Most 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 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.
I think the idea of negative churn looks attractive, because the mathematical definitions of SaaS churn and SaaS growth are essentially similar, give or take a minus sign.
|SaaS Churn||=||ΔCold||;||SaaS Growth||=||ΔCnew|
|Δt x Ctotal||Δt x Ctotal|
In the above formulas, ΔCold is the number of old customers churned (a negative number), whereas ΔCnew is the number of new customers acquired (a positive number). Or in the case of MRR churn/growth the amount of downgrades and upgrades, respectively.
|SaaS MRR Churn||=||ΔMRRcancellations
|;||SaaS MRR Growth||=||ΔMRRacquisition
|Δt x MRRtotal||Δt x MRRtotal|
NB: While I argue throughout this article that churn should be cleanly separated from growth, there is also ample argument that upgrades and downgrades should not be commingled either, as they are in the MRR formulas above, when these metrics are driven by fundamentally different business processes from acquisition and cancellation respectively.
While churn and growth are simple mirror images in theory, they are completely different in practice. There is a trick in physics, where you can simply substitute -t for t and reverse time in theory, however, going backwards in time in practice is a little more difficult. And, therein lies the problem with negative churn.
In practice, acquiring a new SaaS customer is much more difficult and expensive than keeping one, and losing one is essentially free. Moreover, SaaS churn naturally scales with the size of your customer base. This is the fundamental SaaS growth challenge: SaaS churn is free and naturally viral; SaaS growth is expensive and requires persistence. Achieving viral, organic SaaS churn is a given. Achieving viral, organic SaaS growth requires network effects and economies-of-scale that result from sound business strategy, flawless execution and a little luck to boot. The label “negative churn” sounds too much like a fair fight.
Upsell is Not Negative Churn
That would be a triple negative, but who’s counting? The concept of negative churn is based on the idea that a SaaS business can offset churn with upsell, so that the net change in recurring revenue from current customers is positive. However, there is a flaw in this logic: upsell customers churn too, and when they do, they take all that lovely upsell recurring revenue with them.
Upselling increases the average recurring revenue per customer over time. It is an increase in price, not volume. SaaS churn is fundamentally a volume problem, negative virality. Upselling is better viewed as a transition from one average price scenario to another. It can soften the impact of churn, but it cannot reverse it.
Upselling is better viewed as a transition from one average price scenario to another.
It can soften the impact of churn, but it cannot reverse it.
The chart shows how the SaaS growth trajectory when 50% of customers upsell (red line),
is really a transition from the 5K base price SaaS growth trajectory (green line)
to a higher average price SaaS growth trajectory at full penetration (purple curve).
In the long run, however, churn wins in both scenarios as net customer growth slows.
The main takeaway from the above chart is that to offset SaaS churn for any extended period of time, upsell has to be BIG. This particular example assumes 50% of customers upsell for an average of 2X the initial purchase. In other words, upselling must behave like a viral increase in customers to counter churn in the long run. You must double, triple and quadruple the value of a customer through entirely new products and expansion into new buying centers.
Aside from the economic issues, I think my biggest beef with negative churn is that it is…well…just plain negative. Negative churn feels reactive and resigned. Like you’re hoping to tie, instead of planning to win. Achieving sustained SaaS growth requires creativity and tenacity, a relentless optimism to overpower a tireless enemy. I’d rather strive for viral, organic growth. It just sounds better.
(Cross-posted @ Chaotic Flow by Joel York)