The Three Churn Mitigation Strategies of SaaS Startups

Every SaaS business suffers from churn. If churn isn’t managed properly, the lost revenue from churned customers offsets new revenue and the business flat-lines or suffers negative revenue growth. I’ve seen startups employ three patterns for offsetting churn: acquiring new customers faster, upselling existing customers to buy more software, or structuring pricing to grow with customers.

Each strategy requires different levels of investment but achieves similar results. These strategies are often deployed in addition to a customer success team, which require their own investment.

Below, I’ve modeled a hypothetical company which grows from 100 to 50,000 customers. The business charges an average of $20k per year (ACV) and loses 20% of their revenue to churn annually, net of customer success efforts. For each strategy, I show the investment required to offset revenue churn.

Customers 100 1,000 10,000 50,000
ACV 20,000 20,000 20,000 20,000
Revenue in $M 2 20 200 1000
Revenue Churn as % 20% 20% 20% 20%
Revenue Churn in $M 0 4 40 200
Strategy 1: New Customer Acquisition
CAC 25,000 25,000 25,000 25,000
Customers Req’d to Offset Churn 20 200 2,000 10,000
Average Sales Velocity per Rep per Year 60 60 60 60
Sales Reps Req’d to Offset Churn 1 3 33 167
Investment Required in $M 1 5 50 250
Strategy 2: Account Growth
Upsell Revenue to Offset Churn 0 4 40 200
Conversion Rate of Customers to Upsell 20% 20% 20% 20%
Upsold Customers 20 200 2,000 10,000
Upsold Customers Avg ACV 40,000 40,000 40,000 40,000
Average Sales Velocity per Rep per Year 60 60 60 60
Sales Reps for Upsell 1 3 33 167
Investment Required in $M 0.2 0.5 5 25
Strategy 3: Organic Growth
Annual Organic Growth to Offset Churn 0 4 40 200
Customer CAGR Needed 20% 20% 20% 20%
Average Customer ACV at EOY 25,000 25,000 25,000 25,000
Investment Required in $M ? ? ? ?

The New Customer Acquisition strategy means acquiring new customers to fill the void of churned customers. This is the most expensive strategy to mitigate churn because each new customer costs about 15 months’ worth of contract value to acquire. Plus, the sales team must grow to field these customers. At 10,000 customers, or a $200M run rate, the company must invest $50M in acquiring new customers just to sustain their revenues. If, like most SaaS companies, this one invests about 50% of revenue into sales and marketing, they can generate a 40% total revenue increase, half of which goes to filling the vaccuum left by churn. Then the company’s growth is capped at 20% annually.

The Account Growth strategy requires account managers within the startup to sell more seats or units of the software to existing customers. By growing 20% accounts from $20k ACV to $25k in the first year, account managers offset churn. Upselling existing customers is significantly cheaper than acquiring new customers because a relationship exists already. This model assumes 20% conversion to upsell rate which implies the average contract value for upsold customers must double to $40k. This hypothetical strategy requires the same number of people and labor costs to achieve, but it costs 1/10th the investment of the New Customer Acquisition Strategy because there is no additional CAC.

The Organic Growth strategy is likely most efficient but necessitates tradeoffs. As customers’ needs grow, so does pricing. In this example, if all renewing customers’ revenues grow on average 20% in a year, their growth offsets the churn. The costs of this approach are likely very much lower than the others because the cost of growth is borne by the customer. However, this model only works for particular types of companies, those with utility based pricing or products that enable self-service out grow of contract requirements. So it is hard to model generically. Also, this model trades “frictionless” organic growth for the revenue predictability offered by contracts, another tradeoff.

These three churn mitigation strategies are rarely employed independently, but are often combined. Only in the case of this hypothetical startup is the distinction between them stark and clean. Most startups blend new customer acquisition, account growth and organic growth to nullify churn impact on revenue growth. But I think this framework models the efficiency of each tactic well enough to inform a strategic conversation about which channels are the best ones to keep the business growing.

Published 2013-10-31 in SaaS  Customer Success  Sales 

I'm a partner at Redpoint. I invest in Series A and B SaaS companies. I write daily, data-driven blog posts about key questions facing startups. I co-authored the book, Winning with Data. Join more than 18,000 others receiving these blog posts by email.

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