If you are running a SAAS company you are part of the Subscription economy. One killer datapoint we often ignore is ‘Churn’. Normally we are so focused on the customer acquisition part – with marketing initiatives and events and advertising and campaigns we overlook at what rate we are loosing customers. Churn impact both the key numbers – CAC and LTV. The motivation of all SAAS companies is to reduce the first and increase the 2nd. Churn puts a spanner of sorts in that (fly)wheel. So we need to pay attention on day one.
Key reasons for churn you need to look out for –
- Your customer can’t see/get the value proposition of your product anymore;
- Your product or service doesn’t meet the expectation or lacks quality/features;
- Your product is good but customer service is not;
- Your customer has chosen to change your product to a competitor’s product; amongst others. iagram
David Skok wrote about how to unlock the path to negative churn. His recommendation
- Expand revenue from your current product.
Even a -2.5% negative churn can have huge impact on your MRR. It has a impact on your valuation as well – a 2% increase in retention leads to 20% higher multiple and an incremental 2% increase in up-sell leads to a 28% higher multiple. Although this may not be feasible for all types of SAAS. Also managing Churn is harder if you are selling to Very Small or Small Businesses.
Lincoln Murphy (Sixteen Ventures ) says acceptable churn should be between 5-7% annually (this translates less than 0.5 % monthly) and advocates proactive customer retention. A KeyBanc survey of Private SAAS companies reported that 70% companies have a churn lesser than 10%. Further he calculates that a 5% monthly churn rate translates to 46% annual churn – which is disaster.
How do you reduce churn? – ensure that your customers continue to realise value from your service.
Links to all articles below.
Unlocking the Path to Negative Churn / David Skok/ https://www.forentrepreneurs.com/why-churn-is-critical-in-saas/
Churn – What is it? How to calculate it? https://saasmetrics.co/churn/
SaaS Churn Rate: What’s Acceptable? / Lincoln Murphy / https://sixteenventures.com/saas-churn-rate