5
 min read

Death by Churn

Once upon a time, in a faraway land, there was a Startup full of hopes and dreams. They had searched far and wide and assembled, at great cost, a castle full of Customers. But then the Startup kingdom fell victim to a seemingly harmless looking little monster called Churn and the business died a very, very slow death as all its Customers left… one by one.

The plot....

Once upon a time, in a faraway land, there was a Startup full of hopes and dreams. They had searched far and wide and assembled, at great cost, a castle full of Customers. But then the Startup kingdom fell victim to a seemingly harmless looking little monster called Churn and died a very, very slow death as all its Customers left… one by one.

In this post - we are going cover Churn; what it is, what causes it, and walk through a case study - Castle Software Solutions - to better understand how Customer Churn can undermine the long-term success of a business.

The Churn Monster

Customer churn (or customer attrition) refers to the loss of customers or subscribers. Businesses measure and track churn as a percentage of lost customers compared to total number of customers over a given time-period.

  • In general, B2B firms have an average 5% churn rate, while B2C firms have an average 7% churn rate.
  • Usually tracked monthly and reported at the end of the month.
  • Voluntary churn - happens when your customer chooses to leave the service on their own, whether it’s due to a poor experience or a better competing offer.
  • Involuntary churn - happens when customers leave your service without actively choosing to do so.

What Causes Churn?

  • Budgeting / finance issues
  • Confusing onboarding process
  • Customer fails to see the value proposition of your SaaS long term.
  • Poor customer service or response rates
  • Customer has moved to a competing product/service

Sample SaaS Company - Castle Software Solutions

Castle Software Solutions is a subscription-based cyber-security company that markets to the SMB space. Through social media, partnerships, and an expensive cost-per-click campaign, they currently boast a total of 1000 active customers who each pay a monthly subscription fee of $120.

We will be modelling several different scenarios to show how churn progressively affects Castle Software.

Scenario 1

To view and interact with Scenario 1 LIVE (desktop only) click here.

Castle's onboarding and customer support has been lacking. As a result, they have been experiencing 7% monthly customer churn.

Initial Customers = 1000
Monthly Churn = 7%

To better illustrate the effect of churn, for now we will assume no new Customer Growth.

By year's end, after starting with 1000 Customers, and with a monthly churn of 7%, Castle Software will have lost all but 389 of those initial Customers. The MRR now drops from $120,000 to a measly $46,715. The Churn Monster strikes.

With 7% churn, the resulting LTV (Lifetime Value) for each Customer is $1,714.29.

Scenario 2

Act 2 - it could be worse. Now let's take a look at two even scarier Churn rates; 10% and 13%.

To view and interact with Scenario 2 LIVE (desktop only) click here.

At 10% - those 1000 Customers become 254 by the end of the year. The LTV drops from $1,714.29 @ 7% to $1,200 @ 10%.

At 13% - all that remains are 164 Customers and a staggering 836 users have abandoned Castle Software. 83.6% of their customers have left. MRR is now $19,680 and the new LTV is $923.08; nearly half of what the LTV for a Customer is at a churn rate of 7%

Churn... Meet Growth - Our Knight in Shining Armor

  • Obtaining funding from venture capital (VC) firms is part of the roadmap for a lot of SaaS companies. While growth is usually the first thing VC firms look at in a SaaS valuation, if your churn rates are high, it’s much less impressive.
  • For a company to experience growth it must ensure that its new subscriptions are higher than its lost subscriptions in a given period.

Why Churn, Growth and CAC Matters

  • Monthly recurring revenue (MRR) is the life and blood of a subscription business. Without predictable sources of revenue, it’s impossible to sustain your business over the long-term.
  • Customer Acquisition Cost is the total cost of sales and marketing efforts that are needed to acquire a customer.
  • It can cost seven times more to acquire new customers than to retain current ones. That means for every customer you allow to churn, you’re not just sacrificing the potential revenue they could bring in, but also the money you already invested to get them as customers in the first place.
  • Tracking how much customers will spend on your products or services during their time (Lifetime Value) will help you understand the impact of churn rates.

Scenario 3

This is the big one where we bring it all together. The dramatic conclusion where the hero saves the day, tames the Churn Monster and the Kingdom is saved.

In this model - we'll test three different Growth rates to counteract the negative effects of Churn. But Growth isn't cheap. Historically, it has cost Castle Solution $350 to acquire each of their Customers - better known as CAC (Customer Acquisition Cost).

Using whatifi, we'll also test a Dynamic Growth and Dynamic Churn example where Castle Software Solutions not only edges their Churn rate down over time, but also amps up their sales, marketing and positioning to increase their monthly growth rate.

This Scenario contains 16 different financial models

To view and interact with Scenario 3 LIVE (desktop only) click here.

Why Churn, Growth and CAC Matters

  • Monthly recurring revenue (MRR) is the life and blood of a subscription business. Without predictable sources of revenue, it’s impossible to sustain your business over the long-term.
  • Customer Acquisition Cost is the total cost of sales and marketing efforts that are needed to acquire a customer.
  • It can cost seven times more to acquire new customers than to retain current ones. That means for every customer you allow to churn, you’re not just sacrificing the potential revenue they could bring in, but also the money you already invested to get them as customers in the first place.
  • Tracking how much customers will spend on your products or services during their time (Lifetime Value) will help you understand the impact of churn rates.

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