• Adrian Nita

    Hi David. That’s a great article! I would ask if you know what the ideal churn/retention rates are for an SaaS company? We all talk about retention, but we do not have a minimum idea about what the ideal retention rate is! Thanks a lot and keep the great work!

  • http://www.apptegic.com/ Ryan Connors

    David this is a phenomenal resources. The charts do a great job helping to visualize the impact of churn on profits. Thanks for putting this together.

  • Ryan

    can I ask what that Wall Street research report was called or which firm put it out?

  • http://www.forentrepreneurs.com David Skok

    It was Goldman Sachs.

  • http://www.stephdokin.com/ Stephen King

    GREAT article on the topic. This is why TCELab CRD Voice of Customer Survey product is SO vital for SaaS companies. Check it: http://www.tcelab.com/#!/crd (See: points 2 and 3 of David’s article “Tactics to reduce churn”: measure engagement and figure out what makes your product sticky!). Until end of June 20% off CRD #iwantmyCRD (Thanks for letting me spam your post!)

    Stephen King, CEO, TCELab.com

  • Javiero

    Dear David,

    We owe you a big appreciation from Spain as we have been learning a lot from you.

    We set up a SaaS company a year ago in Spain and now we have a plan to expand internationally . Although we focus only on growth and do not distract ourselves, ultimately we dream a day where our company will be acquired. So my question is; Shall we expand to structured market where competition is high and market is big like UK, Germany or developing countries where competition is low and market size is fair enough and market-entry is hard like Russia.

    Which one potential acquirer love more? Acquire a company where acquirer do not have presence or acquire a company which has a mid-level growth in established markets like UK?

    I know that this is “it depends question”, I really do need your personal opinion.

    Thanks very much and appreciate your time .

    Best regards from Spain

  • http://www.forentrepreneurs.com David Skok

    First of all, I personally believe that the best way to run a company is not to think about getting acquired (at least not until you are right in the end game and looking for an exit). The reason for this are as follows:

    1. You don’t control getting acquired. Only the acquiring company controls that decision.
    2. Acquiring companies generally are most interested in buying companies that are not trying to get bought
    3. Acquiring companies can tell when you are trying to get bought. They smell that, and it makes realize they can pay a low price
    4. Running your company to optimize for acquisition will lead you to do the wrong things
    5. The best people won’t want to come and work for a company that is trying to get acquired.

    Now that I have that out of the way, I can try to answer your next question, which is where (geographically) should you focus your attention first. I would first try to make really sure that I had demonstrated clear product/market fit, and also a repeatable and scalable sales process in my own market before trying to establish the company in yet another market. (See this blog post if you are not sure why: http://www.forentrepreneurs.com/setting-the-startup-accelerator-pedal/). It would be a big mistake to be experimenting on these important issues in two different markets.

  • Sebastian

    Nice post. It would be interesting to see the churns for different business models. I always found it difficult to
    define the right churn rates.

    On the other hand i would rather focus on
    actions to lower the rate and wrote a post about that on
    http://community.netigate.net/sample-questions-for-a-churn-survey-to-improve-your-churn-rate-9300.html

    Let me know what you think!

  • http://www.forentrepreneurs.com David Skok

    Check out the latest blog post that has Churn data from a survey we just did.
    http://www.forentrepreneurs.com/2013-saas-survey/

  • http://www.reenhanced.com/ nhance

    There’s a lot in here, but the math is fundamentally wrong.

    Let’s look at profit as an equation.

    Profit = Traffic * Conversion Rate * ((Lifetime Value * (1 – Churn %)) – Customer acquisition costs)

    Let’s look at what a change in conversion rate does:

    Traffic = 100

    Conversion rate = 1%

    Lifetime Value = $10

    Churn = 1%

    CAC = 0

    For these base values, profit = 100 * 0.01 * (10 * 0.99) = $9.90 / month

    If the conversion rate changes by 1% to 2%, then profit becomes $19.80 / month

    However, if churn changes by 1% to 2%, then profit becomes $9.80/month

    A 1% change in conversion rate is worth FAR more than a 1% change in churn, and it’s proved by MATH.

    However, churn is attractive to focus on because it has the benefit of human psychology on its side. It’s called Loss Aversion (http://en.wikipedia.org/wiki/Loss_aversion), which states basically that a person will work harder to prevent from losing $100 than they will to gain $100.

    Business Growth for a SaaS will always be worth more than churn. Churn is still important, but if you have to pick on one to focus on, use the math. Focus on conversion rate. No SaaS (except maybe Constant Contact) is large enough to have to worry about running out of new customers.

    I really appreciate the work you put into this, but I don’t agree. Please let me know what you think!

  • http://www.reenhanced.com/ nhance

    I’m sorry if this comes across as overly critical! I just want to point out that as a growing business, focus should be on gaining new customers.

    It’s a fact of life in any SaaS that all of your customer base will churn out eventually, but in order to have the traction a business needs to grow, the limited attention of the founders is best placed upon improving conversion rates and traffic.

  • http://www.forentrepreneurs.com David Skok

    Your point is a very good one. The only small change I would make to that is this: there is no point in focusing on gaining new customers if they all churn out quickly. You are simply filling a leaky bucket, and will not be able to build a long term sustainable business. You will also have difficulty attracting investors who will focus on whether you are providing real value to your customers. However if your churn rates are reasonable, this won’t hurt you too much in the early days, as there won’t be a big installed base. So you have time to fix that as the business grows.

  • http://www.reenhanced.com/ nhance

    I totally agree. Decisions should always be made with the big picture in mind

  • http://www.forentrepreneurs.com David Skok

    Your equation doesn’t take into account how churned $’s grow as the size of your installed base grows. If you have a very small startup, you are right, focus on conversion rates. But as you get into your later years, you will soon see that your installed base not renewing will quickly wipe out most of the gains you make on conversion rate. Example: let’s say you are able to grow your MRR by $10k every month, and that you have an installed base of $300k in MRR. If you are churning at the rate of 3% a month, you will be losing $9k a month in revenues, which is almost more than you are able to bring in with new bookings.
    The problem only gets worse as the size of your installed base grows. You can ignore churn for a while, but there is a point in time where it becomes extremely hard to bring in enough bookings to overcome the lost revenue from churn. At that point in time your business will stop growing.
    Put this another way, for any given churn rate and specific bookings rate, there is an absolute maximum size of business that you can reach.

  • http://www.reenhanced.com/ nhance

    I agree that churn is more important as the installed base grows. Any change to any of the variables in the profit equation will have an impact on profit and they usually won’t change independently of each other.

    If the team has a monthly new revenue goal that’s fixed, meaning sales must do $10k/month and is not working to increase that number, then churn becomes a much bigger concern as that will have the effect of fixing the conversion rate, assuming traffic remains relatively stable.

    But the equation still holds, even for more mature companies, as it works off percentages. However, I am very interested to tweak it if you see something that’s wrong, as this forms a good chunk of my understanding of this whole space. Can you suggest an improvement?

    Is it that maybe what you’re talking about is how the size of a 1% change in churn with a large installed userbase is much bigger (and thus higher impact) when the size of the installed userbase approaches the size of the new traffic that sees the app?

    Once the traffic count (the number of new eyes that see the business) is below the number of paying customers (hopefully this never happens), then the importance indeed does flip, even though the equation has no input for the number of existing customers. At that point, when no new traffic can be brought in, then you’ll need to focus on keeping rather than losing. Decreasing churn like you mention here indeed does lead to an increase in profits.

    However, I wonder if it just comes down to philosophy. I’m of the opinion that I always want to seek out more new customers as churn will eventually eat every one of the customers of the business. Churn can be slowed, but it will never stop.

    I’m excited for your feedback. Thank you for your response!

  • TheSmileCeo

    Some great points, specifically I think that the focus for startups and beyond, should be “how do I best spend the limited funds that I have available to me”. If your limited resources are best spent on attracting new clients, then that is what you should do. So if creating new customers can come cheaper, than retaining customers lost to churn, then the decision is easy, (although it is likely not always the case). I think the better or best exercise is to regularly check in on those costs to ensure that when the scale tips, your efforts follow the optimal ROI.
    Great article and an even better reminder for me personally given where we are in the development of our business. Thanks :)

  • http://www.forentrepreneurs.com David Skok

    Agreed. Nicely put.

  • Benjamin Bondurant

    Hi David,
    I spent the last two weeks reading as many posts on your blog as possible. I’ve downloaded two excel files and started playing around with them for my business.

    I’ve also read your SaaS metrics post(s) about 5 times each. I am not kidding. Thank you so much for these valuable insights. You are doing a lot for the startup community.

    Do you have an excel file for the graphs shown in this post? I have seen that you have similar graphs in the other excel file but I’m curious if you have an excel file for these specific graphs (i.e.: churn graphs) ?

    Thanks again for everything!

    -ben

  • Arrun

    Could you also share with me which bank this was? akapoor@sjfventures.com

    Many thanks for the thoughtful pieces. Very insightful.

  • http://justinmcgill.net/ Justin McGill

    Hey David – just came across this one. It’s a great post. I’m curious – how would you go about setting this up to measure in Stripe? For example, we are going to be using Baremetrics for reporting. Seems to me, it’s just going to look at churn as a cancelation regardless of which product/upsell the customer is using. I’m curious how you would handle it?

    Thanks!

  • http://www.forentrepreneurs.com David Skok

    Hi Justin, my apologies for the delayed reply. I have an overload of email, and can’t get to everything. Unfortunately I don’t know enough about Stripe to be able to answer your question. My apologies. I hope you have found a way to solve the issue without my input. Best, David

  • http://withnoble.com/ Bryant Jaquez

    One of the best churn rate articles I’ve read. Thanks David.

  • http://www.forentrepreneurs.com David Skok

    Glad it was helpful. Thanks for taking the time to let me know!

  • Leandro Faria

    David I’m amazed how your 2-3 year old blog posts still so useful and up to date – in an industry that evolves so quickly and changes every 6 months. Thanks for sharing your thoughts!

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