Customer Churn –You feel Sick in the Stomach?

I think it’s fair to say that people who launch SaaS apps are smart people.  We’re not giving ourselves a pat on the back here, but rather SaaS start-up founders and managers seem to be driven people, passionate and obsessed by metrics. Everything is measurable.

This is a very different story to the telco and dot.com world at the turn of the century.  Money was fast-and-easy to come by, numbers didn’t matter.  The dot.com bubble may have burst in 2001 but when any new market or sector experiences rapid growth you will still find that rationality goes out the window.  I worked in the online gaming sector from 2004; relatively early doors, and it was all about growth, growth, growth.  Customer numbers were growing so rapidly they didn’t even think about retention, yet alone hire a team until several years later when growth came grinding to a halt – when the market retracted by 80% overnight.  But that’s another story.  At that point halting churn was perhaps seen as easier than growing revenue!

Whilst SaaS is not consumer facing, where it’s all too easy to get caught up in the growth story and forget about churn, you get my point.

Let’s be clear churn can kill a business if left unchecked.

For example – Things are going well and this time next year you’d like to double your income.    Sounds reasonable and do-able – right?

But you’ve got a churn rate of 5% per month. That’s an annual churn rate of around 46%!

So if you’d stared this year with 1,000 customers by the end of this year you’d have only 540 left.  If you’re more interested in the money (quite right!), your $10,000 of MRR would now be $5,400 come New Year’s Eve!

Happy New Year!

Whilst you can understand when times are good and you’re growing fast it’s easy to ignore churn, the example above shows you just how much of a killer it can be when you’re standing still.

But this is where the standard SaaS blog post about churn ends. I want to get you to think about it slightly differently.  Yes churn is important, of course it is, but as we’ve discussed in other blog posts you need to determine which metrics are important to your business (for example “active” customers logging in can be meaningless) and at the right time.

So for those fast growth B2C businesses perhaps ignoring churn was, at that moment in time although a little short-sighted, understandable nonetheless.

You’ll find on many SaaS, entrepreneur and start-up forums founders and managers desperately looking to find out “what is a reasonable level of churn for a SaaS business?”  Is the 5% a month churn rate good or bad?

The answer as ever is it depends. It will depend on the territory in which most of your customers are in, the sector you’re in, but perhaps most of all the kinds of businesses you’re selling into.  And this often correlates with the age of your start-up.

Most very early stage start-ups sell into individuals or mom-and-pop shops as you guys like to call it on the other side of the pond!  Particularly if you’re running a freemium pricing model these are your target audience.  For these customers the ability and cost of moving to a competitor is low.  Also sadly you will find that many of these guys and girls just a few months down the line after signing up with you no longer have the need or perhaps the ability to pay for your product.  This often bears no correlation to just how good, or indeed how bad your service has been.  In these early days churn is arguably just a variable figure that oscillates on a month-on-month basis. It doesn’t necessarily (though key “necessarily”!) reflect the value of your product to your customers.

When your SaaS product has been in the marketplace for a while you’ll start to see a shift in the type of customers you’re getting aboard.  You’ll see a shift from those individuals and mom-and-pop shops to more household names – blue-chips or enterprises.  And as a few join you, learn to trust you and stay (and you get their logos on your home page <do this!) you’ll find that your user base in terms of demographic and monthly / lifetime value has significantly shifted from when you first started however many months or years ago.  And with the larger sized customers – the corporates – you’ll also find that churn decreases.

Why?

Firstly you’re charging a far greater amount to these enterprise customers than your early users (you grandfathered them in right?!). So even taking into account customers that completely churn or downgrade a tier you’re still adding far more revenue – more ARR – year-on-year.

Secondly for larger businesses the “cost” of moving to another competitor doesn’t become just about price, or new features.  It’s about the cost of exiting your product and moving onto another platform. Can you transfer data easily or will it new data be in one place, historical in another?  How easy will a new product be to learn?  Anyway when does our current enterprise deal end?  Can we be bothered – it would mean trying to sell this new product to my line-manager.  What will he or she say?  This is not to say you should take for granted that churn will be lower in enterprise customers – far from it – but churn when it comes to customers is not created equally.

So what’s the take-home point here?  Firstly don’t try and compare the churn of your SaaS product to anyone else.  Rather try and get a feel for what you think the “background” level of churn should be within your business.  In other words if your product is right, your customer service is firing on all cylinders get that number and then use it as a benchmark.  The line in the sand never to be crossed.

Keep trying to trend it down.  Keep looking for those days, weeks, or months where churn is higher than you would expect.  Try and understand why that’s the case.  But don’t obsess.  If you’re an early stage start-up just try and get everything right with your product, with your customer service and the rest will follow.  If you’ve got to the point where you have a whole team worrying and obsessing about churn you’ve done great.  What a nice problem to have!

James Barnes, Co-Founder StatusCake.com – Uptime Monitoring