A popular metric in the SaaS/Subscription space is churn. For most scaling startups churn is metric that is tracked closely and investors almost always ask to see it. It is generally said that in order to succeed a startup needs low churn and if churn starts to increase, it could be a warning sign. This isn’t always the case, startups are fast moving and evolving businesses and as they scale through different stages they are trying to accomplish different goals. As these goals change, churn can swing up and down with it and we will breakdown why it’s ok for churn to fluctuate as you scale.
For most Seed or Series A stage startups their main goal is to find product-market fit. As you build your product or service you are looking for that initial “market” to sell into. As you identify that initial group, if you have built a sticky and value product or service then you should start acquiring customers and churn should fall into a consistent and healthy level (SaaS companies will always have some churn).
Once you successfully find that first segment of customers and move on to Series B and C rounds the goals and objectives will change and could potentially impact churn. Series B and C startups are typically now in growth mode, B and C stage investors will ask the company to prove that they can sell their product or service to new customers outside of their initial market. This might be a new geography, new industry, or customer type (SMB vs. Enterprise for example). As you expand into new customer segments you may find that certain groups just aren’r the right fit. You will have spent time and money acquiring these customers but ultimately they will churn. As you grow and expand churn may start to increase as these poor-fit segments churn off.
In a vacuum, increasing churn is a caution/warning sign. But if the company monitors which customer segments are churning and why, you can take operational steps to help address this and focus energy and capital into the new customer segments that are sticking. Scaling startups will often see this spike in churn as they grow through the B and C stages and the process of successfully scaling may actually increase short term churn as you work through finding the best-fit customers. In many cases, if churn is analyzed appropriately, it can help a scaling business focus its energy and capital into the right markets to successfully scale.