SaaS, and other recurring revenue businesses are different because the revenue for the service comes over an extended period of time (the customer lifetime)

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SaaS, and other recurring revenue businesses are different because the revenue for the service comes over an extended period of time (the customer lifetime). If a customer is happy with the service, they will stick around for a long time, and the profit that can be made from that customer will increase considerably. On the other hand if a customer is unhappy, they will churn quickly, and the business will likely lose money on the investment that they made to acquire that customer. This creates a fundamentally different dynamic to a traditional software business: there are now two sales that have to be accomplished:

1. Acquiring the customer
2. Keeping the customer (to maximize the lifetime value).

Because of the importance of customer retention, we will see a lot of focus on metrics that help us understand retention and churn. But first let’s look at metrics that help you understand if your SaaS business is financially viable.

More SaaS + Software Stats

If your Net Revenue Churn is high (above 2% per month) it is an indicator that there is something wrong in your business; this will become a major drag on growth

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

Japanese company Hitachi accounted for three percent of the world’s market for diagnostic imaging in 2017.

At a 35% CAGR, it takes 10 years for a SaaS company to grow from $5M to $100M in ARR

In all SaaS businesses there will likely come a moment where they realize that not all customers are created equal

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

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

Customer’s lifetime value (LTV)= average revenue per user (ARPU) / monthly churn rate

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The median average contract length is 1.3 years and the average billing term is seven months in advance in 2016. Comparable to 2015, with average contract length shortening from 1.5 to 1.3 years and average billing period increasing by one month from 2015 to 7 months

More Growth Strategy Stats

56% treat “Existing Customer Renewals” as high priority

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A 1% increase in pricing strategy yields an average 11% increase in profit

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

Non-renewal rates are higher than gross dollar churn rates and higher for shorter duration contracts

As with unit churn, companies with longer contracts (2+ years) tend to report lower annual dollar churn

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

80% of venture capital investments take place in the enterprise

If the numerator of your quick ratio is growing that means your revenue is growing. It’s important to keep increasing revenue to counter any MRR (Monthly Recurring Revenue) that is lost to churn

All types of investment have grown, year-on-year, with the biggest growth during the seed stage of financing