The true cost of customer churn
Calculating and tracking churn is a great starting point for anyone tasked with owning Customer Success. Churn is a unique metric that can provide insights that are applicable across numerous teams. For Sales/ Marketing teams churn determines customer lifetime value (LTV), target customer acquisition cost (CAC), and can provide insights that should shape their ideal customer profile. The Product team should see churn as an opportunity to do further research on product/market fit, and to perhaps recognize some issues with the quality or frequency of their feature releases.
As I mentioned in my last post, SaaS customer churn is commonly calculated by volume or by net revenue. When you look at each these types of churn in a silo, they could be telling only part of the story. Perhaps you’ve managed to keep your churn by volume at 4% annually (which is good for a SaaS company), but the customers that you lost resulted in a churn by net revenue of 15%. Not all customers are created equal, and it is important to keep in mind that loosing a lot of smaller clients is probably less concerning than loosing your top 5 clients by revenue (something you should also calculate). Finally, an important thing to remember about SaaS customer churn is that its effects are compounding over time, as Graph #1 (above) illustrates.
Yearly Renewals: 1.5% of these customers churn monthly, and at the time of their annual renewal another 20% churn
Constant: 5% churn per month
Declining: churn starts at zero and increases 0.25% each month
Having 5% monthly churn means if you started the year with $1 million in Monthly Recurring Revenue (MRR) you’d end up with $540,000/MRR at the end of December — a reduction of nearly 50% in what you could have otherwise achieved.
Graph #2 (below) shows the potential impact a slightly negative churn by net revenue could have over time. If you made just 0.25% more revenue each month, over 3 years you would bring in $21 million more than a company running a 5% monthly churn rate.
