Dear SaaStr: If you were in the driving seat of a company, getting 1,500 trials a month, with 200 paid conversions and a 6.8% MoM churn, where would you focus your energy to scale? If on the churn, where would you allocate resources specifically?
Churn much past 3% a month IMHO is not really recurring revenue anymore.
Once your customers don’t even last a full year on average, they still are customers no doubt — but they don’t recur. Not really. Not for a second year.
A lot of tools that sell to individuals and very small businesses do see churn around 5%-7% a month though. An individual merchant might try, say an SMS tool, see that it doesn’t work for her, and cancel the following week. This is a very different buying pattern than an enterprise that might spend 3 months looking at vendors, 3 months piloting one … and then 3-10 years sticking with the one they chose.
And even SMBs, simpler products often see 3% a churn a month even if the product is great. SMBs go out of business. They are super strict about budget. Then cut a lot when the business shrinks. Unless your SMB SaaS app is truly mission-critical, truly the core OS of their SMB, churn often stubbornly stays close to 3% a month.
What can you do? I think you have 4 options, which are not mutually exclusive:
- Get used to it. You can survive in a very high churn VSB/SMB market, but your CAC has to be super low. This really is only sustainable with an epic brand. After $3m-$4m in ARR, most companies growth just starts to decay from this churn. So to grow here, you have to have such a strong brand that it brings in an ever increasing number of leads consistently. This is hard but not impossible.
- Focus on incremental improvement. You can always decrease churn a bit, often at least 20%-30%. Make the product better. Add more value for the same price point. Improve support and customer success. Improve onboarding — many SaaS companies lose 10%-20% of their paid customers during onboarding. Make that epic. No matter how high or low your churn, it can always be decreased.
- Go upmarket. As soon as you start to sell to larger customers, the churn will come down, as noted above. At least if you do it successfully. But this will also require you to evolve your product, build different features, etc. Often quite a bit. That’s also a big commitment. Net net, this is how many get to 100%+ NRR.
- Go multi-product. Especially for SMBs, this is often the answer in the end — paired with incremental improvements. HubSpot didn’t really get to 100% NRR until it went multi-product, first by adding marketing automation, and later CRM.
We had a great discussion here with MangoMint on how they hit 110% NRR from SMBs.
They needed 3 products. And not just that, enough product to not just be a point solution, but a full ERP for their vertical:
But that level of churn … 7% … it is not uncommon when you sell to individuals and tiny businesses. But it is really, really hard to get to $10m ARR with that level of churn. The weight of that churn just brings you down. Because your revenue really does not recur at all. So things don’t get any … easier.
Feature image from here
A related post here:
