As executive-in-residence at Scale Venture Partners, I’ve worked with a number of SaaS startups to help them refine the efficiency of their operations. One of the things that is often neglected is customer churn. Early focus on churn helps build discipline that becomes even more important as a company grows to $100 million or more in revenues. In the bad old days of on-premise Enterprise software, a startup was considered to have traction when it got its first dozen paying customers. These were typically six-figure deals and required a lot of heavy lifting to get the customers into production. While the old-school field sales model was not particularly efficient, it had the virtue of driving an organization toward making early customers successful.
When you have hundreds or thousands of customers, though, things can become rather anonymous and it’s harder to make sure customers are using your product correctly. If customers aren’t successful in using your product, they churn.
Having churn is like rowing a leaky boat. After a while, you spend more time bailing water than moving forward. By contrast, organizations that focus on reducing churn will find that their revenue grows every quarter. Break it down. To accurately measure what’s going on, you should begin by breaking out churn (customer cancellation) from contraction (a downgrade in spending). Measure downgrade and churn separately from upgrades and expansion; otherwise, your net growth numbers will mask problems that are bubbling below the surface. If your SaaS product has different editions (e.g. Basic, Pro, Enterprise) you should watch for downgrades that suggest customers are not seeing the value in the higher-end features.