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The third and final post in our Xanax for SaaS Execs series, we're talking about the three questions you can ask to evaluate if your churn rate is sitting where it should be (Spoiler alert - is should be low).

 

What keeps SaaS executives up at night, and how can they get a better night’s sleep?

Churn kills SaaS Companies. It definitely keeps SaaS execs up at night. It erodes revenue and profitability. It means that some percentage of new customers will flow out the bottom of a leaky bucket. And since it costs between 5 and 25 times more to acquire a new customer than it does to keep an existing one according to Forbes and HBR, churn is a topic that inevitably comes up when SaaS company founders get together.

Aydin Mirzaee would know. As co-founder of Fellow.app (a toolkit for managers and their teams to power their 1-on-1s, team meetings, feedback, goals/priorities and a whole lot more), co-founder and past co-CEO of FluidSurveys and Fluidware, and board member of Fresh Founders and Invest Ottawa, he’s regularly in touch with other SaaS founders. As Aydin explains, SaaS founders know their churn rate should be low. They know they probably want it lower than it is today. But, they wonder, what should it really be, and how can they get it there?

Good news. There are 3 questions you can ask to see if your churn rate is in the right ballpark. But before we dive into those, let’s make sure we’re on the same page for how we define churn, and its more optimistic cousin, retention.

Churn is the amount of revenue or the number of customers you lose over a given period of time, for example a month or a year.

Retention is just the opposite – the amount of revenue or the number of customers you retain over a given period of time. There are 2 important distinctions to measuring revenue retention, gross retention and net retention:

  • To calculate gross retention rate (GRR), take the starting revenue from a set of customers for a given time period and subtract the lost revenue from customers who either didn’t renew, or who renewed at a lower dollar value, for that same period. Don’t include any up-sell/cross-sell revenue, one-time setup fees, or price increases.
  • To calculate net retention rate (NRR), take the starting revenue for a given time period, subtract the lost revenue in that same period (same as above), and then add in any up-sell/cross-sell revenue for that same set of customers in the same time period. Don’t include any one-time setup fees or price increases.

What Should Your Churn Rate Really Be?

While there are many nuances depending on your company’s specific context, here are three questions you can ask to see if your churn rate is in the ballpark, informed by SaaS Capital data from across 700 B2B SaaS companies. And based on how you compare, there are concrete actions you can take to increase retention and reduce churn.

1| What’s your average annual contract value (ACV)? The higher it is, the lower your churn and higher your retention rate should be. For example, the median GRR across companies with an ACV under $1000 is 89%, or 11% churn.

For companies with an ACV over $150,000, the median GRR is 95%, or churn of 5%. Why? Because companies with a higher average ACV can afford to invest more in retaining those customers. And if you’re like most companies, individual customer ACV varies across your customer base. You’re therefore wise to segment your customers into a few simple groups or tiers using factors like revenue, market vertical, logo recognition, and even whitespace opportunity. Then you can focus on investing more high-touch time and energy on retaining and growing your top tier customers, while putting in place some lower-touch approaches to retain and grow your lower tier customers.

2| How long have you been in business? The older your company, the higher your churn will likely be. For example, if your company is a year or 2 old, the median GRR is between 95 and 100%.

If your company is 15 years old, you can compare yourself to a median GRR of 90%. Why is this? One reason is that your customers’ business models and environments change over time. The reason they bought your solution in the first place may no longer be as valid or sticky as it once was, given changes in their business. The old “it’s not you, it’s me” scenario. A second reason is customer employee turnover. The champions and users who were knowledgeable about your product initially may have moved on. Therefore, you need a way for your company to stay in tune with changes in customer business models, and ensure you’re continually helping them take advantage of sticky new product features through continuous learning and adoption strategies. You also need a way to monitor adoption pro-actively, ideally through your software itself, so you can get ahead of churn before it happens.

3| How big is your company? Companies with revenue between 1 and 5M have a median GRR of 95% (and NRR of 99%). Once they get to over 20M in revenue, GRR falls to 87% but NRR hovers around 96%. Why? GRR falls primarily for the reasons mentioned above – assuming that companies with higher revenues have generally been in business longer.

What’s interesting here is that while straight revenue renewal rate falls off as company size increases, companies get better at expanding the revenue footprint of the customers they do have, increasing up-sells/cross-sells, and thus NRR. The key here is to ensure that your product strategy and pricing model build in ample opportunity for high value cross-sell and up-sell plays.

So there you have it: three questions you can ask to get a better sense of what your churn rate should be, and some concrete actions you can take to plug that leaky bucket, reduce churn, increase retention, and ultimately get a better night’s sleep.

If you want to take the next step to crush churn and increase retention, reach out! I can help you determine what your ideal churn rate should be, and what the root causes of your current churn are. Spoiler alert! the most common causes of churn are customer on-boarding and adoption, customer success practices, product issues, or sales and marketing challenges.

I work with an incredible cross-functional team of experts at Stratford, so no matter what the root cause of your churn, we have the expertise to help you build and implement the right plan to crush it.

And if you’re in the Ottawa, Canada area, check out these two Meetups where you can connect with others who are out to crush churn:

 

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This article was published more than 1 year ago. Some information may no longer be current.
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