Happy Software-as-a-Service (SaaS) customers regularly use your product. They stick around for the long haul, contributing Monthly Recurring Revenue (MRR) and bringing a significant Lifetime Value to (LTV) to your company.
The flip side of that? Unhappy customers churn. They cancel their subscription after the terms of their one-year contract ends, or even try to terminate their contract early. All your efforts and the substantial costs to acquire that customer has now been for naught, as they churned before their full LTV was truly realized.
That is a major problem.
Ask any SaaS CEO or Sales VP what keeps them up at night and most of them would nominate churn as the boogeyman haunting their dreams. Most of them typically calculate churn by either accounts or revenue. We’re here to introduce a different spin on churn that SaaS companies should be analyzing:
Dollar-Weighted Account Churn.
What’s different about each churn metric
Before we dive into why dollar-weighted account churn matters, let’s examine the nuances of each individual churn metric:
- Account Churn – Also known as Customer Churn or Logo Churn (i.e. the logos of the companies that cancel their subscription). This refers to the actual number of customers that cancel. If you have 100 customers and 10 of them cancelled this quarter, your churn rate for the quarter is at 10%.
- Revenue Churn – This metric tracks how much money you lost during the period due to cancelled subscriptions or downgrades, net of upsells.. If your Monthly Recurring Revenue (MRR) is a million dollars and you churned several companies who contributed $50,000 in MRR, your revenue churn rate is at 5%.
SaaS companies are increasingly moving away from relying on Account Churn as their main metric. The problem is that it considers every account as equal, giving too much importance to small accounts. No company wants to lose customers, but it is much more palatable to lose a small account than to churn your biggest account. Losing three accounts that contribute $10k in MRR isn’t nearly as damaging as losing one huge account that contributes $100k in MRR. With an across-the-board Account Churn rate, that type of nuance is not easily discernible.
On the other hand, CEO’s love knowing their Revenue Churn rate; after all, this is the truest picture of the company’s health, and correlates most closely to the business. This metric also provides much clearer divides between your big and small customers; losing two of your biggest MRR-contributing customers is more dire than losing a swarm of 10 small fish. So, what’s the problem with revenue churn then?
Negative Churn (Monthly Recurring Revenue) = [New Customers (New MRR) + Existing Customers (Expansion MRR)] – Churned Customers (Lost MRR)
The problem with relying on the Revenue Churn rate is that it considers upsells in its calculations. If you churned 5% of your revenue in a month, but was able to add 6% in upsells, that leaves you with a negative churn rate for the month. Everybody’s smiling…but more serious structural problems with your business might be masked. This is why we recommend that SaaS companies study their dollar-weighted account churn rate in addition to their revenue churn rate.
What is Dollar-Weighted Account Churn?
Dollar-weighted Account Churn looks at the rate at which you’re churning accounts, and then factors in the value of those churned accounts.
Take a look at the table above. This company had a tough time convincing customers to re-up their contracts in June and August, with high account churn rates of 4.7% and 4.3% respectively. However, in August, those 19 churned accounts only contributed 1.6% of the company’s total MRR. In June, those 20 churned accounts contributed a whooping 5% of MRR, representing a huge hit to the company’s bottom line revenue. June was a much more damaging month.
Where this is a “truer” measure than your Revenue Churn rate is that it doesn’t consider upsells, thereby not masking some flaws that might be showing in the foundation of your company. There are different mechanisms in gaining upsells vs. preventing customer churn that make it so that both aspects are not really related. For example, you can reduce friction in upsells – such as giving customers one-touch options to buy more licenses – but that doesn’t really help you reduce cancellations. That requires a whole different type of customer happiness experience altogether, such as tracking usage and improving engagement.
This is why CEOs and Sales VPs at SaaS companies should be tracking their dollar-weighted account churn rate in addition to their revenue churn rate. Taking into account the number of accounts you churn, the MRR contributions of these churned accounts and then your revenue churn rate and any sources of expansion revenue (upsells, cross-sells) will give you the truest measure of the health of your SaaS company.