Every SaaS business wants to have very low churn rates. Public SaaS companies often release renewal rates in the mid- or even high 90 percent range, without giving any detail about how the number was derived. But how do you interpret SaaS churn metrics?
In our annual Software and SaaS benchmarking, we’ve been tracking churn rates for six years. We look at churn by two different definitions in order to get at more precise data:
- By the total number of customers up for renewal that renew
- By the total dollar value up for renewal that is renewed, or “re-contracted.”
In general, the dollar figure is always higher for every peer group benchmarked than the customer number. Typically, average dollar rate renewals includes expansion within a customer and upselling of a customer. We also see companies with effectively negative churn, or renewal rates by contract value of over 100 percent.
For private SaaS companies in 2011, we found an average renewal rate of 78 percent by total customer renewals and 87 percent by total dollar value.
While these average numbers are for all private companies, generally, renewal rates get better as companies get bigger because a company isn’t going to grow revenue by much if new customer acquisition has to overcome a really strong churn trend — it is easy to model how this works. However, we also see renewal rates may go up and down but trend upward over time as companies grow.
Public SaaS companies tend to stabilize churn at relatively low levels; we found for the same period that public SaaS companies averaged 91 percent renewals by customers and 95 percent by dollar value.
Churn is also affected by macro economic trends. We saw customer churn increase for most companies during the recent 2008/2009 recession; however, a number of companies were able to maintain renewal levels by dollar value during this period.
Improving average churn through customer segmentation
On an individual company basis, we see successful companies analyzing churn rates by customer groupings segmented by vertical and by size of revenues. In addition, some companies we work with are doing a great job improving overall churn rates by segmenting customers in terms of how long they’ve subscribed and reducing the customer cohort that is only subscribing for a short period (yet costs much the same to acquire as customers that tend to subscribe for much longer periods). Have sales and marketing focus resources on the low-churner group and take resource away from the high churners.
For example, if your average renewal rate for all customers is 74 percent and you segment your customers into three groups:
- 20% customers have a 50% renewal rate
- 40% have a 70% renewal rate
- 40% have a 90% rate.
By reducing the worst 20 percent to 10 percent and increasing the next best group to 45 percent of the total and the best renewal rate customer cohort to 45 percent, your average renewal rate would be 77 percent.
Identify problem areas and establish overall targets through peer benchmarks
Seeing what peer companies are achieving helps focus management energy and resources on areas that could be improved and start executing on concrete strategies. It helps get company-wide acceptance of targets and working together to improve performance.
We look closely at all these indicators, as well as a comprehensive set of other critical financial and operational metrics, such as detailed departmental expense numbers, hosting expense, departmental and geographic headcounts, revenues and growth rates, profit and margin metrics, and more in this year’s software and SaaS benchmarking survey, kicking off in February.
This article originally appeared on Sandhill.