Churn is the worst word in SaaS recurring revenue parlance. The deeper you get into churn, the more ways there are to look at it. But ‘customer churn’ is probably the most basic. A churned customer is one who leaves you. And that sucks.
SaaS businesses grow at the intersection of customer acquisition and lifetime value. When customers churn they cut short lifetime value and upend the fundamental driver of healthy growth—the difference between what was spent to acquire the customer and what revenue was subsequently earned from that customer.
I feel like I’m going to repeat this several more times—churn sucks. Aside from the business-zapping impact of burning your capital faster, there are some other very real reasons…
- Churn means your market fit is flawed. The right product, positioned and sold authentically, should resonate for users. When it doesn’t—that means the product’s capabilities don’t align with users’ needs. That sucks big time.
- Churn wears on your teams. Keeping customers is supposed to be easier than landing customers. When that’s not true, your people feel it and that feeling undermines their confidence in not only your product, but in your company. I’ve seen vicious cycles of customer churn leading to employee churn, leading to more customer churn.
- Churn kills deals. The world is a very small place and review sites make it entirely plausible that your lost customers can be very public, even when they’re not trying to be. Prospects use these same sites to evaluate solutions prior to buying. If you don’t think your churn is damaging your win rate, think again.
- Churn kills expansion. Some of the strongest SaaS performers rely on the land-and-expand strategy to mitigate overall churn with additional revenue from retained customers. Well, churned customers means fewer customers from which to generate expansion revenue. That makes it so much harder.
- Churn is incredibly expensive. If you have 20% annual customer churn, you have to grow your customer count at 20% just to stay flat. If you’re trying to operate as a capital-efficient business, investing to grow 30% but only seeing 10% growth is a losing proposition. Played out over time, that pattern results in weak ratios between cost to acquire a customer (CAC) and lifetime value (LTV).
- Churn kills valuations. For those of you thinking liquidity, churn mega-sucks. You can have incredibly strong sales and marketing, great win rates and still get valued like a Ford Pinto if you lose too many customers. For all the reasons outlined above, churn is probably the single reddest flag you can hoist to outsiders looking to value your company. If you have a churn problem to fix, my advice is to fix it before going to market or get comfortable taking a big hit to your multiple. And get used to answering “so why are they leaving?”.
- Customer churn is black and white. Unlike revenue churn that can be offset by expansion revenue, customer churn is purely a number. And, often in SaaS, number of customers drives many other health metrics. You can’t hide or explain away your customer count over time. It’s obvious if it isn’t progressing as it should be. And even easier to pinpoint when you also have strong acquisition numbers. There are metrics revealed by calculous and others revealed by arithmetic. Everyone understands customer count.
I seem to gravitate toward renaming posts as a write them. This one would surely be titled ‘seven ways churn sucks’ if not for the fact that I can’t bring myself to add to the ‘x ways’ post titles trend right now. That aside, these are only seven of many more ways churn sucks. Losing customers is never a good thing and when your business model relies on the future value of recurring revenue—the future part is pretty damn important.
This isn’t a post about managing and mitigating churn. Anna and I have written, and will write, plenty of those. It’s about understanding how damaging churn is across the business and consequently committing to prioritize controlling it. And yes, that’s a big ask. Because flaws like market fit, or sales and marketing culture, or onboarding and support are hard to fix. And those are often the perpetrators behind customer churn.
For more perspective and context, please watch my related video.