Churn rate is key to the success of SaaS and subscription services. Business insights revealed through it are also worth examining.

Currently, many SaaS offerings are provided through subscription models, giving rise to services across diverse categories such as music, video content, and daily necessities. To sustain revenue from subscription services, it is essential to not only acquire new customers but also implement strategies to reduce churn rate. Churn rate is a crucial metric not only for influencing revenue but also for gauging customer satisfaction and trust in the brand. This article explores the theme: "Can churn rate countermeasures in SaaS and subscription businesses provide insights for creating brands and services that customers choose over the medium to long term?" We examine key points for reducing churn rate and methods for enabling sustainable growth for companies and services.

Understanding Challenges Facing Companies and Services Through Churn Rate

In recent years, subscription-based services, including SaaS (Software as a Service: services enabling software use via the cloud), have become increasingly widespread. Traditionally, the mainstream model for using products or services was a "one-time purchase" where users paid a single fee at the point of purchase. In contrast, subscription services operate on a business model where users pay a fixed monthly or annual fee to access the product or service during that period. Since this model assumes continued service use over a certain period, it aims to keep the cost per use low and generate profits through long-term usage.

The rise of subscription services was driven, first, by the widespread adoption of IT infrastructure. This made cloud-based services like SaaS and unlimited access to digital content such as music and video more accessible. For users, the low upfront cost makes it easy to start and use, and the convenience is also highly valued. Additionally, for businesses providing products or services, it offers the advantage of stabilizing operations by keeping existing customers engaged, especially as acquiring new customers becomes harder due to population decline and increased competition.

However, while some companies achieve significant success with subscription services, many others withdraw early. So, what metrics should you look at to determine if your own service is performing well?

The Critical Metric for SaaS and Subscription Businesses: "Churn Rate"

For recurring-revenue services like SaaS and subscriptions, metrics like monthly revenue and new customer acquisition are important, but the most critical is the "churn rate." As mentioned earlier, recurring-revenue services operate on a business model where initial implementation costs are low, but costs are recouped through long-term usage. Therefore, even if new contracts are secured, significant revenue cannot be expected if customers cancel immediately. Even with a high volume of new customers, a high churn rate can lead to losses. Acquiring new customers inherently requires substantial effort and costs, such as advertising expenses and handling inquiries. In many cases, allocating budget to retain existing customers offers better cost performance than spending heavily to acquire new ones amid fierce competition.

Furthermore, churn rate is a crucial metric for gauging brand and service value. A high churn rate suggests potential issues in service design or underlying user dissatisfaction.

Incidentally, the average churn rate is generally considered to be around 3-10%, though this varies by industry and business type. B2C services tend to have higher churn rates than B2B services, and high-priced products/services are said to experience particularly significant fluctuations. Among these, education-related services, subscription boxes (services where users regularly purchase curated boxes of food or daily necessities selected by the provider), and video streaming services tend to have relatively high churn rates (*).

Given these trends, it's essential to thoroughly analyze your company's current churn rate and, if it's high, identify the underlying causes.

Improving churn rate requires meticulous service design and understanding customer needs

So, how can we reduce churn rates? Let's examine common reasons for cancellation and examples of failures.

Examples of Rising Churn Rates

First, let's look at examples of companies and services that experienced a rise in their churn rate in the past.

Case 1: Bidding Information Service
The first example is a service providing information on bidding opportunities for government agencies and public institutions. The provider initially focused on increasing "contract numbers" until the service gained traction. While this boosted new contracts, it led to a rising churn rate. The cause was identified as insufficient follow-up after contract signing and renewals. Subsequently, by reorganizing the team, revising KPIs, and implementing thorough follow-up, they successfully reduced the churn rate.

Case 2: Satellite Broadcasting Service
A satellite broadcasting service lowered the barrier to new subscriptions by offering free trial periods and making cancellation easy. However, this led to an increase in customers thinking, "I'll cancel after the free trial ends." To address this, they implemented guidance from call center operators at the time of cancellation. Rather than a one-size-fits-all approach, they predicted potential needs based on each customer's reason for cancellation, their subscription start date, and their original motivation for joining. By making personalized proposals like, "You'll be able to stream this content you like," they improved their churn rate.

As these examples show, reducing churn requires designing services and systems that make consumers choose to stay.

The most common reason for cancellation is "the service doesn't meet the customer's needs."

Furthermore, even excellent services can see churn rates rise if they fail to align with customer needs or if the service's appeal isn't effectively communicated to customers.

According to Mitsubishi UFJ Research & Consulting's " Survey on Subscription Service Usage " (December 2019), over 50% of respondents had canceled a subscription service. This is likely because while subscriptions are easy to start, many users switch to better services when available. Furthermore, common frustrations cited by users include "not being able to fully utilize the service" and "not finding products or services well-suited to their needs." This likely stems from services not matching user preferences or failing to communicate their value effectively. In essence, analyzing customers to identify latent needs and tailoring communication accordingly is a critical success factor.

Improving churn rates offers insights not just for SaaS and subscriptions, but for all businesses

As mentioned earlier, improving churn rates requires meticulous service design and communication that uncovers customers' latent needs. Against this backdrop, how can companies and services ensure they remain chosen amidst the constant emergence of new offerings? We examine this point through recent success stories in SaaS and subscription services.

First, we introduce two examples that successfully differentiated their services and products by implementing AI-powered behavioral data analysis.

Case 1: A Service Delivering Sweets Tailored to Preferences
This service utilizes AI to deliver personalized snacks to each user. This enables the automatic selection of different snacks each time based on user preferences and requests. For the company, this also brings benefits such as improved operational efficiency and reduced risks of stockouts or excess inventory.

Case 2: Data Analysis and Statistical Analysis Solution
World-renowned data analytics and statistical analysis software services, also used in digital marketing, have recently implemented measures to improve personalization accuracy by leveraging AI and machine learning. Through AI-driven automated learning, they accumulate, analyze, and predict each customer's digital behavioral data. This enables targeted ad delivery and creative selection tailored to the audience. Utilizing such solutions enhances personalization accuracy, allowing for marketing that precisely matches the target audience.

As described above, "personalization" that closely aligns with each individual's preferences and needs will likely become a key differentiator for subscription services. Precisely because subscription services build long-term relationships with customers, they can accumulate diverse data about customers through these interactions.

Furthermore, as similar products and services proliferate and their offerings become increasingly homogeneous, loyalty to the brand or company—trust and affection—becomes an increasingly important reason for customers to choose them. Rather than solely promoting the functional aspects of products or services, communicating the brand's philosophy and approach—such as the value it brings to society and its stance on business—can foster fans who resonate with the brand or company. This can lead to more consistent purchases and further fan growth through word-of-mouth.

This isn't limited to SaaS or subscription services. In recent years, technological advancements and improved infrastructure have accelerated the homogenization of products and services across various fields. Differentiating through personalization and loyalty isn't just about reducing churn rates; it's a concept applicable to all businesses seeking to become the brand or service users choose.

For SaaS and subscription services, churn rate is a crucial metric for judging whether the service or brand is valued by users. To keep churn rates low, meticulous service design and understanding customer needs are key. Furthermore, to differentiate the brand or service on top of that, the concepts of personalization and loyalty are also important.

※Source: Churn Analysis (Recurly Inc./2018 Survey)