Why high churn may be good for your SaaS business
By: Daniel Israelsohn, VP Finance & Operations | Firmex
I wrote the following post to accompany my discussion on The Backbone.
It’s better to keep a customer than attract a new now.
This mantra was drilled into me at my first retail job years ago. While its simplicity is attractive when thinking about it in the context of a Software-as-a-Service (SaaS) business, it can be misleading. For many SaaS businesses decreasing churn has become an obsession. However, like most obsessions this can be very unhealthy.
What does this mean? Should you ignore churn or not manage it aggressively?
Of course not, but rather like all metrics you need to understand it in the context of your business. Take the three following examples of SaaS products for which churn is not a key metric and is in fact unimportant to successful management of the business.
The one time sale
Imagine you’re selling software that supports large-scale building construction (skyscrapers, stadiums etc). The building construction project will at some point end so should you worry about churn? In fact even thinking about it is likely a waste of time, as you will always have, despite best efforts, 100% customer churn.
The customer is always right
I’ve always agreed with this but the real truth is sometimes they’re not worth it. Imagine a group of customers that consume a disproportionate percent of your support infrastructure. In addition these relatively small customers require weeks of account manager time to negotiate a renewal. Should you really worry about churn for over-consumers of your corporate resources? Actively churning out (firing) these customers can often drive more profits. By re-allocating resources and better servicing core customers companies can become more profitable with less customers.
Failure is your customers most likely option
For many small businesses especially restaurants, failure is not only possible but is highly likely. If your SaaS business services these markets, can you really do anything to prevent your customers from going bankrupt and churning? Rather focus on maximizing revenues while they are around and replacing them after they die. By doing this effectively, business can grow despite having limited customer continuity.
Some final words…
Like all metrics measuring churn and operationalizing against it is only as good as the analyst. Looking at churn without truly understanding the customers behind it and the trends driving it can lead businesses into bad decisions. While churn may not be good for a business it definitely isn’t always bad, and understanding it can help you focus on your key metrics for success.
As Vice-President of Finance and Operations Daniel is responsible for overseeing all support functions including information systems, and analytics through to finance and accounting. Prior to joining Firmex, Daniel spent 8 years at PwC in both Canada and the US as both an auditor and consultant. Daniel is a graduate of the Ivey business school at Western University and is a Chartered Accountant.