THE BIGGER YOUR SAAS COMPANY IS, THE LARGER THE SIZE OF YOUR SUBSCRIPTION BASE. AND THE LARGER THE SUBSCRIPTION BASE, THE MORE DETRIMENTAL CHURN BECOMES.
As your subscriber base grows larger, the loss of revenue caused by even a low churn rate will begin to compound. The number of new bookings needed to replace the customers who are leaving becomes unachievable, and the struggle to keep your head above water becomes unsustainable. Not only will the aimless pursuit of plugging this hole in revenue cause an overwhelming drain on company resources, but your teams will also become scattered, morale will plummet and company growth will stall.
If not approached in the right way, the battle with churn is one that you will inevitably lose.
What’s a “good” churn rate?
This remains one of the most hotly-debated questions in all of SaaS. While Bessemer Venture Partners says an “acceptable” churn rate could be as high as 7% annually, there are many SaaS CEOs who consider anything above 5% unacceptable. Regardless of where you stand on this issue, the fact remains that as your subscription base grows, your once “tolerable” churn rate will become not-so-tolerable.
To help readers understand this concept better, David Skok of ForEntrepaneurs put together a very simple model which illustrates this point quite nicely. The model starts with MRR (Monthly Recurring Revenue) at zero, and bookings from new customers at $10k in the first month, increasing by $2k every month after that. Building his study on the premise of a 2.5% churn rate, Skok shows how such a small churn percentage reflects an equally small and manageable loss of revenue in the company’s early years. But as the company shown reaches the end of its fifth year with a vastly matured subscription base, even a low churn rate of 2.5% now costs the company $64k a month in revenue. This revenue is extremely hard to replace with new customer bookings and the once “acceptable” churn rate begins the threaten the company’s ability to survive in the longterm. And with a churn rate of 5%, Skok points out that the number is even worse at $90k. Not so acceptable anymore, is it?
So what can you do?
There are many methods of reducing churn and increasing customer retention, many of which have been discussed on our blog in the past. But what we’re going to talk about today is what Nathan Latka of The Top calls “the holy grail of SaaS”. This, of course, is Net Negative Churn. Also known as a Negative Churn Rate and often called Account Expansion, this metric remains one of the most commonly misunderstood aspects of SaaS success.
But before we continue, it’s important to understand that when it comes to churn – “negative” is really a positive thing.
What is Net Negative Churn?
To put it simply, net negative churn is the cure for everything mentioned above. The SaaS CFO‘s Ben Murray explains it best:
Net negative churn occurs when your expansion revenue from existing customers totals more than your lost revenue from existing customers. This SaaS metric does not factor in any revenue from new customers, just existing customers.
Sound great, right? It is. SaaS experts of all kinds agree that achieving a negative churn rate should be a primary focus for SaaS companies of any kind. But, like most things in SaaS – achieving a negative churn rate isn’t quite as easy as it may sound.
How to achieve net negative churn:
When you break it down, the key to achieving net negative churn lies in something called expansion revenue. Expansion revenue is exactly what it sounds like – expanding the revenue you’re currently receiving from your current customers and your current product. The logic is simple: It’s easier to get more money from an existing customer who is already happy with your product than it is to get money from a prospect who only has a vague understanding of who you are.
When you generate enough expansion revenue from existing clients, you lay the foundation for a negative churn rate and you, your team and your investors can all breathe a big sigh of relief.
So perhaps the real question is how to achieve account expansion and generate expansion revenue. Here are four proven strategies for doing just that:
As simple as it sounds. Offering customers a more expensive, upgraded version of the products they’re already using is the single most effective method of generating expansion revenue. And the best part? You’re actually helping them achieve the results they’re looking for in the process by providing additional value through new features, modules, and updates.
There are many ways to upsell your existing clients without being pushy, greedy or dishonest. Instead of pushing upgrades on clients that may not be interested in them, educate customers on why an upgrade may benefit them and let those who are interested come to you.
Make it easy for users to learn about the benefits of upgrading by putting the information in plain sight. Unless users are actively thinking about upgrading (which most are not) it’s unlikely that they’ll be visiting your pricing page to learn about higher tier features. So why are your upgrade prompts exiled to your pricing page? Place information about premium features where users can see it while actively engaged in your app.
Companies like Branch are great examples of how to do this well, discreetly placing prompts regarding higher tier features into their users’ current dashboards. When users discover a feature they want or need but notice it’s currently unavailable to them in the exact moment that they need it most – Branch gives them the option to upgrade and use it right then and there.
Cross-selling is similar to upselling, only instead of selling an upgraded version of something they already own, you’re selling a different product that enhances the product(s) they’ve already purchased.
Think of selling someone a tie that compliments their suit, shoes that compliment their outfit or even a phone case that protects their smartphone. This may not be something the buyer was originally looking for, but after learning more about how it enriches something they’re already using, they can’t say no.
When cross-selling to a client, it’s best to not only show them the added value the product will generate for them individually, but also offer it to them for a discounted price. This special treatment will show them that you appreciate their loyalty and that you’re interested in a longterm relationship with them as a customer. Nothing means more to a customer than your honesty, respect, and appreciation.
3. Resource Expansion.
Resource expansion is a lot like upselling/upgrading. However, with resource expansion, you’re not selling a higher-tier version of a product, but rather selling a customer the ability to use more of something they need. A common example of resource expansion is purchasing more space from a cloud storage service like Dropbox or Google Drive. Resource expansion occurs outside of the SaaS world too, most commonly in the form of things like additional cell phone data, legroom on an airplane, battery life, etc.
Create different packages organized into different tiers and price them accordingly, allowing customers to expand and adjust their capabilities as needed.
4. Seat Expansion.
This applies to SaaS companies who charge a fee per product administrator or software user. This is a very common business model for SaaS companies, and this strategy encourages customers to add more proverbial seats to the table by purchasing additional licenses for each person who may need to access the system.
The most common method of doing this is to add features intended to help people who may not be in your traditional user base. What does this mean? Simply put, if your company sells software intended for sales, you could add features that assist other departments like accounting, HR, etc.
This strategy leaves a little more to be considered though because, in order to provide real value, your product and features have to be specifically designed to deliver the results you’re promising. For many SaaS companies, a good seat expansion strategy is something that develops further along in a company’s growth, as specific seat expansion opportunities begin to clearly take shape over time.
While not a hard and fast rule, many SaaS companies believe in splitting the sales organization into two groups. While group A goes out to hunt for fresh leads and nurture deals through the pipeline, group B stays home and tends to the existing customers. This is partly due to the fact that both hunting and farming require unique skills, and partly due to the fact that humans perform best when focusing on one thing at a time. Regardless of whether or not you choose to assign different groups to these tasks or not (we recommend that you do!), it’s important to at least treat these two things differently. Give both hunting and farming the time and attention they deserve and don’t put one above the other. Remember, it takes a village to achieve real SaaS success.
Timing is everything.
As we’ve said many times before, your customer’s success is your success. Every aspect of SaaS success (yes, even achieving net negative churn!) requires you to meet your customers where they are and understand their individual journey. As mentioned above, it’s important not to be driven by greed. Rather, account expansion should be thought of as another form of customer success. If you’ve done your job well, the customers in your subscription base are a good fit for your product and your company, and if this is the case, one or more of the account expansion opportunities above will benefit them greatly. Your mission is to show them how and why account expansion can help them achieve their desired goals while also bringing you one step closer to achieving net negative churn. When they win, you win.
A significant portion of successful customer marketing and retention is understanding what your customers need, and when they need it.
However, even when a customer is a believer who proudly endorses your product, the timing is still key. Encourage an upsell too soon and you risk alienating a customer. If you wait too long, you can miss an opportunity to help them achieve their desired results, leading to them losing faith in your product fit. So how can you tell when it’s the right time for account expansion? Data, data, and more data!
Learn everything you possibly can about your customers. Study their email open-rates, their daily usage and engagement, purchasing history, and their product adoption. Talk to them about their goals, concerns, hurdles they’ve overcome, etc. Anything and everything. The more you know, the more they know you care and the easier it is to identify prime expansion opportunities. The road to net negative churn is paved with honesty, communication, customer-centricity and of course – lots and lots of data!