When you're an early stage B2B SaaS startup (with less than $2M ARR) finding your ideal customers and turning them into raving fans of your product is all that matters. This is hard work. It is easy to highlight whatever signals that show you are making progress.
Don't do that.
Keep it simple: Reduce gross churn and keep your cost of customer acquisition low until you've truly found product/market fit. Ignore the allure of "net negative churn" and other vanity metrics.
I gave this presentation on October 14, 2016 at #brightconf in Chicago.
4. Today’s lesson:
Avoid premature optimization
1. Get product-market fit
2. Then scale
This applies to every part of the business:
Engineering, marketing, sales, support, …
8. Ways to measure churn
(of paying customers)
- Gross or net
- Customer count or revenue
- Monthly or annually
Start here.
It’s easier to understand* and
compare gross/mo/cust. churn
But, more importantly:
Gross churn tells us more
about PMF.
* Note: If your SaaS business has a large usage-based revenue component,
you may find rev-based churn more useful, even early on.
9. If you have 100 paying customers on Jan 1,
at a 5% monthly customer churn rate, you’ll only have
54 customers remaining at end of 12 months
Not good.
5% monthly
customer churn
= 46% annual
customer churn
54
10. At 2.5% monthly customer churn,
73 customers remain at end of 12 months
= 27% annual churn
11. At 1% monthly customer churn,
88 customers remain at end of 12 months
Better.
= 12% annual churn
…depending on
your CAC.
12. Quick lesson:
LTV to CAC Ratio and payback period
Source: Matrix Partners (forentrepreneurs.com)
13. An example:
Let’s say that on average…
● It costs $500 to acquire a new customer
● MRR per customer is $50
● Customer churn is 5%
Lifetime value of customer is $1,000.
Calculation: (1/0.05) = 20 months * $50 MRR = $1,000 LTV
2.0 LTV:CAC ratio
10 months to recover
CAC (payback period)
16. How does MRR and churn affect how
VCs think about investments?
Source: Mamoon Hamid, Social+Capital (slideshare.net) - SaaStr Annual 2015
the part of “my” talk today where I
crib this kickass presentation that
Mamoon Hamid (S+C) gave at
SaaStr Annual 2015
Serious props to these guys for sharing!
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25. —Investopedia (investopedia.com): Quick Ratio
“The higher the quick ratio, the better the
company's liquidity position.”
Source: Mamoon Hamid, Social+Capital (slideshare.net) - SaaStr Annual 2015
and ChartMogul (blog.chartmogul.com) - SaaS Quick Ratio
30. “5% churn isn’t
that bad, right?”
Source: Lincoln Murphy (sixteenventures.com) - SaaS Churn Rate: What’s Acceptable?
31. In summary:
Get product-market fit, then scale
Do Don’t
- 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
32. Churn and what it says about
product/market fit
#brightconf
@resetbrian
bk@thirdrail.co
Brian Kelly
www.thirdrail.co
Third Rail Group, Inc.
Q+A