Following my previous article about identifying churn patterns through cohort analysis (https://www.linkedin.com/pulse/spotting-churn-patterns-cohort-analysis-ran-matoki-0cwvf/), I've received numerous inquiries about the causes of churn and its underlying reasons. Recognizing the critical nature of this issue for businesses, particularly for growing startups, this article aims to dissect the primary reasons behind customer churn. To present a clearer overview, we'll break down the causes of churn within the B2B SaaS sector into three distinct categories: Product-Related Reasons, Customer-Specific Reasons, and External Factors, illustrated with real-world examples from my client base (see Exhibit 1).
1. Product-Related Reasons
These reasons stem directly from the product's characteristics, often cited by many CEOs as their primary concern:
- Price vs. Value: For instance, a data analytics startup implementing a uniform pricing strategy experienced churn among small businesses that deemed the tool overly costly relative to the features they utilized.
- Missing Features: An email marketing SaaS lacking automation or integration with key e-commerce platforms led to operational inefficiencies, pointing towards a misalignment with market needs.
- Support & Engagement: A startup offering a CRM with a complex learning curve witnessed high churn rates as newcomers felt swamped and lacked sufficient support or prompt technical assistance.
2. Customer-Specific Reasons
These are tied to changes or specific situations within the customer's own organization:
- Going out of Business - A small startup employing a project management tool from one of my clients shuttered due to financial troubles, leading to contract termination.
- M&A: Churn occurred for a SaaS provider when a client merged with another company that already possessed an established toolkit.
- Changes in Business: Sometimes, a customer's pivot in operational focus to different business avenues results in no longer needing the originally purchased product.
3. External Factors Reasons
These are reasons beyond the control of the SaaS provider, often influenced by broader market, economic, or regulatory changes:
- Market: A client specializing in traditional email marketing faced increased churn as the market moved towards strategies requiring integration with social media, SMS, and more.
- Macroeconomics: Economic downturns or recessions prompt budget constraints and decreased expenditure on SaaS solutions, particularly those not deemed essential.
- Regulatory Changes - a fintech client of mine lost customers for failing to adjust to new data protection laws requiring enhanced security measures and data privacy protocols.
By organizing churn causes in this manner, SaaS businesses can more effectively pinpoint improvement areas within their scope, such as product enhancement and customer interaction strategies, and formulate plans to mitigate external risks.
In my next article, I'll explore effective ways to tackle each reason behind churn. Stay tuned!
