better user experience will naturally create more referrals for you, and it can also reduce your customer churn rate. Why would customers leave if they have everything they need? The answer is: they won’t.
Similar to the point above, when you do your homework and find out what people really need, you are able to design products that are both usable and desirable. In the SaaS world, many companies find themselves in a price and feature war, where potential customers are comparing competitive products based on cost and/or what features are available on which platform. In a case where the user experience is not dialed in, the cheapest product often wins. This type of thinking can lead to higher churn rates, because once a user downloads the free trial or starts using the product, they may actually realize it doesn’t fill their need and/or is not a great experience. So they move on, switching to a competitor. Instead, you want to offer an amazing experience for your customers, where your product stands out as the one clear choice. This way, you move out of commodity land and instead are competing on value. We know that customers are willing to pay more for a better experience. In fact, in their “Future of CX” study, PwC found that 73% of people point to customer experience as an important factor in their purchasing decisions. That’s huge.
If this sounds familiar, your UX might need some updating. Here are a few ways to get started:
Conduct a UX audit or heuristic review. Take an audit of the parts of your product, app, or service that are not performing, or that might be causing headaches for your customers. This type of exercise will show you how to boost conversions by making the product easier to use.
Examine the customer journey. Look at the ups and downs in your customer’s experience at every touchpoint. Identify pain points and turn them into opportunities. This can be a great exercise for investigating why your trial experience, for example, is not converting.
Learn more about your target audience. We always recommend interviews, observations, and surveys (among other great design research methods) to better understand your target audience and customer base. You should be developing user personas based on real data that get to the heart of who your users are, their behaviours, and motivations. Once you truly understand your users and customers, you can design an experience that they fall in love with. If you don’t have personas already, they are high-level archetypes that represent your different user/customer groups, and can help your team make targeted product/feature decisions. (We have a great 3-part blog series all about personas!)
While the points we are making here may seem intuitive, many SaaS companies are still not embracing UX design best practices.
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Six Common Pitfalls we see for SaaS Companies
Not talking to their customers/users. This is probably the #1 most common issue we see. Even when a company understands that UX is an important differentiator (and that great UX is now just expected by customers), they are still afraid to buy into one of the MOST important parts of the UX design process: discovery research or the “fuzzy front-end” (see image below). This is where you’ll actually go out and talk to real customers and users, and listen to what they need.
Allowing engineering to drive design decisions. We see this all the time, too, especially in organizations that have lower UX maturity, and among teams who don’t truly believe or understand the value of design. Often, while a SaaS company may have a UX or product designer on board, that person is managed by an Engineering Director or a Product Manager. This automatically means that the designer’s priorities will come from that angle, with engineering making decisions about what to work on next––decisions that are not being informed by research or design. Ultimately, every SaaS company should have a UX Director managing that team, who works collaboratively with engineering and product to prioritize features. At the same time, they can advocate for the user’s needs.
Making reactive decisions based on competitor features. Your competitor launches a new feature, and all of sudden your entire release schedule is thrown out the window. We’ve seen it happen. Entire teams are asked to drop what they are working on, and shift gears to release a new and better version of what their competitor just released––which usually causes team frustration as well as confusion for the customer.
Making decisions based on assumptions (rather than customer data). Returning to Pitfall #1 above, when you don’t know what your customers really want, you are just guessing based on assumptions of what they might need. This is a slippery slope. As soon as you become comfortable making decisions based on assumptions, it can be hard to start implementing proper research practices, because the people making the decisions don’t want to be proven wrong…and they like making the decisions. The longer you hold out on talking to your customers, the harder it can be to get stakeholder buy-in to conduct UX research in the first place.
Only looking at numbers and analytics. So much insight and innovation comes from actually observing your users in action. The qualitative data (that you gather from in-depth interviews and observations) is crucial for understanding why users do what they do, and how you can make their experience better. When you make decisions based solely on data analytics, you can identify where customers are dropping off in your sales funnel, the paths they are taking through your product, which features are used most often, and so on––but you won’t know WHY. This means you’re operating with half truths. Making smart decisions for your product means understanding the whole story. For example, HBR recently mentioned a great case study about Toyota, which observed and interviewed its target customers (American, male, high-income earners) in California to find out what they want in a car. Listening to customers can be one of the most important parts of the design process.
Not prototyping and testing. Even when the design team is doing a great job (with the information they do have), to create an easy-to-use and beautiful product, many SaaS companies still don’t feel comfortable putting early (unfinished) designs in front of customers. The beauty of prototyping and user testing is that it allows you to gather quick and early feedback from real users. In this way, you can reduce the risk of product launches and feature releases by correcting issues before you get to the development/implementation stage. Making a change to a wireframe in Adobe XD or Figma is quick, easy, and cheap. Making changes to a feature that took many hours to create detailed visual design and product UI assets for, as well as code and build, is time intensive and costly.
Now that we’ve highlighted common pitfalls––if you see some of these issues in your own company and you are experiencing a churn rate, what can you do?
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Quick Tips to Improve your UX
Here are three quick first steps to get your UX up to par and improve your product development cycles:
Establish UX governance. Who manages your UX team? It might be time to invest in a UX Director who can start implementing a solid design and research process.
Set up some user interviews. if you have a big release planned, we really encourage you to integrate some discovery research with real customers (and not just your most passionate or vocal customers––they might skew your data). This doesn’t have to be complicated. Try to set up at least 10 one-on-one interviews, where you ask open-ended questions about the user’s experience with your product. You’ll be amazed by what you learn.
Set up some usability tests. If you have wireframes and visual mock-ups, you can easily create a clickable prototype (and in fact, you might already have the prototyping piece down). Now, put that prototype in front of five to eight users and gather some feedback! These should be 30-minute, one-on-one sessions. Think of some key tasks you’d like to watch users accomplish, and ask them their general thoughts on the prototype.
Reducing customer churn is not always simple––but it shouldn’t be a mystery either. There are many great ways that UX research and design methods can improve customer retention and satisfaction for your SaaS/tech company (and beyond!)