Churn is the single most important metric for SAAS companies. Most finance professionals, especially if they come from the on-premise world, will continue to look for traditional profitability metrics like profit margin and gross margin or total revenue.
The primary difference between a SAAS company and an on-premise company is that the revenue from the customer is not guaranteed on day 1 as is the case in the on-premise world. Once a sale is done or a CD is shipped the entire $240 can be booked as revenue. In the SAAS world, it would take two years of a happy customer to bring in the same amount of revenue. Inherently, the customer is highly unprofitable the first few months as the company just spend dollars on customer acquisition (CAC) and the customer needs to stay on the product to deliver the full lifetime value. Any amount of churn eats into the potential lifetime value of the customer. Inherently, the newer customers are way less profitable than the longtime customer and hence customer support & care is a very important department, a department that had traditionally taken a backseat in the conference room.
It is interesting to note that a 2.5% difference in monthly churn can make things look dramatically different. Take this example, where a company acquires 100 customers each having a monthly recurring revenue of $25. Cost of acquiring each customer is $100. Assuming a churn of 2.5%
The primary difference between a SAAS company and an on-premise company is that the revenue from the customer is not guaranteed on day 1 as is the case in the on-premise world. Once a sale is done or a CD is shipped the entire $240 can be booked as revenue. In the SAAS world, it would take two years of a happy customer to bring in the same amount of revenue. Inherently, the customer is highly unprofitable the first few months as the company just spend dollars on customer acquisition (CAC) and the customer needs to stay on the product to deliver the full lifetime value. Any amount of churn eats into the potential lifetime value of the customer. Inherently, the newer customers are way less profitable than the longtime customer and hence customer support & care is a very important department, a department that had traditionally taken a backseat in the conference room.
It is interesting to note that a 2.5% difference in monthly churn can make things look dramatically different. Take this example, where a company acquires 100 customers each having a monthly recurring revenue of $25. Cost of acquiring each customer is $100. Assuming a churn of 2.5%
Contrast that with a churn of 5% . Pay close attention to the green colored area and how that changes dramatically to the point that the negative value of the customer in the initial period almost cancels the positive lifetime value of the customer.
Contrast that with the 7.5% monthly churn. Here you have no profits and goes back to why CAC to LTV ratio is so important to track.
No comments:
Post a Comment