While the SaaS community is nothing but supportive, we run rampant with a lot of conjecture and rumor. I don’t...
For most SaaS startups, churn is one of the key metrics used to assess the health of the business. At...
Last week we opened up with the world’s largest set of SaaS MRR churn benchmarks (part 1) to help founders and operators get over guessing when it comes to knowing if they’re on target or not in their businesses. Essentially, we answered the question, “how do you stack up with other companies?” You can see breakdowns of churn across ARPU, MRR, venture backing, and how long the company has been around here.
Churn measures the ultimate failure in SaaS—all of the customers who tried out your product and decided it isn’t worth paying for.
As a consultant to SaaS and Cloud providers that are looking to grow, I get asked what an acceptable SaaS churn rate is all the time.
My starting point is that comparing churn rates across companies and industries is a futile exercise. There are too many unknowns to make a meaningful comparable. Nonetheless, Lincoln Murphy shares some valuable insights as to how to think about the concept.
As a SaaS company becomes larger, the size of the subscription base becomes large enough that any kind of churn against that base becomes a large number. That loss of revenue requires more and more bookings coming from new customers just to replace the churn.
Burbn was a foursquare knock-off. A location-based app that let you check-in to places, earn points for hanging out, and post pictures. It was too complicated and had a massive churn problem.
The developers started to use analytics to find out how users were using the app. They found that people didn’t bother using the check-in features at all. They only used the app to post pictures.
We’re on the receiving end of this confusion as Intercom is a product that actually reduces churn. People will read one of our case studies and ask us how to get similar results, but the first step is always to clarify what churn looks like in your business, and then make plans to address it.
As I prepared the S-1 analysis for ServiceNow, the third largest public SaaS company in the world, I came across a section in their latest annual report called Key Factors Affecting Our Performance in which the company describes the two ways they evaluate churn. One is common, but another is unusual. Below I’ve quoted their definitions.
Every SaaS business suffers from churn. If churn isn’t managed properly, the lost revenue from churned customers offsets new revenue and the business flat-lines or suffers negative revenue growth. I’ve seen startups employ three patterns for offsetting churn: acquiring new customers faster, upselling existing customers to buy more software, or structuring pricing to grow with customers.
An entrepreneur asked me the question, what is the maximum viable churn for a startup? Within that question, a few others are embedded. How should a founder think about trading off efforts to grow revenue and mitigate churn? What is the impact of account growth on net churn? Startups must walk a tight-rope to balance growth, churn and cash. Below is the framework I use for working through maximum viable churn.
Negative churn is an incredibly attractive characteristic of a SaaS company because it means that customer accounts are like high-yield savings accounts. Every month, more money comes in, without much effort. This is a powerful effect and can fuel SaaS companies to huge success, as we saw in New Relic’s S-1.
s every SaaS entrepreneur knows, churn is one of the single most important metrics in determining the day to day health of the business. Acquiring new customers is time and capital intensive, and this growth is meaningless if those customers do not stay.
A little over two years ago, I published a series of well received articles on SaaS metrics that culminated in the SaaS Metrics Guide to SaaS Financial Performance. Since then, I’ve received numerous inquiries regarding the many practical quirks encountered in day-to-day SaaS metrics implementation.
Every business would like to know why their customers cancel, and every business wishes they could predict when customers are on the verge of cancelling. Then every business could be proactive in saving and satisfying their customers, right? Rather than reactively looking at their churn metric to see how much business went out the door.
Which is the more important priority? Growth or churn? Churn or growth? Early-stage companies have limited resources to focus their efforts. On one hand, growth is important in order to raise a venture capital round. Growth shows demand for a product. On the other hand, churn is a huge source of friction and raises questions of product market fit.
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