Negative Churn and Expansion Revenue

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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.

More SaaS + Software Stats

54% treat upselling and add-on sales as high priority

Median annual gross dollar churn was 8%, 7%, 6% and 8% in 2016, 2015, 2014 and 2013

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

In contrast, only 8% of large companies use internet sales strategies. The proportion of companies relying on internet sales increases as company size decreases

The ultimate solution to the churn problem is to get to Negative Churn

Smaller SAAS companies reported more frequent use of third-party providers as their primary application delivery method, while the largest companies were more likely to use self-managed servers

SAAS companies with >$250K median ACV book nearly 25% of their contracts at 3 years or longer

SaaS businesses face significant losses in the early years (and often an associated cash flow problem)

The median TTM revenue growth rate + adj. EBITDA margin for publicly traded SaaS companies was ~37%, implying that just under one half met or exceed “The Rule of 40%”

As companies scale their growth engines, a slightly-above-average churn rate becomes harder and harder to offset with net new revenue growth, especially when the goal is to outpace it by 4x

More Growth Strategy Stats

54% treat upselling and add-on sales as high priority

How to Reduce Churn

Between the SMB and Enterprise customer types, the top-quartile performers not only have net-revenue churn that is 14% to 23% percentage less than the average performers but also have net-revenue churn that is negative in an absolute sense

In 2018, the revenue of General Dynamics amounted to nearly 36.2 billion U.S. dollars.

The median monthly revenue churn for large SaaS companies is 0.75%, translating into an annual revenue churn rate of 10%

The fastest growing SaaS companies raise an average of $9.5M in Series A funding

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

SaaS IPOs have more than doubled over the last 12 years

The venture-backed companies that were acquired most often had a 7 percent share of female execs, as opposed to 3 percent at unsuccessful (unacquired) firms

The very best SaaS businesses have a negative revenue churn rate and will have a Revenue Retention Rate of greater than 100%