Churn and what it says about product/market fit
I closed out the day with a talk about B2B SaaS metrics—specifically churn, cost of customer acquisition (CAC) and lifetime value of customer (LTV). This is a topic I've been thinking a lot about over the past year. We all hear about the to-be SaaS unicorns and their net negative churn, but these stories and associated metrics are often a distraction for early stage companies. If you're not yet above $10M in annual recurring revenue (ARR) this talk is especially relevant to your business.
The gist of the talk is to remind early stage B2B SaaS companies to care about churn—the event when a customer stops paying you. This sounds completely obvious, but it's hard to do in practice. Startup founders and execs find excuses to ignore or downplay the effect that churn is having on their business.
Every startup selling into SMB has high churn.
We're just not reaching the right customers with our marketing.
You can't grow a business worrying about churn.
I argue that not only is gross churn an extremely important metric to track (at least monthly), it might be the strongest indicator of whether or not you have product/market fit (PMF). PMF is the stuff startup dreams are made of. I like Guy Turner's definition of PMF:
PMF is when you can add and retain $20K/month in MRR at the same cost as the $5K/month you added 12 months ago.
It's near impossible to grow your business at that rate if churn is a problem.
In summary: Get product/market fit, then scale.
- Make your product ridiculously good for a very specific group of customers (ie. find PMF!)
- Measure gross churn diligently and always be improving it
- Measure SaaS Quick Ratio and keep it at 4 or higher
- Only focus on MRR growth
- Think about net churn until gross churn is <1% monthly
- Drive LTV:CAC ratio below 3 before you have PMF
- Ignore payback period
If these points resonate with you please share this with another founder. I'm far from the first person to highlight the importance of measuring metrics churn, but clearly this is something we all need to be reminded about when building our businesses.