SaaS Churn Kills Growth, Profit, and ultimately your SaaS Business… together we can end Retention Deficit Disorder today!
Very often when I’m asked to help grow a Software-as-a-Service (SaaS) business, the CEO is often focused on Customer Acquisition strategies… the “how can we get more people into the top of the funnel?” issue.
But when I start to help a CEO get their SaaS company to profitable growth, I always dig a little deeper to see what’s REALLY going on… beyond what they THINK is happening.
Very often I find that – while ramping customer acquisition is most likely PART of the solution – the company isn’t hitting their proposed growth numbers because they aren’t keeping enough customers.
This means that a lot of their current Customer Acquisition effort (and spend) is being used to simply replace churned-out customers… making it VERY hard to grow at the rate they’d like.
Which is why I say that Customer Churn is the vile enemy of Growth while Customer Retention is a Growth Accelerator.
Anti-Growth Math: 1-1+1=1
Think about it… for every customer that churns out – that you lose through attrition, cancellations, and non-renewals – you have to Acquire a brand new customer just to break even…
… and if you want to grow your business, you need to acquire TWO new customers just to grow by ONE new customer.
When you have strong Customer Retention and low Churn (low attrition or low cancellation) rates, it means your Customer Acquisition budget is spent acquiring net new customers; not filling a void left by customers who churned out!
You Just Need More Wind!
Let’s say you have a goal you want to reach – a distant port – but the old sail boat you’re in has massive holes in the bottom and keeps taking on water.
In order to move forward you need to keep bailing the water out, but that takes time, energy, and effort to do and keeps you from focusing on your goal of moving the boat forward.
It even sends you off-course occasionally as you try to find creative solutions to reach your goal as your sail boat continues to take on water.
There are only two actual solutions to this problem.
You either need more wind to move you through the water faster, though you’ll still take on water and you’ll need to keep bailing.
And while the new burst of wind will help you move forward, it’ll be slower than you’d like because the water you take on makes the boat heavy and the drag caused by the holes keeps you from skimming the water as you should.
… or you can plug the holes.
Plug the holes!
Some Putty and a Jet Engine for your Skiff
I’ll stop with that boat analogy now, but clearly, before ramping Customer Acquisition… we need to plug the holes in your business that are letting customers fall out.
Once you’ve done that, you’ll see that it gets even better when Customer Retention becomes a Growth Accelerator!
Customers who you retain are more likely to add additional users within their organization to expand their usage of your service.
They’re also more likely to invite other customers – new customers external to their organization.
Both of those improve your Viral Coefficient and lower your Customer Acquisition Costs (CAC); two key metrics in the growth – and valuation – of your SaaS business.
On the flip side, customers that churn out are more likely to actively NOT recommend your service, causing you not only to have to work harder (and spend more money) to fill the void they left but to also overcome the bad publicity and negative word of mouth they cause.
It really comes down to this, though:
Clear Metrics of Growth
When I work with CEOs of SaaS companies, we very quickly get to what EXACTLY “growth” means to them… does it mean Revenue Expansion? Number of customers? Growth in registered users? Growth in Daily/Monthly Active Users? Something else?
Every company is different and each CEO has their own goals – and reasons for those goals – so we need to know what to measure to know if we’re on the right path to reaching those goals or not.
There is no right or wrong way to measure growth; the metrics of growth should be based on the company’s goals set forth by the CEO.
Now, assuming you’re looking at Customer Lifetime Value (CLV) as the definition of growth in your SaaS company, then retaining customers for a longer period of time increases the CLV for that customer and – obviously – improves your average CLV.
Clearly, customers who churn out have a lower CLV themselves and also bring down your average CLV.
Retaining customers for a longer period of time increases the profitability of that customer, too, which might be your measure of growth.
The longer they stay after what it cost to acquire them is paid back – and especially if you get more efficient at providing your service to them over time – the more profitable they are as a customer.
Customers who churn out or do not renew are less profitable over all and if they churn out too early – perhaps they didn’t stay long enough to even cover their acquisition or on-boarding cost – they could actually cost you money!
Customers who stay longer are also more likely to not just stay a customer, but to pay you more as they continue to use your SaaS application – what’s called Expansion Revenue – as it’s easier to promote cross-sells and up-sells to existing, happy customers.
There’s no trick to keeping customers for a long time, just remember this…
Continual Realization of Value is the Key to Reduce SaaS Churn
You know it’s not enough to just work to Acquire customers… once you have them, you need to work just as hard – or harder – to keep the customer and ensure they continue to Realize Value from your service.
There is only one of me, which means I can only help a limited number of SaaS providers at any one time. But if you’re serious about finally reducing your SaaS churn rate, email me with the details of your situation and I’ll get back to you to setup a meeting.