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Gross churn is the most important SaaS growth metric

I highly recommend reading this post published by TechCrunch yesterday. Ajay Agarwal of Bain Capital Ventures and Ben Vonwiller of McKinsey wrote an analysis on "which customer success metrics most impact growth" by examining a subset of the companies in SaaSRadar, McKinsey's database of pre-IPO SaaS companies (published April 2016).

Our conclusion is that gross churn, by far, is the most impactful metric.

The article appropriately breaks down gross churn across several dimensions:

  • Customer types: SMB (ACV <$15,000), mid-market (ACV $15,000–$75,000), and enterprise (ACV >$75,00)
  • Annual customer churn (how many "logos" are lost, per year) and annual gross revenue churn (how many dollars were lost due to losing paying customers)
  • Mean and top-quartile percentages of these numbers. Top-quartile SaaS performers are in the top 25% of their customer type in terms of quarterly growth.

This segmentation is very important. I've seen SaaS founders and execs dismiss "industry benchmarks" because they think their company is an outlier and therefore cannot be easily compared to benchmarks. Don't do that.

The following chart shows that for SaaS companies selling into SMB (less than $15,000 Annual Contract Value), the average customer churn is 34.8%. This is a monthly customer churn rate of 3.5%. There's not a huge difference between the mean and top-quartile performers when it comes to average customer churn, but take a look at annual gross revenue churn.

 Source: SaaSRadar; McKinsey analysis

Source: SaaSRadar; McKinsey analysis

The top 25% SMB SaaS companies are only seeing annual gross revenue churn of 16.4%. This is a monthly gross revenue churn rate of about 1.5%. This is 40% better than the average SaaS company selling into SMB.

Why is this so notable? The top-quartile SaaS companies have figured out that it's okay if they lose the "wrong" customers as long as they focus on the ones who are getting the most value from their product. These top-quartile companies know that they cannot spend the same amount of time with every customer (whether in customer support/success or product/engineering efforts).

By focusing their efforts on the customers that are their best potential fit for their product these top-quartile SaaS companies significantly outpace the gross revenue churn of their peers.

Brian Kelly