For scaling recurring revenue/subscription startups, tracking revenue churn versus customer churn is a crucially important metric to keep tabs on. Revenue churn is the % of revenue that is lost over a given period of time for an initial set. Say we start the year with $10,000 in recurring revenue and at the end of the year we have $9,700 from that same set of customers, which would be 3% ($300) of revenue churn. Same for customers, just looking at the total amount of customers. Say that same set of revenue represented 1,000 customers and then we are left with 970, that would be 3% customer churn. Today we breakdown why tracking these two metric is vital for early-stage startups:
Poor-Fit Customers are Inevitable
Resource strapped, racing for a next funding round, or needing to add customer count. All early-stage startups for one reason or another will grab any customer willing to pay for your product or service in the early-years, especially as you are still tinkering with product-market fit. I can speak from experience, when starting my first SaaS company, I would take meetings with any business with a sales team willing to try our software. Early on while finding product-market fit often times your revenue churn and customer churn will mirror one another and there will be random months where it spikes due to a cohort with a higher concentration of poor-fit customers. Below is a sample 13 month breakdown of customer and revenue churn for a pre-product-market fit SaaS company:
Revenue Churn and Customer Churn Changes as You Scale
The good news is as you find product-market fit and you align your entire team around your ideal customer profile, those customers tend to produce greater revenue retention and lower customer churn. This combined with the early poor-fit customers churning off and for a lot of startups that are scaling will see a divergence in revenue churn which will remain low (aided by upsells to high-paying good-fit customers) and customer churn which will temporarily spike as those poor-fit (and often low paying) customer churn off your platform. While this might seem like warning sign at first as customer churn begins to increase, remember to examine revenue churn, if it is holding steady then you are on track. Below is a sample 13 month analysis of a SaaS company that has found product-market fit and has begun to scale while shedding its early poor-fit customers:
While the above graph is only temporary, if you are experiencing this with your SaaS business, make sure to identify the segments of these poor-fit customers and once the majority of them have churned off, customer churn should come back down towards more closely matching revenue churn.
If you and your company are interested in discussing more how to fully analyze the economics of your recurring revenue/subscription business, reach out to us about ourand setup a time for your free initial consultation!