Hey, everyone, this is Steli Efti with Close.io, and in today’s video, you’re gonna learn
all the ways that SaaS founders either completely and grossly misunderstand their own churn,
or just flat out bullshit you when they talk about their churn numbers.
So I was having coffee today with a SaaS founder, and we talked about the business, we talked
about the future of the business.
It’s a SaaS product that is well known, I’m not gonna put them out there, but it’s
doing millions of AR, it’s a well know brand.
And he was a great founder, it was a great chat, we exchanged war stories, we had a lot
of fun.
Eventually, the topic went to one of the most infamous, and important, and devastating,
and exciting topics when it comes to running a SaaS business, which is: what’s your churn?
What is the churn like in your business?
And that founder, or that CEO, of that SaaS business looked at me and said, “Our churn
is 3.8 percent last month.”
I said, “Okay, what kind of churn is that?
Was that customer churn?
Revenue churn?
Seed churn?
Was that gross or net?”
And the founder looked at me with really big eyes and went, “Hmm, that is a good question.
I don’t know.
I’m just getting these reports from my customer success team, and it says ‘Churn’, and
it says the number, and I only pay attention to that.
Oh, I’m so glad.
I’ve never thought about churn in this depth and detail.
I’m so glad you’re bringing it up, Steli.
I need to get back to my team and figure it out.”
Wow, you’re running a SaaS business that makes millions in AR, and you’ve no fucking
clue about your churn; and that’s just one example.
It’s an example of ignorance, but I’ve met many, many founders in the past that were
touting how great their churn numbers, or how massive churn has declined for their business.
But then, when you examine it, they just bullshit you.
They just gave you the most rosy version of churn they could think of.
So I thought it was time to break churn down – at least churn numbers in a way you can
think about it so that, No. 1, if you’re a SaaS founder, you understand your ABCs of
churn so you’re not ignorant when you run your own business and ignorant when you look
at these numbers, completely misunderstand their meaning.
And also, when you talk to other SaaS founders and they tell you about their great churn
numbers, you’ll learn to look beyond the façade and ask a few question to really compare
apples to apples, and not compare your, let’s say, net churn number with their gross churn
number, or vice versa.
So let’s break this down.
This is not that difficult, so we’ll go step-by-step.
Now, churn, for you who don’t really know, is the expression of customers’ revenue
that is cancelling in your subscription business, in your software-as-a-service business.
Now, churn is a complicated metric because there’s a lot of ways to look at it, and
a lot of ways to analyze it and break it down.
So let’s go through them step-by-step to enlighten all of us when it comes to churn
from a SaaS perspective.
So, No. 1, there’s multiple ways of churn.
I can think, immediately, on top of my head, of three types of churn.
If you run a subscription business, you can have revenue churn; so how much revenue did
you lose that month?
You could have customer churn; the number of customers you lost that month, or the percentage
of your customers that you lost that month.
If you have a seed-based pricing model like Close.io has where a customer can add more
and more and more seeds to their subscription, you could have seed churn; so how many seeds
did you lose from existing customers, or what was the percentage of seeds that were lost
this month?
Revenue, customer, and seeds; those are all interrelated, but they’re not the same.
You could have massive revenue churn one month, but actually have great customer churn because
it was only your biggest customer that cancelled; you only had one customer cancelling this
month.
In the total number of customers that you had, this might not be that bad.
Maybe you have 100 customers, you had one customer that churned, that’s just 1 percent
churn, right?
It is not great, but it doesn’t sound horrible.
But if that customer was your biggest customer and accounted for 20 percent of your revenue,
well then, you had a horrible churn month when it comes to revenue perspective.
I mean, you see how the way you look at those numbers can completely alter the way your
business looks to the outside world, or how healthy it’s perceived, or how healthy you
think it is?
So these things matter, and they matter a lot from the way you think about your business
and its health.
Customer churn is an indicator you need to look at, revenue churn is an indicator you
need to look at, and seed churn is an indicator you need to look at.
Seed churn.
If you have lots and lots of seed churn, but it’s always, maybe, from your smaller customers
– or it’s always from your larger customers, but it’s actually the lowest level plan
seeds – that might tell a totally different story about what’s going on in your business
than if you have massive revenue churn because your biggest customers are constantly and
continuously growing out of your service, and out of your product, and leaving you to
go to the competition; although all your tiny customers stay with you and are completely
happy and successful.
These things change the way you look at your business and the health that your business
has today.
So first, three types of churn: revenue, customer, seed.
Then we can look at churn from another two points of views.
We can look at churn from a monthly subscription perspective, or we can look at it from a total
customer perspective.
Now what’s the difference?
Well, let’s say 50 percent of your customers are signing an annual contract.
These 50 percent of your customers – let’s say we have 100 customers – these 50 customers
cannot churn this month.
They can’t churn next month either.
The first available chance for them to churn is in 12 months.
So if you count all of your customers, the 100 customers – although 50 of them are
under contract and can’t cancel – if you take the 100 customers that you have and you
look at 10 of them cancelling, then you could say our churn was 10 percent; our customer
churn was 10 percent this month.
But if you say we only are counting the churnable accounts in our churn, only the customers
that are not under contract, only the ones that can actually cancel, then you only take
50, and 10 of them cancel, well, that’s not 10 percent, that’s 20 percent customer
churn.
That’s double the number.
See how we can tweak these numbers to tell a story the way we want them to?
Now, some founders utilize that knowledge.
They are not ignorant, they know their shit, and they use those things, those nuances,
to get to the smallest number possible to tell to investors, to the press, to potential
hires, or just to friends when they brag at SaaS events and parties.
Don’t be a fool.
When people give you their churn numbers, dig deep to understand what that number truly
represents.
Some founders, like the founder I met earlier today for coffee, is just plain ignorant.
They didn’t know.
They’re like, “Well, I get the reports from the customer success team and it says
“churn”; so I don’t know, whatever that is.
I assume that’s revenue, but I don’t know.”
And even if it is, what about customer and seed churn?
And is it just purely based on monthly subscription or all customers, even those that are under
an annual contract?
Then, to even go a level above that, we talked about revenue, customer, seed churn.
We talked about churn based on monthly subscription versus churn based on all customer accounts,
including the ones under contract.
But even another level to this is gross versus net churn.
Gross churn is, basically, you had 100 customers.
Let’s say, on a revenue basis – you can’t really do this on a customer basis.
But let’s say you have 100 customers, and then, a bunch of them add a ton of new seeds
or upgrade to new appliance, so your customer base is growing in terms of how much money
you’re making with them.
But then, a bunch of your customers have canceled, or downgraded, or deleted some seeds.
Now, if you look at the gross number, you only look at all the ways that your revenue
has decreased, and you just report that number.
If you look at the net churn, you take all the revenue that has decreased from your current
customer base, and you actually subtract the churn that has the revenue that has increased.
So, if some customers are giving you more money, and some customers are giving you less
money, you take these two numbers, and you get to the net number.
That net number, hopefully, is actually positive.
It means, actually, that you are making more money this month with your customer base than
last month, not less money.
So that’s also an important factor, because some people will just say, hey, we have no
churn at all, we’re at 0 percent.
Is that gross or net?
Because, I have a difficult time believing that no customer whatsoever in your business
is ever cancelling.
Right?
So these things, these nuances, are important for you to be able to really grasp what the
churn really means, what the meaning behind the numbers is, and where you have to pay
attention to.
And it’s important because too many people are manipulating the numbers to bullshit you.
And if you’re a founder – I, at least, don’t like to be bullshit.
Now, in some cases, it’s non-consequential.
One founder talks to another, they might make you feel a little inadequate, but there’s
no real massive consequence to it.
If you’re an investor, you don’t truly understand the way churn works, and you don’t
dig deep, it might have massive consequences.
But either way, I’m just annoyed that people just throw out a churn number, and other people
just accept it without truly understanding what it means.
Beyond all this, the bullshit talk, one more thing that I want you to focus on if you track
your churn, and you are working hard on improving that number, is that you want to understand
the reasons for churn.
Not just what is happening, but why is it happening.
Because some companies are breaking down their churn between avoidable and unavoidable churn.
Some things happen, like, if you serve a specific customer base – Well, some of my friends
would say all churn is avoidable.
I had this conversation with my good buddy, Lincoln Murphy, once.
To the one extreme from a philosophy perspective, you could say all churn is avoidable.
Well, this business went out of business, this customer went out business, how is that
avoidable to us?
We can’t make the business not go out of business.
Well, if you put it to an extreme, you could say, if we serve them better, if we made sure
they’re more successful, we could’ve helped in the overall success of that customer and
maybe kept them alive as a business.
That is what you should be striving for.
But the reality is that it is a fair question to ask, you know, how many of our customers
are going out of business?
How many of our customers are churning because of reasons that are things we’re not gonna
tackle.
So these people will always be leaving, and these customers are leaving for reasons that
are completely avoidable.
And also, which of these churn reasons affect what kind of a strategy you run?
Maybe your marketing’s attracting the wrong kind of customer that’s going out of business
very early.
Maybe you need to grow up-market to larger and larger businesses because these small
customers are churning at too fast of a rate to make your business healthy.
Maybe you need to build a certain feature or functionality to keep up with your growing
customer base and their needs to services them better.
Maybe you need to spend more time educating your customers on things in your product and
activating them so they get more out of your product, because most people that churn, churn
because they’ve never used your product and have even been paying you for months.
Whatever it is – and usually it’s a bunch of reasons, and these reasons are constantly
changing and evolving – you need to stay on top of it to know what’s happening, and
then to be able to formulate a strategy to improve those numbers.
So I’m really interested to hear your thoughts on this.
Maybe there’s even more ways to look at churn, more perspectives at analyzing, philosophizing
around churn that you want to share with me.
Make sure to leave a comment.
If you’ve been bullshitted recently, you’re not alone, don’t feel bad about it.
I hope this video was enlightening.
And if you were just a little bit more ignorant than you should be, we’ve all been there.
There’s not a single founder that hadn’t had a phase of ignorance where later we realized,
oh shit, I should’ve known about this thing, but I totally ignored it or wasn’t aware
of it – then you’re a human being.
Congratulations, don’t beat yourself up over it.
Hopefully, this video, even if it just helps one other founder to understand churn at a
deeper level, it was worth the time, and I’m proud of that.
I’m happy we had this experience together.
Make sure, if you have more questions about churn, to send me an email at steli@close.io
and to go to blog.close.io and to subscribe to our blog.
We publish, two to three times a week, highly tactical, highly strategic content for SaaS
founders.
I hope you like it.
I’m looking forward to seeing you in the next video.