How to control SaaS CHURN

The bane of every SaaS business is churn.  Nothing is more discouraging than a great sales month being offset by a heavy month of churn.  Churn happens at every SaaS business and the general rule of thumb is 20% annual gross churn of the customer base is ok, 10% is excellent, and anything lower than 10% is outstanding.  Measured another way, some companies like to look at “net retention” which is generally defined as begin customers – customers churned + existing customers which expanded their account.  We know of 16 publicly traded SaaS businesses that report net retention and on median, their net retention is 105% and on average it’s 110%, meaning upgrades by existing customers outweigh lost customers in a given year.  The range of net retention of the 16 companies is 90% to 136%.   So long as you’re in these ranges, you’re fine. 

    TTM TTM  TTM  Capital Enterprise Market        
Name Ticker Revenue EBITDA FCF Surplus Value Cap Debt Cash EV Calc Retention
2U TWOU $150 -$19 -$9 $217 $871 $1,060 $0 $184 $876 120%
Benefitfocus, Inc. BNFT $185 -$45 -$32 $310 $886 $953 $65 $89 $929 95%
Box, Inc. BOX $280 -$162 -$87 $855 $1,280 $1,440 $47 $215 $1,272 126%
Castlight Health, Inc.  CSLT $75 -$78 -$57 $410 $147 $264 $0 $120 $144 116%
Cornerstone OnDemand, Inc. CSOD $340 -$51 $44 $378 $1,460 $1,480 $233 $244 $1,469 95%
Cvent, Inc.  CVT $188 $16 $27 $212 $716 $872 $0 $145 $727 100%
Demandware, Inc. DWRE $237 -$18 $15 $426 $990 $1,170 $0 $197 $973 100%
Five9, Inc.  FIVN $129 -$14 -$13 $177 $408 $420 $47 $58 $409 96%
HubSpot, Inc. HUBS $182 -$39 $0 $323 $1,150 $1,210 $1 $105 $1,106 99%
Marketo, Inc. MKTO $210 -$55 $2 $336 $546 $653 $3 $107 $549 105%
New Relic, Inc. NEWR $162 -$53 $3 $382 $1,110 $1,310 $0 $191 $1,119 130%
Proofpoint, Inc. PFPT $265 -$61 $46 $441 $1,770 $1,780 $346 $406 $1,720 90%
RingCentral, Inc. RNG $296 -$16 $5 $306 $1,140 $1,260 $19 $138 $1,141 99%
SecureWorks SCWX --- --- --- --- --- --- --- --- --- 105%
Veeva Systems Inc. VEEV $382 $91 $75 $348 $2,670 $3,050 $0 $339 $2,711 136%
Zendesk, Inc. ZEN $209 -$62 $5 $485 $1,310 $1,580 $0 $246 $1,334 123%
                       
                  median………………………….… 105%
                  average…………………………….. 110%

 

The big question is what can be done to control churn? Below are a few guidelines:

 

-Do a fantastic job of onboarding new clients.  The first 90 days is critical for any new client so make sure someone on your team is dedicated to a successful onboarding and ramp up of a new client.  This is also a great opportunity to upsell them on additional features or seats they didn’t purchase the first time around, so look at great onboarding as a revenue center, not a cost center. 

 

-Make sure you have more than one champion.  A big reason for churn is that your main contact or champion at the client has moved onto another job.  Prevent this by ingratiating as many members of your team with as many high level execs as you can at the client.  Your account executive, head of onboarding, and head of customer success, and even the founders need to all have good contacts at every client just in case someone at the client leaves, or in case one of your employees leaves (don’t make the mistake of letting one employee be the manager of all of your client contacts).

 

-Contact the client often.  At a minimum, someone at your organization should contact each champion at the client at least once a quarter.  Make it a call, not an automated email, and use it as an opportunity not only to make sure everything is going smoothly, but also to add more seats, upsell features, etc.  Similar to onboarding, you should look at customers success not as a cost center, but a revenue center that can drive incremental sales.  Make sure you’re incentivizing your CS reps and onboarding team with commissions equivalent to that of your sales reps. 

 

-Measure statistics so you can show ROI.  Make sure you’re monitoring KPI’s and statistics related to each client, and every time you call the client (which you’re doing at least quarterly), share some of the data and solicit feedback.  For instance “Our system shows that Brock and Brody have been heavy users of the content scheduling tool.  How are they doing?” Brock and Brody will of course be doing fantastic because after all, they’re heavy users of the tool, and you’re getting the client to acknowledge that which will be very valuable for renewals and upsells. 

 

In summary, contact is the key.   Make sure you hand hold the customer through the onboarding process, you’re establishing multiple touch points, and you’re reaching out to those touch points at least quarterly.  Give your CS team and onboarding reps a chance to earn commission so they are incented to reach out to clients regularly and upsell.  When your CS and onboarding reps can become revenue centers instead of cost centers, that’s when achieving net retention of 110%+ becomes easy.  Feel free to share any other churn tips in the comments section.    

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