Negative Churn and Expansion Revenue

From sixteenventures.com
Quote in SaaS & Tech Growth Strategy

Yes, you might have “negative churn” or “expansion revenue” where you lose some customers but the ones that stay pay you more over the course of the year.

That’s awesome! Expansion revenue is the best.

Unfortunately, in my experience, SaaS providers with high churn rates often don’t know how to effectively up-sell, cross-sell, or even down-sell so their churn rate is rarely offset by expansion revenue.

And the cost of acquiring more customers – especially when accurately figuring in all sales, marketing, on-boarding, and support costs – will frequently do more to offset what expansion revenue they have than the other way around.

As well, their pricing models are usually such that they don’t effectively move customers to higher pricing tiers and, in fact, often have non-value differentiators (like storage) separating pricing tiers so that customers game the system to avoid paying more (a major churn threat, by the way).

That said, assuming you’ve got up-sells and cross-sells that work and you have a pricing model that encourages customers to use more so they pay more to drive expansion revenue, how much better would it be if you could expand revenue over a larger customer-base by keeping more customers?

RightÂ… so even when arguing for expansion revenue, I’m also arguing for lower churn.

More SaaS + Software Stats

Gross dollar churn among companies with an internet go-to-market strategy saw a meaningful increase, up from 8% in 2015

51% of large (revenue >$2.5million) SaaS companies use field sales as their primary method of distribution

SAAS companies invest between 80% and 120% of their revenue in sales and marketing in the first 5 years of their existence

Achieving a SaaS Quick Ratio of 4 is a good benchmark for young, high-growth companies but the equation changes as those companies reach scale

It’s 4x cheaper to upsell existing customers than acquire new customers: costing just $0.28 to acquire an additional dollar of revenue

Companies that spend more on sales and marketing (as a % of revenue) generally grew at a faster rate than those that spent less

Best-in-class SaaS companies achieve 5-7% annual revenue churn – equivalent to a loss of $1 out of every $200 each month

The statistic shows the worldwide IT spending on enterprise software from 2009 to 2020.

55% of SaaS companies rate Customer Retention as the key metric to measure

Improve Your Pricing Schedule And Turn More Profit

More SaaS & Tech Growth Strategy Stats

A 2017 SaaS Capital survey showed that young companies actually have higher retention rates than more mature SaaS businesses

The very best SAAS companies keep monthly revenue churn at around 0.58%, that’s only about 7% revenue churn a year

The median SaaS business loses about 10% of its revenue to churn each year and that works out to about 0.83% revenue churn a month

The average company gets 16% of new ACV sales from up-sells and expansions, though companies with revenue between $10MM-$40MM are relying more heavily on up-sell and expansions

More than two thirds of SAAS companies experienced annual churn rates of 5% or higher

How To Make Pricing A Constant Process In Your Organization

If your Net Revenue Churn is high (above 2% per month) it is an indicator that there is something wrong in your business; which may have a dramatically negative effect on your company’s growth. Source: Mckinsey

Growing faster has twice as much impact on share price as improving margins

The median SaaS business generates 16% of its new Annual Contract Value (ACV) from upselling to existing customers

Since churn is so important, wouldn’t it be useful if we could predict in advance which customers were most likely to churn?