The Real Reason SaaS Customers Cancel (here's how to fix it)

0:00Every time a customer cancels, you tell yourself a story about why. They needed a feature you didn't have. They found something cheaper. They just weren't a good fit. And most of the time, that story is wrong. In SaaS, we quantify cancellations with churn rate. It's the percentage of customers or revenue that you lose each month. Even a 5% churn rate can be deadly. Doesn't sound that bad until you do the math and realize that you're replacing half your customer base every single year just to stay flat. Half your marketing isn't growth, it's treading water. And right now, this is playing out at an extreme scale. AI

0:32native SaaS companies are churning at 15, 20, even 30% month over month. Numbers that make it almost impossible to build a real business. But when I look at why, it's not some new AI specific problem. It's the same handful of mistakes I've been seeing kill SaaS companies for 20 years. AI just turned up the volume. After investing in more than 230 SaaS companies and building several of my own, there are dozens of reasons I've seen customers leave. Every business is a little different, but today I want to walk you through the biggest buckets I see come up over and over and help you figure out which ones you can actually

1:06do something about. The first pattern I see is that customers never had their aha moment. Most people who cancel their subscriptions made that decision in the first 2 weeks. They just didn't tell you for another 3 months. You can see this when your churn is heaviest in the first 30, 60, maybe 90 days where your retention grid shows this almost universally. They have high churn and then it it frankly levels out. These customers are treating their paid plan as an extended trial. What you have to think about is this concept of onboarding, of getting people on boarded, and the minimum path to awesome. So, this is the minimum number

1:41of steps, the minimum path within your app for something to click with the person. So, as one example, my last SaaS app was called Drip. You can view it at drip.com. We built an internal dashboard tracking users through setup steps as a leading indicator of conversion. And we could track if they'd done one of the steps, two of the steps, three of the steps, and almost predict whether they were going to churn in the first 30 or 60 days. And there's another version of this missing the aha moment. It's when your marketing promises something that the product doesn't yet deliver. So, a customer signs up expecting magic and it

2:15really doesn't match. This is rampant, ubiquitous right now with AI products. The demos look incredible, [snorts] but the day-to-day experience doesn't live up to the pitch. And that gap between expectation and reality is one of the fastest paths to churn. The fix here is onboarding. If you've actually built something that people want once they get on boarded, you need to send emails, you need to have checklists. You can add a customer success manager who is proactively reaching out, in-app chat widgets, tutorials, and for higher price points you can have a person, a human customer success manager walking them through. But also, honest messaging that sets realistic expectations up front is

2:54a really good start towards cutting this type of churn. Pattern number two, they were never the right customer. If your churn rate is a problem, you need to dig deeper than just looking at the number. You need to actually start looking at who's churning because I guarantee it's not everyone. The problem with looking at aggregate churn and expecting that everyone is churning across the board for the same reasons and at the same rate is incorrect. The analogy I like to use is an Amazon review. So, if we were to look at an Amazon product that had a 2.5 star average, that could mean everyone voted it 2.5 or it could mean

3:30half of the people loved it, half hated it or were the wrong audience, and it averages out to 2.5 stars. Similarly, if you're looking at aggregate churn, it's muddy, it's cloudy. You can't see through to actually see certain tiers churn a lot higher. So, one of the companies in my SaaS accelerator, TinySeed, published an example where they had a $30 a month tier that had 11% churn, and then their $100 a month and up tier had -4% churn. So, this is a 15%

3:58swing in churn between these two plans. It's night and day. This is like growing two completely separate businesses. The idea here is once you can see that different tiers are churning at different rates, you can now make an informed decision of whether you want to get rid of your lowest plan, whether you want to pay more attention to that lowest plan, whether you want to raise the price. There's a bunch of things you can do, but if you just looked across the board and said, "Oh, we have aggregate 7 or 8% churn," that isn't helpful until you segment it out by tier. And I want to make a quick

4:25distinction here. Net churn factors into expansion revenue, right? This is when existing customers upgrade and pay you more. And net negative churn, as I said in this example where they had minus 4% churn on their $100 and up plans, that means you can actually grow without adding new customers. So, there are different approaches you can take here. You can segment by pricing tier. You can segment by marketing channel. And you can segment by the cohort, right? Which given month, 10 months ago versus 5 months ago, how are the churns different? One example is Agent Methods, and the founder Aaron Casover told me that he segments by acquisition channel

5:01and it revealed that his pay-per-click ad leads had much lower lifetime value than customers acquired through other channels. In addition, my rule of thumb, almost always correct. In fact, I have I think I've heard of one counterexample of this rule, lower paying customers always churn faster. Pattern number three is death by a thousand cuts. Very few people cancel your product because of one bad experience. They cancel because of 50 okay experiences that weren't quite good enough. So, what often happens is there's this accumulation of small frustrations. So, if your user interface is confusing, your user experience isn't great, you have broken integrations, you have bugs, you have billing surprises, these stack

5:41up. None of these would be deal breakers alone, but together they erode trust. And these kinds of small issues are what open the door to competitors. The customer isn't actively shopping, but when they hit a small frustration and they notice that another tool they're already using could handle the job or a competitor's ad or cold email lands at the right moment, the switching cost suddenly feels worth it. These customers rarely tell you the reason they're leaving. They'll say, "We switched to X," when the truth is X just happened to be there when they'd had enough. One way to attack this is to watch engagement

6:11trends, not just cancellation reasons. So, a customer who used to log in daily and now logs in once a week is quite possibly already halfway out the door. The place I most often see this pattern is with software where there's no technical founder. So, a SaaS app is started by someone who hires an agency or a freelancer who doesn't give a crap about the code quality. And over time, bugs, confusing UX, broken integrations, they just creep in and nobody really knows how to fix them. So, I'm not saying never start a SaaS without a technical co-founder, but there's a reason that 85 to 90% of companies that I'm invested in

6:48have at least one technical co-founder. Pattern four are forces outside your control. Some churn you can fight and some churn you just have to absorb. Knowing the difference can save you from spending months trying to fix the wrong problems. There are all kinds of specific reasons that fit under this pattern, but two big ones are the champion leaves the company or the customer outgrows or shrinks out of your product. What I mean by champion departure is where the person who bought your product, who evangelized it internally, and who knew how to use it, leaves the company. Their replacement evaluates the tool with fresh eyes and no loyalty. You can reduce this risk by

7:25getting multiple users engaged and making the product embedded in team workflows, not just one person's workflow. But if a customer outgrows you, so they started as a five-person company and now they're at 50, their needs can shift. This it it isn't really a failure if you're not trying to serve that market. If you're really focused on being amazing for five to 49-person companies, I don't necessarily view this as a failure. It can be the natural life cycle of a customer segment. Businesses shutting down are another reason that folks cancel. So, when I was running my last SaaS app, there were plenty of cancellations that came from people who

7:55were simply shutting down. They were going out of business. I couldn't fix that. There were also folks who sometimes were investing in a certain marketing approach and sometimes building their email list, and then they just decided it wasn't worth it. And those are pretty hard to work around. The key with uncontrollable churn is to try to measure it separately. You don't want to let it inflate your churn numbers and distract you from the churn that you can fix. The way that I tried to do this in addition to having a cancellation reason when people click cancel, is I had a personal note. It was an email that was sent from me as the

8:25founder within 10 minutes of someone canceling. It was an automated email. It asked, "Hey, could you just give me one sentence about why you canceled? I'm really curious." And then we would categorize those responses. In a minute, I'm going to talk to you about how to make sure you're actually looking at your churn metrics the right way because most founders aren't. But first, everything I talked about today, segmenting churn, finding your minimum path to awesome, understanding which churn you can fix and which you can't, I write about this kind of stuff every week. You can head to robwalling.com/subscribe to get on my email list. You'll also get

8:55a free chapter from the SaaS Playbook, which is where a lot of today's video came from. My last point of this video is to make sure you're looking at the right number. So, if someone told you that their SaaS had 8% churn, you'd probably say that's a problem. But that single number is almost useless without some context. The first thing is, know what stage you're at. So, if you're pre-product market fit, the number itself doesn't matter that much. You want to worry about why people are churning and use that to refine your product market fit. After PMF, your churn rate becomes critical because it determines when you'll plateau and feeds

9:28directly into your lifetime value or LTV calculation. Another thing to do is don't game your churn. So, forcing people to email or call to cancel, moving to annual only, these tactics are good maybe in the long term, although I would say it's a dark pattern to force people to, you know, to call or email, but these tactics can hide the reason that people are leaving, especially early on. You don't want to mask churn, especially in the early days, because you're masking your lack of product market fit. Another thing to do with churn, as I said, is to segment it. One aggregate number tells you almost nothing. So, as I said earlier, you can

10:01break it down by pricing tier, marketing channel, and cohort, and know your benchmarks. So, once you're measuring correctly, here's some loose rules of thumb. If you have under 3% gross monthly churn for most B2B SaaS, probably doing pretty good. 2% is amazing. Under 1% is what venture scale businesses look for. This is gross churn, not net. 5% can be okay in massive markets with low customer acquisition costs. Can be. But, if you're sitting at 5, 6, 7% and you're not driving hundreds and hundreds of trials per month with a credit card up front, you don't have millions of potential users, you have a problem. I saw someone on X Twitter the other day

10:39saying that, "Oh, 10% churn is the new norm." Like, that's what apps do these days. And that is completely incorrect. That is Don't believe that. You want your churn as low as possible. Low single digits is what you're aiming for per month. And in fact, what you really want is net negative churn where your expansion revenue outweighs your gross churn. And lastly, you want to ask people directly. So, as I mentioned in my last SaaS app, every customer who canceled got a personal email from me within a few minutes. And the responses

11:07will tell you more than any dashboard. If churn is on your mind, there's a good chance you're somewhere in the messy middle of finding product market fit, and that's where most of these problems either get solved or get worse. In this next video, I break down the five phases of product market fit so you can figure out exactly where you are and what to focus on next. If you found this video helpful, please give it a like and subscribe. Thanks for watching. I'll see

11:28you next time.