At time we sold Pardot several years ago, our monthly gross churn was 1.4%. On an annualized basis, it was roughly an 80% renewal rate. Back then, we had next to no upselling of customers due to a poor pricing model (it was subsequently changed), resulting in a net renewal rate (upsells less downgrades and cancels) that was essentially the same as the gross renewal rate.
With a growth rate of 100% year over year, we weren’t concerned with plateauing where new customer signings are negated by customer churn resulting in a no-growth business (general ballpark, depending on a number of factors, is that the growth rate goes down 20% per year e.g. 100% year one, 80% year two, 60% year three, etc.). Only, without a much better net renewal rate, ideally over 100%, it was clear that in the next few years the customer base would get so large, and the new customer signings larger, but not large enough, that the business would no longer grow.
Customer churn is the #1 enemy of SaaS startups.
So much shine wears off a startup when it isn’t growing fast, and the fastest way to ensure that it keeps growing, is to not have any churn (nearly impossible save for software to large, enterprise customers), or low churn plus upsell, resulting in growth even if no new customers are signed. Everything from custom professional services to great customer support to heavy qualification of the potential customer before they’ve signed should be employed to ensure the highest probability of customer success, and thus the greatest chance of being a customer for life.
Churn is part of the SaaS experience, but everything possible should be done to minimize it and maximize the chance for net negative churn.
What else? What are some more thoughts on churn as the #1 enemy of SaaS startups?
3 thoughts on “SaaS Enemy #1: Churn”
Great topic and definitely the “silent” killer in SaaS. During the first few months of selling product, how do you balance the pressure to grow with the need to truly ensure value is extracted over a 12 month renewal cycle and beyond? Would you recommend shorter contract terms (month/month) in the very early days to avoid having too much optimism if sales are good early without any retention data?
Early on, revenue should be much lower on the priority list and customer happiness should be at the top. Month-to-month terms is a good way to start to ensure value to the customer and then go to an annual or multi-year contract once the customers are receiving tremendous value.
Mail Chimp is a solid example of this. With a valuation apparently around $1B they are a terrific Atlanta success story – and, never took a dime from investors. They have a product backed by great customer success that customers like and are willing to pay for. Their challenge is once companies hit the enterprise level they fall-off. There is some irony in that they arguably facilitate the growth of their grateful clients but lose them once they hit a revenue threshold. Now what?