I woke up this morning needing to articulate this post. Over many years and incarnations, I learned a lot about how to have a happy and healthy SaaS company. Of the health metrics I focused on most, churn was by far the most important as well as the most complex.
Two Views of SaaS Churn
Customer churn is pretty simple. It’s how many customers were not retained period-over-period, typically month-over-month, and usually annualized. Customer churn is simple, but also relatively useless unless your customers are (1) all worth the same amount of monthly recurring revenue (MRR) and (2) that MRR is fixed—neither increasing nor decreasing over time. (Okay, “useless” is overstated—customer churn is a direct reflection of product/market fit and is hugely valuable in that context.)
Revenue churn is more complicated, but also more valuable. Since most SaaS companies have varying MRR, wrapping metrics around the period-over-period change in that number is critical to management. Revenue churn is expressed as a percentage of MRR. The sweetest thing that can happen to revenue churn is that it goes negative, meaning the percentage of revenue retained month-over-month is greater than 100%. In SaaS, all things being equal, negative revenue churn is heaven.
Negative and Positive Churn
I’ve had SaaS incarnations with both negative and positive MRR churn. This post is not really about those specific performance numbers, but rather it’s about how to set yourself up to deliver negative churn. The most pressing issue impacting overall churn (customer churn) will be product and market fit and that’s for another post. This is about the levers you need to be able to push or pull to increase the AMOUNT of MRR from retained customers.
In order to generate negative revenue churn, there has to be headroom to up-sell your customers. When I’ve had negative churn, I’ve had pricing and packaging that made it easy for customers to spend more period-over-period. They need to be able to and want to, upgrade mid-contract—feature add-ons, scale expansions, etc. When I’ve had positive churn, I had hemmed myself in with pricing and packaging that had too much built in for customers—giving my sales team nothing to sell and customers nothing more they wanted or needed to buy. You need to be able to pre-define your expansion revenue opportunities before you take your pricing and packaging to market.
Negative Churn Opportunities
Let’s say you have 100 customers all spending $20 per customer—$2,000 MRR. If you lose 1% per month in customer churn, you lose one customer, leaving you 99 retained customers generating $1,980. That means you need more than 1% in up-sold MRR from the retained 99 customers to make up that ground. If you can’t up-sell, your revenue churn is positive, no two ways about it. Play that simple example out at scale and you see the opportunity.
If you can generate 5% in up-sold MRR from the 99 retained customers, you’re rockin’ it with $2,079 in MRR or 104% revenue retention — negative revenue churn. You must design MRR up-sell headroom into your pricing and packaging from the outset. You will never eliminate customer churn, but you can mitigate and even nullify its effects with thoughtful planning.
Conceptually to a growing tech company, preserving and increasing MRR from existing customers is perhaps the single most critical path to capital-efficient growth. This is because you’ve already paid to acquire those customers. And if you’re good at customer acquisition, you can probably add 30% in new contract value every year without outside capital. But, turning that new customer acquisition into NET revenue growth north of 30% is contingent on revenue retention and expansion. If you can’t expand retained customers, you get on a customer acquisition treadmill that’s neither capital efficient nor fun.
My highest performing incarnations have had ‘land and expand’ DNA baked in from day one. I learned fast that the expand potion of that is very challenging to layer on top after the fact. It must be thoughtfully and intentionally designed into product, packaging, and pricing.