SaaS Metrics 4 – Maintaining Revenue In The Face Of Customer Churn
The last article in this series ‘Why LTV/CAC Ratio is Important to SaaS Entrepreneurs’ explored why it is important to have a good grip on the real costs associated with winning a new customer. Following on from this, understanding Customer Churn is a fundamental principle for any SaaS business.
In the early stages of a SaaS business, the emphasis on customer acquisition is typically very high. Adding volume to the customer base can make it seem that the business is performing well but it’s essential to understand how long it takes you to cover your cost of sale and make a profit.
Identifying your customer churn rate, and being clear on how much customer churn your SaaS business can tolerate is essential. Writing large volumes of business that is poorly scoped against your real cost of servicing, retaining and growing the customer can mean contracts that leak profitability or represent losses for years to come.
But what happens if they do walk away inside their contract term? It’s important to keep an eye on this number because it can indicate underlying issues with your customer satisfaction levels.
How to calculate Customer Churn
Customer Churn is a formula that calculates the percentage of customers that cancel their subscriptions in a given time period. It is usually calculated month to month, and is a ready reckoner for the business to determine if there are fundamental issues with product or service that are negatively impacting customer satisfaction.
Customer Churn = Number of existing customers who left during a given period / Total customers at the start of that period.
Simply put, if the total number of customers is increasing at a rate of 20% month on month, but the rate of departure is 31%, you’ll end up with a lot of red ink on your profit and loss very quickly.
A typical Customer Churn rate for a SaaS company should be well under 10% over any given year but this can be highly variable depending on the industry you are in, how competitive it is, the type of end customer, and how mature the product or service is.
Customer Churn rates can change over time but it is important that new SaaS businesses measure the right things. Customer experience and satisfaction is crucial, and by engaging openly and honestly with existing users, it is a trend line that should follow a steady downward trajectory as you refine the product and solve customer service issues.
A typical Customer Churn rate for a SaaS company should be well under 10% over any given year but this can vary wildly
Dive deeper with cohort analysis
A great way to understand Customer Churn more deeply is through cohort analysis. This allows you to analyze Customer Churn over time based on different variables within the business – for example – seasonality, product developments or upgrades, changes to customer servicing or pricing – to name just a few.
For example, you could calculate the Churn Rate for customers who signed on after a new product upgrade before you changed your pricing versus those who signed on after a new product upgrade after you changed your pricing. This might tell you something about perceived value issues with the upgraded product.
Or you could compare the Churn Rate for customers who have been with you for more than a year versus those that have been with you for less than a year. A high churn where older customers stay around longer than your newer customers might suggest improvements to the on-boarding process.
There are endless variables you can pump through a Cohort Analysis should you notice a change in your overall Customer Churn Rate. Use it to dive in and find the root cause and stem the drain on revenue.
Manage your revenue risk
Whatever you find to be the cause of the Customer Churn problem you uncover it’s likely you are not going to fix it overnight. Having a well considered approach to staying ahead of big issues is essential, lest you hit a tipping point wherein customer losses impact revenue so greatly that it’s almost impossible to re-invest in fixing the root problems.
The good news is that Multipli’s subscription prepayment funding model for SaaS companies – the first of its kind – finances the SaaS customer for the life of their contract, paying companies upfront for the agreed subscription amount.
In paying you upfront, your cashflow is effectively “de-risked”. Multipli takes on the task of chasing up any late payers and the risk of delinquent customers. It gives you more security over your future cashflow and limits the impact of customers “skipping out” on the rest of their contract should they become unhappy.
With Multipli’s subscription prepayment funding model for SaaS companies your cashflow is effectively “de-risked”.
Bringing forward your cash flow – sometimes by years – allows you to fund your growth faster, execute on larger initiatives and divert resources to problem areas and resolve them faster.
This may just give you the breathing spacing you need to get your Customer Churn under control and maintain – or better yet – grow your revenue.