Your Impressive SaaS Growth Might Be Headed for a Churn-Around

There are two ways for this house to fall

“We have almost no churn!”

Anyone in the early-stage SaaS world hears this every day, and in many cases it may well be true. But if your revenue is growing rapidly and the churn your business experiences varies during the customer life cycle, your growth rate may be masking your true churn rate and customer lifetime value. This can have serious implications on your valuation.

Let’s look at a simple example to illustrate the point.

  1. Company X sells a SaaS product, and its churn rate during the first 3 periods of a customer lifetime (months, quarters, moon cycles, doesn’t matter) is 1% per period.
  2. After these first 3 periods of the lifetime churn increases to 5%.
  3. Company X is currently growing at 30% per period.

Let’s look at what happens to Company X’s overall churn rate calculated as “Total Churned in Period” divided by “Units at the Beginning of the Period” over time as their growth rate declines (this analysis holds whether you use customers or revenue).

Long relationships can get complicated

The punchline here is that under the right customer lifetime behavior and without any change in underlying customer behavior, your growth rate can seriously alter your reported churn metrics. In this example it’s almost a 50% difference between overall churn reported in the early days (e.g. period 5–9) and later stage (period 20) all due to changes in growth.

The obvious next question is how to represent these numbers in order to get at true churn figures, which is a topic we’ll get to in an upcoming post. That said, it’s important to anticipate this phenomenon in your business and figure out ways to get a handle on it.

JC Goodrich is the Head of SaaS for the McKinsey Growth Tech practice. This blog piece was originally published on his personal blog.

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