The key metric every SaaS startup should track: churn
When I was in business school, I made a lot of great connections (including one with my wife) but only learned two tangible things. Both came from Stanford’s famed accounting professor, Jim Van Horne: 1) cash is more important than your mother, and 2) you need an investor with not only deep pockets but also long arms. In other words, you always need liquidity to pay the bills; and you need investors who will be willing to help you when necessary.
When it comes to SaaS and other subscription businesses, however, another rule is nearly as important: Churn is more important than your mother.
Of course, we all know that churn makes it harder to grow your business because you have a “leaky bucket” problem. But I want to enumerate the more important reasons you need to keep existing customers on board:
- New customers are expensive. Long before the rise of the subscription economy, Fred Reichheld of Bain & Co. demonstrated that it was 5x more expensive to acquire new customers than to retain old. Today, we have more visibility into this. A recent KBCM Technology Group survey, for example, found that the median SaaS company spends $1.31 to acquire $1 of new revenue, while upselling to existing customers costs only $0.71 and expansion strategies (see #4) cost only $0.38.
- Churned customers are probably dead to you. Even if you evolve your offering into something perfect for them, they likely won’t come back because they know (or think they know) the limitations of your product and company.
- Churned customers are bad to have in market. In the language of the Net Promoter Score, they are likely to be detractors. They might discourage other prospects from hunting for a new solution — or keep those that are doing their homework from ever contacting you.
- Customers are your best source of future revenue. Many SaaS businesses start with an easy-to-adopt, lightweight product and grow by drawing customers into a broader suite of solutions. The best SaaS businesses continue to innovate and build additional modules to sell to existing customers. Having a base of customers that are happy with your products is the best way for these expansion strategies to work.
So there they are: four reasons why reducing churn is foundational and the first thing to work on when improving your start up. Of course, other factors also come into play too, not least alignment, team culture, product differentiation, clarity of Ideal Customer Profile, and competitive win rate. But preserving your customer base, including your ability to grow accounts by adding users or new modules, is (to quote my favorite author Dr. Seuss) Thing One.
Now, go hug your mother. Of course, she is more important than your business.
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