Software-as-a-Service (SaaS) continues to be one of the most popular tech-based business models as evidenced by the multiples for publicly-traded SaaS companies. It’s easy to get excited about the model due to the recurring revenue, high gross margins, and general growth of the space. One area that doesn’t get the attention it deserves is the #1 enemy of SaaS: churn. Churn is when a customer leaves and is a normal part of business, but with SaaS, it takes on more importance.
Here are some thoughts on churn:
- A leaky bucket can quickly form if the number of new customers equals the number of customers that churn (assuming no upsells and everything else is equal)
- A killer amount of churn is often thought of as 3% or more per month, due to the huge number of new customers required to continue growing
- Keep detailed records around churn reasons and analyze them on a regular basis
- Monitor customer cohorts on a monthly/quarterly/annual basis to understand how churn rates are improving/declining over time
Churn is the #1 enemy of SaaS and deserves more publicity. The next time you think about SaaS metrics, churn rate should be near the top of the list.
What else? What are some other reasons churn is the #1 enemy of SaaS?
David Cummings on Startups 
David – I totally agree with you on churn. I worked at a SaaS start-up and there was total disregard to the cost of churn. I tried desperately to point our that churn had dramatic effects on total customer value, cost of customer growth, and ultimately also on ‘buzz value’. (‘We tried it and didn’t like it.’ vs ‘We tried it and love it!’)