Metrics & Operations

Two SaaS Metrics That Actually Don’t Matter That Much: Absolute Churn and Sales Cycles'

Jason Lemkin

Screen Shot 2013-01-09 at 3.40.43 PMOk, I know the title sounds a bit controversial, but bear with me, it’s not.  Metrics are critical in SaaS, and you need to track them fastidiously.  But it’s also important to focus on the right metrics, at the right stage, and not obsess about the less important ones at the wrong times.

And I’m going to suggest two that will worry you a lot in the early and middle days — Churn and Sales Cycle — you should track, but not obsess over, until you are well, well past traction.  Even though many around you will talk about ad nauseum.

Why is this?

>> Let’s Start with Churn.  Absolutely, getting your churn trending downward is important.  At EchoSign, we tracked this religiously, and in fact, this is the metric we use to judge the results of our client success team, and on an existential level, our product.

But, here’s the thing — at a strategic level at least:

  • First, most SaaS products sold to SMEs and bigger have low churn  — and negative net churn.  If you are providing value into SMEs or Enterprises … it’s pretty sticky.  In fact, if your customers are using your product — a lot — they will renew.  Period.  That’s actually all that matters for a renewal.  And down the road, almost all successful SaaS products selling to SMEs and larger have negative net churn.  By that I mean, add in upgrades/more seats/upsell — and almost all SaaS products have negative churn from a revenue/customer basis.  I.e., their total existing customer base adds more revenue each year even taking into account the ones you lose or that downgrade.
  • Second, most SaaS product have an inherent rate of churn.  It’s relatively high in freemium SaaS and SOHOs, it’s very low in seven-figure SaaS deals, and for the rest, somewhere in the middle.

So I’m not saying don’t track Churn.  Track it every month, all the time, and force your team to trend it downwards (and to trend engagement upwards).  This will lead to many great things.  In fact, once you are post-traction, I recommend paying your Client Success team for driving churn down, as the key metric for their variable comp.  Also, of course, as you need to calculate and understand Customer Lifetime Value, Churn is going to be the #1 factor here — as an input.  Customer Lifetime Value is just Churn inverted.

But, as a Strategic Metric … in SaaS … in the first 24 months or so at least … unless your business is primarily freemium, Churn sort of is what it is, and is nothing more than a variable in your growth formula.  Don’t obsess about the number itself.  Because SaaS done well, is stickyand once you get a Great VP of Client Success, Your Churn Will Go Down.  Period.

>> Now About Those Sales Cycles.  Yes, long sales cycles are worse than short sales cycles.  Yes, long sales cycles really s*ck when you just trying to get your business going.  Yes, the longer a deal drags on, the lower the chance it will close.  And I know — I know — 12-18 months in, how painful a sales cycle of any material length can seem … I mean, will that deal ever close? …

But …

  • So long as you get the customer … that’s really what matters.  Not when.  SaaS compounds, so what’s most important is just getting the customers, period.  Exactly when — not as important.
  • Many customers, when you are getting going, starting, just won’t be ready.  It will take them time to deal with, to understand, to get comfortable with, a new vendor.  And if you are a new vendor and a new paradigm — it will take even longer for some customers.
  • And sales cycles have a certain natural cadence.  $250k deals can’t be closed in a month let alone a week.  A $20/month purchase should take 2 weeks or less from material usage.

And most importantly — it Will Work out.  Because as soon as you hire a Great VP of Sales, your Sales Cycles will shrink, and your revenue per lead will go up.  Your Great VP Sales has every incentive both to shorten sales cycles … but not blow the deal — to balance it all to maximize revenue per lead.  He or she will get it right.  And you’ll end up with the optimal variant of your natural sales cycle cadence.

So rather than obsessing about your Sales Cycle, or your Churn rate compared to that of your seeming peers … all of which is fine, but … recognize that it’s a 7-10 year journey, and what you really should focus on is just first Closing Every Possible Customer, Every Single Lead … and Second, Making Their Experience Fabulous .. and once you have initial traction, and can afford it — getting a Great, Great VP of Sales, and a Great VP of Client Success.

Then, these seemingly Key Metrics will just become a small part of the KPIs of each of their jobs.  Which is where they belong.

My real point just is don’t obsess about these seemingly key metrics in the early days.  Track ’em, hire the right people to own them and drive them down as soon as you can.  But don’t run your business on them — or really worry about them.

Published on January 10, 2013