Churn - The Silent Killer
Poor retention - aka high churn - is often referred to as ‘the silent killer’.
And for good reason.
This post is presented by Sprig - build a product people love.
Sprig is an AI-powered platform that enables you to collect relevant product experience insights from the right users, so you can make product decisions quickly and confidently. Next-gen product teams like Figma and Notion rely on Sprig to build the user-centric products people love.
At Snyk, Sprig was an indispensable part of our product stack, and now, readers of The Product-Led Geek can get 10% off!
You’ll find nothing new or revolutionary in this post.
In fact, what I’m going to talk about here is pretty basic.
But you will find a very important message about retention and churn here.
And it’s a message that, in my experience, not enough people understand the importance of.
You’re at the weekly growth metrics review and see monthly revenue churn of 15%.
But your go-to-market engine is repeatably bringing in $100K in recurring revenue every month.
That feels good!
If this is your first rodeo, you might not feel too alarmed.
But you really should be.
You won’t be feeling the same way a few months from now.
Because the impact of churn compounds over time.
Churn is quietly and continuously digging a hole that gets deeper and deeper and, over time, becomes incredibly difficult to pull your business out of.
Thanks for reading The Product-Led Geek! Subscribe for free to receive new posts and support my work.
To demonstrate this point, I’m going to refer to some visualisations I first learned about from David Skok (Matrix Partners). I got to know David during my time at CloudBees where he was an investor. He shares them in his article about SaaS Metrics - an essential read for any startup founder and product and growth leader.
So let’s look at that 15% monthly churn scenario on a graph:
By month 24, monthly recurring revenue has basically flatlined at ~$650K.
Your business has plateaued.
You’re no longer growing.
Customers are churning like lemmings jumping off a cliff.
Note: FWIW, 15% monthly churn is equivalent to 80% annual churn - hence the massive impact. As such it can be a good idea (even for startup PLG businesses focuing on monthly contracts) to annualise your churn and retention rates. You’ll also benefit from negating any fluctuation through the impact of seasonality.
If we get monthly churn down to 10%, you'll see that we’re in a better position, but still not great.
You’ve extended your time to flatline by ~12 months and raised the ceiling to nearly $1M in MRR.
But what if you could get monthly churn down to 2%?
That looks like a much more healthy situation with almost linear growth.
But the magic in B2B PLG really happens when you unlock net negative churn.
This is why Net Revenue Retention - NRR (or Net Dollar Retention - NDR - if you call it that) is such an important metric in assessing the health of a B2B SaaS business.
Strong SaaS businesses find ways (on average) to generate more revenue from each customer over time.
Snowflake: 135% (down from 174% in Q1 2022 - not even they were immune from the macro context).
Data from Blossom Street, as of Q3 2023.
If you’re able to get to a position whereby your expansion revenue covers the impact of churn (and downsell) and then some, you have net negative churn.
So, what does -5% churn look like?
Remember, with 15% churn, you flatlined at month 24 at ~$650K MRR?
Now, with -5% churn, at month 24, you hit nearly $4.5M.
And every month is looking better than the last.
But Gross Revenue Retention - GRR (i.e. the inverse of churn) is still critically important because the higher it is, the higher your NRR will be, and the faster you will grow.
And if your expansion engine ever falters, you’ll minimise the impact on topline growth.
GRR is a transparent measure you can’t hide from.
Note: All of these calculations assume a constant new revenue stream. Ideally you’ll look to grow new revenue. If you do that, it will somewhat mask the impact of high churn.
But it’s really hard to do that consistently over a long period of time.
Left unchecked, high churn will catch up with you.
Up to now, I’ve focused this discussion on revenue retention.
But remember that the biggest leading indicator of revenue retention in PLG companies is usage retention.
And the exact same maths (🇬🇧) applies to usage retention.
Your active user/team base will plateau at some point, depending on how well you are able to retain new users and teams that sign up for your product.
In PLG, the equivalent of ‘expansion revenue’ in usage is virality.
If, for every 1000 users, they bring in 200 more, then that’s the equivalent of 20% expansion revenue in the Net Revenue Retention formula.
That can go a long way to counteracting the impact of churn and contributing to net negative usage churn, and an exponential user growth curve and a lot more fuel for monetisation. ❤️
I’ve found that understanding all of this from first principles really helps in growth.
I hope this post was informative to some and a useful reminder to others.
This post was presented by Sprig.
Until next time!