Churn – Measurable, Understandable, and Yes, Manageable
Let’s dive a little deeper into understanding your Revenue Retention metric’s behavior. I called Net Retention the most important metric for ensuring medium and long-term SaaS business health in my last post. Putting this powerful metric to use requires understanding the opportunities and challenges present in each of its elements:
In this post, I will focus on Churn.
Simply put, the definition of Churn is the value of the customers that leave your installed base and stop using your products.
For Net Retention purposes, Churn is the MRR associated with the lost customer. It can be also be described as a percentage of beginning MRR. Some SaaS businesses also measure Churn as a number or percentage of logos (customers) lost. However many ways you choose to measure and report Churn, there are four things I recommend you keep in mind when measuring and monitoring your Churn.
Four Things to Keep In Mind When Measuring and Monitoring your Churn:
1. Measure all Churn
There many ways to justify why some Churn doesn’t count, and it is risky to go down this path. I recommend you measure and report all Churn, no matter the cause, the type of customer, etc. Rationalizing Churn doesn’t make it go away, and failing to understand and address the root cause increases the chance of more of the same. Measure it all.
2. Churn Makes the Sales Job Harder
You can be doing a great job of generating new revenue by adding new customers and generating new revenue from existing customers (Expansion). However, if you are not managing your customer experience and renewals, you could be giving a lot of it back in Churn, landing you on a revenue treadmill. For example, if your MRR growth goal for the month is to increase MRR by $10,000 and you Churn $5,000 in MRR, you must add $15,000 in New + Expansion MRR to meet your goal. Add the expense of acquiring new SaaS customers (see below), and you can see how not retaining customers is a money-losing proposition.
3. Churn is Expensive
In its 2019 SaaS Survey, KeyBanc Capital Markets found that SaaS companies spend between 85% and 216%, with a median of 134%, of first-year ARR to acquire a customer and that the median payback period is 20 months. If it’s true that most Churn occurs in year 3 of your customer relationship, and your payback is consistent with the median, then you are just starting to make money on the customer when they Churn. Also, Churn drives up customer acquisition costs because you have to sell more to offset Churn, and you’re back on the revenue treadmill.
4. Churn is Manageable
While it is true that some Churn is inevitable, you can control it. Mark Roberge, former CRO @HubSpot, calls churn “the silent killer” and recommends identifying a leading customer success or churn indicator. He suggests these indicators be observable within weeks or months, automated and correlated to the customer value proposition. For HubSpot, a leading indicator was the adoption of 5 of 20 features within 60-days. The metrics identify customers successfully adopting your product and those that are not. You can then focus on how to get those not adopting successfully and reduce the opportunity for them to churn. For SaaS companies with higher value subscriptions, your Customer Success team should be more than a service that answers customer questions and troubleshoots problems. They should be your proactive product engagement team, constantly monitoring customer adoption and looking for ways to expand product usage and anticipating/closing subscription renewals well in advance
Customers will leave for reasons you cannot control – they get acquired, go out of business, need to cut costs. What you can control is managing your customer engagement to increase customer adoption and value to reduce your Churn. That’s what successful SaaS businesses do – focus relentlessly on results.
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