Key Performance Indicators (KPIs) for Software-as-a-Service (SaaS) Companies – CHURN RATE
During their expansion stage, a lot of SaaS companies find themselves in the position where the volume of their revenue and customers accounts put them far ahead of the new startup companies, but their financial infrastructure is far from being well established for successful scaling up and is far from being aligned with the company exit strategy. The Software-as-a-Service business model is so fundamentally different from the traditional Software model that using the GAAP audited financial statements will very often give us very little and even very misleading information for the current state of the business. In a series of blogs I will touch on some of the most important KPIs and KPI benchmarks for the companies in the SaaS industry. These KPIs will provide accurate evaluation of where the business is and should be used to guide and support the decisions of the companies’ management teams.
Today’s phrase is CHURN RATE! A research by Bessemer Venture Partners suggested that the top performing SaaS companies typically achieve annual renewals on a customer count basis above 90%. It may seem obvious that a company needs to carefully follow the number of customers that are leaving, however obvious does not make it a must-do practice. Furthermore, just tracking the total number of customers that churned over time will be of little use, since different customer cohorts have different customer experience and usually tend to use/pay for different amount of service. Therefore it is extremely important for SaaS executives to track the CHURN RATE on CUSTOMER COHOR BASIS. By tracking the churn a company can easily calculate the Average Life of a Customer cohort. For example, if your January customer cohort has shrunk by 20% by February, the average life of that cohort will be 1/20% = 5 months. This simple formula is so important when trying to project the revenue a business will generate, because accurate tracking of the cohort churn rate will avoid the dangerous optimism.
Considering how important churn is, and generally how expensive it is signing a new customer compared to keeping an old one, expansion stage SaaS companies should have a good customer service level tracking matrix as precursor to the churn. I understand that it could be difficult and time-consuming, at first, to dissect your customers into cohorts and track them separately, as well as establish and track the customer service levels, but it will pay back the efforts. The logic is pretty simple, if you want revenue growth you have to not only add new customers but also keep the old ones, and to keep the old customers you will need to make sure that they are happy.
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