The craft and craftiness of interpreting SaaS churn

~ 6 min read | February 21

There’s always that one metric that can make your stomach churn.

Churn.

Your churn rate tells you how many customers or how much revenue you’ve lost. If it shoots up, you obviously have to get your firefighting gear out.

Net MRR churn rate beautifully sums up how much trouble you’re in because it takes into account your revenue expansion from upsells and cross-sells as well. Since it comes in a %, even a slight decrease in your Net MRR churn rate means it’ll be pouring dollars.  

But, is Net MRR churn enough to check the pulse of the business?  

“The single story creates stereotypes,
and the problem with stereotypes is not that they are untrue,
but that they are incomplete. They make one story become the only story.”

-Chimamanda Adichie

Churn rate captures only one dimension of your business. It only captures how good your revenue retention game is.

If you devise strategies to just decrease your SaaS churn rate, you risk trading off Upgrade MRR for your Downgrade/Cancellation MRR. If your downgrade MRR decreases more than your increase in Upgrade MRR, your churn rate still falls, creating a false sense of security.

But the problem still remains. Existing customers aren’t growing at an increasing rate. Looking into churn rate and its immediate constituents will definitely help. But it won’t take you far without the help of a guiding metric or two. Metrics that give you a reality check.

SaaS churn is a lot like Las Meninas, an iconic painting by Diego Velazquez which was reinterpreted by Pablo Picasso in 58 different ways, each interpretation more abstract than the previous one.

Most of the SaaS metrics don’t do well in isolation. They don’t show you the entire picture. Much like another beloved metric, ARPU. The SaaS industry has a bit of a love-hate relationship with ARPU because some believe that it’s a vanity metric. While others view it as a great benchmarking metric.

The way you track your ARPU can make or break your business. When not tracked in context with its sister metrics like CAC and LTV, ARPU can derail your analytics.

ARPU and ARPCS – The causal camaraderie

Average Revenue Per Churned Subscription (ARPCS), simply put, is your revenue churn divided by your subscription churn.

An easy way to probe SaaS churn rate is to look at it with ARPU and ARPCS.

Let’s take an example.

Your churn rate is high, at around 10%. Your ARPU is $100 and your ARPCS is $20. This can be interpreted in 2 ways depending on your marketing strategy.

If you’re trying to move upmarket, and attract high-paying customers, it’s working. The high churn rate needn’t be as alarming.

However, if you’re focussing on early-stage companies or SMBs, then you need to put out that fire that’s blazing.

This high-volume churn could be due to multiple reasons. It could be either because you made a recent pricing change that didn’t go down well with your smaller customers. Or, you made a significant UI/UX change in your product that your customers didn’t appreciate.

A solution for it would be:

  1. Grandfathering customers whenever you make a major pricing change.
  2. Roll out subsequent UI/UX releases to a smaller audience first. And, consider having a phasing-out period when you give users the option to switch between multiple versions of your product.

Not all low churn rates are bad.

Imagine this.

Your ARPCS is high, much higher than your ARPU. Your churn rate is low.

This means you’re in grave danger even though your churn rate is low. You’re losing high-value customers. An immediate measure is to see if there’s a pattern forming and figuring out why these customers churned.

If it is a one-time thing, assigning customer success managers and getting regular feedback would help.

If there’s a pattern, then go a step further and see at what point are these customers churning. If they’re churning early, then there’s a problem with the promises you’re making. If they’re churning at a much later stage, it means your product is not scaling with their growth.

So, a good rule of thumb to keep your churn in check would be to make sure your ARPCS doesn’t exceed your ARPU.

Identifying the growth levers

There are plenty of ways to interpret churn or any other metric for that matter. The underlying principle here is to pair them up with relevant SaaS metrics and not look at just one in isolation.

Mapping such metrics and deep diving into them helps you identify and experiment with growth levers faster.

Quoting our earlier article on SaaS growth,

“If Baremetrics, Ning, and Bidsketch could have run faster acquisition, monetization, and retention experiments, they might have caught on that Freemium wasn’t working for them earlier than they did. Better yet, they could’ve ramped down on patterns that were working and sidestepped freemium altogether.”

Looking at churn breakdown reports, subscription retention cohort, and MRR churn by plan could’ve helped them get to the root-cause faster, and minimize the damage. I’m saying minimize and not completely prevent the whole thing from happening because churn isn’t the best indicator of a company’s growth.

Churn Prevention or Churn Reduction?

Churn is a lagging indicator. By the time the numbers reflect on your reporting dashboard, the customers have already left.

It’s merely a symptom of an underlying disease.

Churn prevention is an uphill battle. There are a lot of other cues you can pick up before a customer churns out – Support tickets, plan movement, and mainly, usage.

Usage retention is your Golden Snitch. If the paying subscribers aren’t using your product, they are going to eventually churn.

Trying to win the game just by tracking and improving revenue retention is not the solution. You can, however, make people stay by building a sticky product and scaling it consistently, i.e, usage retention.

Usage retention accelerates acquisition. New users continue to stay and drive in more users, thereby creating a self-sustaining cycle. If you improve usage retention, not only do you lose fewer users than you otherwise would, but you also influence the rest of your funnel.

A thoughtfully executed product is the best retention tool there is.

PS: Did you know that you can look at churn in 20+ ways with RevenueStory?

RevenueStory is a subscription reporting and analytics tool built on top of your billing system at Chargebee. You can try it out here

Ashwini

Forever torn between picking up a pen and picking up a paintbrush. Can be found taking a stroll outside her comfort zone.