Negative Churn and Expansion Revenue

SaaS + Software
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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?

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

sixteenventures.com

More SaaS + Software Stats

If a software company grows at 20% annually, it has a 92% chance of ceasing to exist within a few years

26% of SAAS companies with at least $15MM in GAAP revenue had a revenue growth rate + EBITDA margin of 40% or higher.

Analysed by contract value, field sales are primarily evident for companies with median deals over $25K. Inside sales strategies are most popular for companies with $1K-$25K median deal sizes

Growth rate accelerates in the expansion stage ($2.5M – $10M ARR)

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

Unlike many other industries, if a software company grows at only 20%, it has a 92% chance of ceasing to exist within a few years

The top 50% of the fastest growing SaaS businesses generate much higher upsells than their competitors. The larger the business, the greater the impact of upselling

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How to Reduce Churn

More Growth Strategy Stats

It’s 9x cheaper to retain existing customers than acquire new customers: costing $0.13 to acquire any additional dollar of revenue

For SaaS companies valued at over $1billion, the median amount of financing raised is $206million

More than 1/2 of SAAS companies increased their spending on customer retention last year

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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

Less than 20% of new revenue came from existing customers in the form of up-sell and expansion sales

The median cost for a SaaS company to acquire a dollar of new customer revenue is $1.18

The median annual unit churn for SAAS companies was 10% in 2016

After $10M in ARR, the median growth rate slows to just under 50%

In 2018, the global tech spending is forecast to amount to 3,212 billion U.S. dollars.

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