Customers bought because they thought their organizations needed this functionality, and so they wrote the checks for Year 1, and even Year 2. But the end-user usage just never appeared …
In SaaS, it actually takes until Year 3 for your customers to churn out from low engagement / low usage.
The reason is as follows:
- Year 1 – the enterprise buys, but often doesn’t even fully deploy until month 9+.
- Year 2 – renewal comes up, deployment only finally got going a few months ago. Engagement Metrics are terrible /nonexistant but (x) it’s already in the budget, and (y) what do you expect, we finally just deployed? It took us 9 months to get our act together and use the service. OK, just renew at last year’s price.
- Year 3 – hmmm. OK, finally, 15-18 months under our belt — and engagement / usage is still low. Should we renew? Meh. Well, if we do, let’s get a big price cut.
It’s not like Zynga, where you see the latest XXXVille usage trail off in a few months after launch, and the revenue comes to a grinding halt. Instead, from a revenue perspective at least, for enteprise SaaS with low engagement, it ‘s a long, slow steam railroad slowdown to zero revenue over 24+ months.
We also saw this at EchoSign, at least in small parts. Most of our larger enterprise customers deployed relatively quickly – the first 60 days. But some, most often due to internal manager changes (our purchase/champion quit, promoted, etc.), would never ever deploy at all in Year 1 despite all our attempts. Yet they would still renew for Year 2. And as long as we got them rolled and successful – we were good for the Year 3 renewal. If not, the customer would churn – but not until month 24.
So if a SaaS app is fast growing, often because there’s segment pull, and there’s a lot of churn in Year 3, it can take a long time to see it, as the numbers can be masked at first by all the new Year 1 and Year 2 deals. In other words, you just can’t tell unless you look at the engagement numbers, not just the churn numbers.