Negative Churn | It’s Not that I Don’t Dislike It, I Do

negative churnMost of us were taught at an early age that double negatives are a bad thing, because they are unnecessarily complicated and increase the chances of miscommunication. It is with this principle in mind, that I propose that we permanently ban the ridiculous term “negative churn” from the SaaS metrics vocabulary. Churn is negative growth. Negative churn is simply growth.

Many of my esteemed SaaS colleagues have casually adopted the negative churn idea without issue, such as this post by David Skok, and this one by OpenView Partners, and this one by Lincoln Murphy, and to my knowledge the very first one by Daniel Drucker who attributes the origin of negative churn to the folks at Bessemer Venture Partners. A very prestigious group of SaaS metrics experts indeed. So, what’s got my goat?

SaaS Growth vs. SaaS Churn

Negative churn implies that the economics of SaaS growth are the same as SaaS churn, only reversed. This is not the case. The business processes and customer decisions that drive SaaS growth are fundamentally different from those that drive SaaS churn. For example SaaS growth might be driven by a sales process that targets a customer need, whereas SaaS churn might be driven by a customer going out of business. As metrics, these numbers are intended to measure those processes. When they are commingled, they lose their value.

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SaaS Marketing | Accelerating Customer Acquisition

saas marketing acceleration SaaS marketing professionals know that customer acquisition is the name of the game. What they generally don’t know is that sustainable SaaS growth requires accelerating customer acquisition. In the long run, acquiring more customers is not enough. Your SaaS marketing strategy must aim to acquire more customers, faster. Otherwise, churn wins and you stop growing.

This is the second post in a series that paves the path to sustainable SaaS growth. The first post in this series introduced the three fundamental levers of SaaS growth: customer acquisition, customer lifetime value and viral customer network effects. This installment explores the first lever and provides four proven SaaS marketing strategies to drive SaaS growth by accelerating customer acquisition.

The SaaS Marketing Mandate: Remove Buyer Roadblocks

While shopping can be fun, buying a SaaS product is hard work. As the buyer, you have to figure out your problem, research and evaluate solutions, negotiate a purchase, and learn how to use yet another piece of software. Unfortunately, most SaaS vendors make it even harder than it has to be. Without world-class SaaS marketing, the typical SaaS product is hard to find, hard to understand, hard to buy and hard to use. And, every ounce of work creates a roadblock for the would-be buyer.

saas marketing roadblocks

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The fundamental goal of SaaS marketing is Continue reading "SaaS Marketing | Accelerating Customer Acquisition"

Driving SaaS Growth Through The Customer Lifecycle

saas growth SaaS growth isn’t a goal; it’s an obsession. The good news is that SaaS growth can be very smooth and predictable, because of the SaaS recurring revenue subscription model. The bad news is that SaaS growth can also be predictably slow the bigger you get. After a few years of rapid SaaS startup growth, it’s easy to find yourself on the short end of the hockey stick if you don’t know the right levers to push.

The Three Levers to Break Through the SaaS Growth Ceiling

At any given time, you can calculate the SaaS growth ceiling for your SaaS business with a simple formula: customer acquisition rate divided by percentage churn rate. For example, if you acquire 200 new customers each year and your percentage annual churn rate is 20%, then at 1,000 customers ( 200 / 20% ) your growth will slow to zero, because customer churn will equal new customer acquisition of 200 customers per year. New customers come in the front door, while old customers leave out the back. Moreover, you will begin to hit the SaaS growth ceiling in exactly one average customer lifetime of 5 years, equal to 1 divided by your 20% churn rate. Finally, your SaaS growth revenue ceiling will equal 1,000 customers times your average customer subscription, e.g., $10M per year for an average subscription of $10,000 in annual recurring revenue. Without a fundamental change to your business, that’s all the SaaS growth you get.

This SaaS growth ceiling depicted in this example is calculated generally by the following basic formulas from the SaaS metrics series.

max SaaS company # customers = acquisition rate ÷ % churn rate

max SaaS company revenue = acquisition rate x average subscription value ÷ % churn rate

Alternatively…

max SaaS company revenue = acquisition rate x average customer lifetime value

This last formula highlights two of the three fundamental SaaS growth levers: acquire customers faster and increase customer lifetime value. If you double your customer acquisition rate, the SaaS growth ceiling doubles with it. Double customer lifetime value by doubling average subscription value or halving your churn rate and again the SaaS growth ceiling doubles.

In the end, however, churn always wins. Churn scales with the size of your customer base. Churn is negatively viral and can only be countered completely by a positively viral growth lever: network effects. Adding more sales reps and increasing your marketing spend are not enough. These strategies may increase your acquisition rate, but to outpace churn you must increase your acquisition rate again and again and again.

The SaaS Growth Levers Follow the Customer Lifecycle

The three fundamental SaaS growth levers: customer acquisition rate, customer lifetime value and viral customer network effects arise naturally and sequentially as a SaaS business matures. Continue reading "Driving SaaS Growth Through The Customer Lifecycle"

SaaS Business Model Competitive Advantage Revisited

What is SaaS? We seem to need to ask this question every couple of years, because the answer is a bit of a moving target. It was simple enough when SaaS was merely software applications pushed through a Web browser, but now we have to contend with the cloud, mobile and even social. Recently, Scott Maxwell of OpenView partners sparked an interesting debate on the topic on LinkedIn that got me pondering it again. I’ve weighed in on the “What is SaaS?” question before, however, every time I encounter this debate, I can’t help feeling that it skirts the more important issue: Why SaaS?

saas business model why

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When trying to create a successful SaaS business model, being SaaS is interesting, but doing SaaS is essential. It’s far less important that your SaaS business model meet the exact definition of SaaS, than it is that your SaaS business model creates sustainable competitive advantage through SaaS. Why be SaaS in the first place? Why not just be software? At any rate, this recent debate got me to re-reading some of my old blog posts on the topic and I realized that they were very text heavy and could use an upgrade. So, in this post I revisit the topic of “Why SaaS?” with a short visual tour of SaaS business model basics.

SaaS Business Model Economics

At the risk of repeating myself, I will repeat myself. The only difference between software and software-as-a-service is that SaaS is delivered over a standards-based network called the Internet. Therefore, all new economic value and competitive advantage must flow from this difference.

The SaaS business model creates competitive advantage in two Internet enabled flavors:

  1. Lower costs from…
    • Network automation of labor-intensive services and business processes
  2. Economies-of-scale from aggregating customers via the network onto a uniform infrastructure
  3. Differentiation from…
    • Reengineering business processes and service delivery through network automation
    • Network effects enabled by customer-customer interaction

Yes, it’s a mouthful. So let’s look at some pictures.

saas business model competitive advantage

Competitive advantage in the SaaS business model comes from leveraging the customer-vendor network connection to reengineer business processes and service delivery, while building a large customer base to create economies-of-scale and network effects.

Network Automation in the SaaS Business Model

SaaS begins and ends with the Internet. The first impact the Internet has in SaaS is to connect the customer to the SaaS business through the product. Let’s think about that for a minute. How many products do we use everyday that can make this claim? Continue reading "SaaS Business Model Competitive Advantage Revisited"