Discover more from Productize
Net Negative Revenue Churn
Sometimes referred to as the Holy Grail of SaaS, it might not be as elusive as people think.
I wrote recently about how churn turns you into a growth addict. This is because churn is a function of your overall ARR, so as you grow if all things are equal, so too does your churn. But if you have Negative Revenue Churn (aka Revenue Expansion) then the same is true in reverse.
What is Net Negative Revenue Churn?
If you have a cohort of customers, over time some of them will churn as customers. I mean, even if it’s just because they go out of business, you’re going to lose some of them. However, if those that don’t churn increase their spend with you over time to the extent that the total revenue you get from the cohort at the end of the period is greater than when you started (in spite of the fact that you’ve lost a few actual customers), then you are in Net Negative Revenue Churn territory. Congratulations!
Assume your customers on September 1st generate $1m in ARR.
A month later, you add up all the churned revenue and it comes to $20,000, or 2% (gross churn).
But you also calculate that there has been an overall increase in spend of $50,000 from those customers, or 5% (gross expansion).
As a calculation:
Gross Revenue Churn % - Gross Expansion Revenue % = Net Revenue Churn %
2% - 5% = -3%
Why is it the Holy Grail?
The SaaS model is that customers pay you for years at a time. But inevitably some will leave. To grow, you have to win new work that not only replaces the churned customers, but adds more revenue on top. But if you have Net Negative Revenue Churn, then all of your new business adds directly to your growth. It also suggests that even if you fired everyone and went and sat on a beach for a year, your business would have more revenue by the time you returned from your sandy retreat.
But given the definition of a Holy Grail is something elusive, I think this is an over generous description. The last two SaaS companies I’ve been a director of both have Net Negative Revenue Churn. I think the bigger issue is that we’re so obsessed about new business that customer success is almost like the poor cousin to sales. In some founders’s minds, customer success is just about retaining customers.
But this is a mistake in my view for two reasons.
1. Getting more revenue from existing customers costs significantly less than from new ones:
- Typically, it takes about $1.15 to win every new $1 of ARR
- It takes about $0.60 to acquire every $1 of upsell revenue
- And $0.30 to acquire every $1 of expansion revenue
2. Not only do they cost less, but they can also make more. Right now, I’m seeing numbers in SaaS companies where expansion is way more significant than new business. Some numbers I saw this week showed Net Negative Revenue Churn at about 1.5x new business (remember that net negative revenue churn is expansion offset by churn and the net figure is still bigger than new business).
How do you get Net Negative Revenue Churn?
There is no one silver bullet, but here are some things to consider:
1. You could move to larger customers with higher Annual Contract Values (ACVs). Small businesses are more prone to just disappear and are likely more price sensitive. Sadly, moving up market can’t be achieved with a magic wand, but long term, if you are fighting for customers at $10/seat, churn will always be an issue for you.
2. You could upsell them to a bigger, better service. Where else can you add value for your customers? Given the costs of acquiring new customers vs upsell, is it worth investing in something that people will pay you more for? This may in itself be part of how you move to larger clients. An SME might just want to be able to manage some aspect of their business. but a larger client will need advanced capabilities and customization options, better security and more complex project management needs.
3. You could add on more services. Add-ons by definition, aren’t for every customer (otherwise they would just be part of the core service), but if enough of your customers would be happy to pay for something that complements your core offering, then you could see your Average ACVS going up.
4. You could increase your prices. Founders are notoriously bad at underpricing what they do. I found that when I increased our pricing by about 10%, it had virtually no impact on sales volumes but added several hundred thousand dollars of ARR in a the space of a few months. A rule of thumb I’ve been told before is that if 20% of your prospects are hesitating over price, then you’ve probably got it about right.
5. You could sell more seats/licences. I introduced a minimum licence requirement which had the effect of filtering out the really flaky super-churners AND improved the Average Order Value. We had slightly less customers as a result, but they were less likely to churn and spent more as a cohort.
Finally, if you’re still at the planning/R&D stage, think about this stuff. When modelling out your plan, it may well be worth starting off with a simpler, cheaper offering. But consider how you may want to invest more in the product down the line to move higher up the food chain and be able to charge more per customer.