churn and what it says about product/market fit

Churn and what it says about product/market fit

Brian KellyThird Rail Group, Inc.

October 14, 2016#brightconf

Brian KellyB2B SaaS product guy

@resetbrian

www.thirdrail.co

http://www.thirdrail.co


Startup problem: Fixation on net negative churn

“It compounds!”

Today’s lesson:Avoid premature optimization

1. Get product-market fit2. Then scale

This applies to every part of the business: Engineering, marketing, sales, support, …

“What is yourchurn?”

Source: Lincoln Murphy (sixteenventures.com) - SaaS Churn Rate: What’s Acceptable?

http://sixteenventures.com/saas-churn-rate

“5% churn isn’tthat bad, right?”



Gross or net?Customer or revenue?Monthly or annually?

Ways to measure churn (of paying customers)

- Gross or net

- Customer count or revenue

- Monthly or annually

Start here.It’s easier to understand* and compare gross/mo/cust. churn

But, more importantly: Gross churn tells us more about PMF.

* Note: If your SaaS business has a large usage-based revenue component,you may find rev-based churn more useful, even early on.

If you have 100 paying customers on Jan 1,at a 5% monthly customer churn rate, you’ll only have54 customers remaining at end of 12 months

Not good.5% monthly customer churn

= 46% annual customer churn

54

At 2.5% monthly customer churn,73 customers remain at end of 12 months

= 27% annual churn

At 1% monthly customer churn,88 customers remain at end of 12 months

Better.= 12% annual churn

…depending on your CAC.

Quick lesson:LTV to CAC Ratio and payback period

Source: Matrix Partners (forentrepreneurs.com)

http://www.forentrepreneurs.com/saas-metrics-2-definitions-2/

An example:Let’s say that on average…

● It costs $500 to acquire a new customer● MRR per customer is $50● Customer churn is 5%

Lifetime value of customer is $1,000.Calculation: (1/0.05) = 20 months * $50 MRR = $1,000 LTV

2.0 LTV:CAC ratio

10 months to recover CAC (payback period)

Benchmark: SaaS companies selling to SMBCompany (year est.) Customers ARPU

(Monthly) MRR Gross monthly cust. churn CAC LTV (months) LTV (dollars) LTV:CAC Ratio

PromoRepublic (2014) 600 $10 $6,000 8.0% $100 13 $125 1.3

Hubstaff (2013) 2,360 $34 $81,125 3.9% $92 7 $686 7.5

Prospect.io (2016) 400 $45 $17,000 6.0% $50 17 $750 15.0

Kit CRM (2014) 2,000 $19 $38,000 4.0% $21 25 $475 22.6

Moz (2007) 22,740 $117 $2,660,824 6.5% $110 15 $1,755 16.0

Unbounce (2009) 11,117 $91 $1,008,865 5.4% $424 13 $1,180 2.8

BatchBook CRM (2006) 10,000 $42 $420,000 5.0% $500 20 $840 1.7

Mindmeister (2013) 30,000 $6 $220,000 5.0% $30 20 $120 4.0

Buffer (2010) 52,624 $15 $790,162 5.0% $50 20 $299 6.0

Aweber (1999) 120,000 $19 $2,280,000 4.0% $95 25 $475 5.0

Contactually (2011) 11,667 $60 $700,000 4.0% $60 25 $1,500 25.0

Source: Nathan Latka (nathanlatka.com) - The Top podcast Nathan rocks!

http://nathanlatka.com/11-saas-companies-reveal-mrr-saas-metrics/

Benchmark: SaaS companies selling to MM & Entr.Company (year est.) Customers ARPU

(Monthly) MRR Gross monthly cust. churn CAC LTV (months) LTV (dollars) LTV:CAC Ratio

Inspire Beats (2014) 700 $1,899 $1,329,300 6.0% $40 17 $32,283 807.1

Vytmn (2015) 85 $1,200 $102,000 4.0% $3,000 25 $30,000 10.0

RJ Metrics (2008) 400 $833 $333,333 3.0% $5,000 26 $21,667 4.3

Fileboard (2012) 800 $2,083 $1,700,000 3.0% $300 33 $50,000 166.7

Lead Genius (2011) 200 $3,333 $700,000 2.8% $15,000 30 $100,000 6.7

DaPulse (2014) 5,000 $72 $360,000 2.0% $600 50 $3,600 6.0

Ambassador (2009) 300 $1,500 $320,000 1.3% $5,000 80 $80,000 16.0

Mattermark (2013) 500 $833 $275,000 1.0% $20,000 24+ $25,000 1.3

SocialHub.io (2013) 116 $549 $69,333 1.0% $2,047 24 $11,129 5.4

Bounce Exch. (2012) 250 $15,000 $2,500,000 0.0% $3,000 unknown $100,000 33.3

Prosperworks (2011) 40,000 $50 $2,000,000 -1.0% revenue not shared not shared not shared 6.0

Cirrus Insight (2011) 100,000 $6 $640,000 -2.0% revenue $85 48+ $750 8.8

Source: Nathan Latka (nathanlatka.com) - The Top podcast

http://nathanlatka.com/11-saas-companies-reveal-mrr-saas-metrics/

How does MRR and churn affect how VCs think about investments?

Source: Mamoon Hamid, Social+Capital (slideshare.net) - SaaStr Annual 2015

the part of “my” talk today where I crib this kickass presentation that Mamoon Hamid (S+C) gave at SaaStr Annual 2015

Serious props to these guys for sharing!

<

>

http://www.slideshare.net/03133938319/saastr

—Investopedia (investopedia.com): Quick Ratio

“The higher the quick ratio, the better the company's liquidity position.”

Source: Mamoon Hamid, Social+Capital (slideshare.net) - SaaStr Annual 2015 and ChartMogul (blog.chartmogul.com) - SaaS Quick Ratio

http://www.investopedia.com/terms/q/quickratio.asp


https://blog.chartmogul.com/saas-quick-ratio/

“5% churn isn’tthat bad, right?”



In summary:Get product-market fit, then scale

Do Don’t- Make your product ridiculously

good for a very specific group of customers (ie. find PMF!)

- Measure gross churn diligently and always be improving it

- Measure SaaS Quick Ratio and keep it at 4 or higher

- Only focus on MRR growth

- Think about net churn until gross churn is <1% monthly

- Drive LTV:CAC ratio below 3 before you have PMF

- Ignore payback period

Churn and what it says about product/market fit

#brightconf

@resetbrian

[email protected]

Brian Kelly

www.thirdrail.co

Third Rail Group, Inc.

Q+A

mailto:[email protected]

mailto:[email protected]



churn and what it says about product/market fit

Software