Retaining Customers , Reducing Churn

Editor’s note: Investor and entrepreneur David Gardner is founder of?Cofounders Capital?in Cary and is a regular contributor to WRAL

When it comes to SaaS company valuation multiples used for fund raising or an acquisition,?entrepreneurs typically focus almost exclusively on recurring revenue and growth rate but there?are other metrics that are also very important.

One such metric is customer churn because it has an increasingly significant impact on both recurring revenue and growth rate at?scale.? Churn is a metric that can sneak up on entrepreneurs and rob them of their next round of?funding or the lifestyle they anticipated upon exiting their venture.

CHURN AT SCALE

I remember being introduced to the function of a square root while in a calculus class at?NCSU.? It always amazed me how even with an infinite increase in the size of the equation, its?graph could never exceed a limiting threshold.? In effect, the larger the numbers got, the greater?the effect of the limiting factor.

The shape of that graph pops in my mind every time I think of a company dealing with customer churn.? Let’s say your startup SaaS company has a 4% per month churn rate.? If you gain 10 new customers per month then you’d only be losing (.4) customers per month or around one per?quarter.? This seems insignificant until you realize that in a few years when you have 1,000 customers you will be churning 40 customers per month.? If your sales quota at plan shows 40?new customers per month then unfortunately your venture has reached terminal velocity.? You?will gain 40 customers and lose 40 customers each month.? You can raise more capital and hire?more sales reps to push the cap a little higher but unfortunately, as the number of customers?grows so does the impact of the churn and you will again quickly return to a zero growth?rate. ? The higher your churn rate … the lower your max recurring revenue threshold.

HIGH CHURN CAN HURT VALUATION

A high churn rate will give pause to most VC and financial acquirers.? A VC may see your maximum revenue growth threshold as too low to garner the size of exit they need to make a?good return.? You have probably heard that VCs do not like to invest in ventures targeting small?to medium size businesses (SMB). ? Actually, it is the typical high churn rate associated with the?SMB space to which they object.? Likewise, a financial acquirer usually wants to buy something?that can be grown and resold.? A strategic investor that sees other synergies with your tech or?positioning might be the only exit available to a high churn venture.

CONTROL CHURN THROUGH GOOD CUSTOMER SERVICE

It is impossible to achieve a zero churn rate especially in the SMB and B2C markets.? Some customers will go out of business or be acquired.? However, a competent management team will?in time get a handle on its controllable churn and be able to reduce it significantly.

We have seen churn substantially reduced in our portfolio companies through good customer retention techniques and processes.? These include starting with a purposeful implementation and training process to ensure full customer adoption of the new technology and any workflow changes required.? They build back-office tools to monitor customer usage of their product to gain early warning of potential churn.? They have dedicated client success teams who regularly engage clients to remind them of the value they are receiving.? I have even seen significant improvement in churn by simply limiting sales commission to customers that do not churn within a certain amount of time.? This reduces the propensity of reps to oversell and incentivizes them to better qualify customers and their needs before selling.

CUSTOMER CHURN A KEY METRIC TO LONG-TERM SUCCESS

With so much focus on driving revenue in early stage ventures, stay mindful of customer?churn.? It may not seem as important at first but in the long run it will prove to be one of the most?impactful metrics for your business.