Why high churn may be good for your SaaS business

By: Daniel Israelsohn, VP Finance & Operations | Firmex

Daniel Israelsohn
Feb 15, 2017 · 3 min read
Listen to my chat with with Shubham Datta on The Backbone here:

I wrote the following post to accompany my discussion on The Backbone.

It’s better to keep a customer than attract a new now.

Image for post

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

Image for post

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

Image for post

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

Image for post

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.

Image for post

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.

The Backbone

A journey inside finance at a startup

Medium is an open platform where 170 million readers come to find insightful and dynamic thinking. Here, expert and undiscovered voices alike dive into the heart of any topic and bring new ideas to the surface. Learn more

Follow the writers, publications, and topics that matter to you, and you’ll see them on your homepage and in your inbox. Explore

If you have a story to tell, knowledge to share, or a perspective to offer — welcome home. It’s easy and free to post your thinking on any topic. Write on Medium

Get the Medium app

A button that says 'Download on the App Store', and if clicked it will lead you to the iOS App store
A button that says 'Get it on, Google Play', and if clicked it will lead you to the Google Play store