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Virtual CFO for SaaS

April 16, 2019

Cohort Survival Rates > Gross Churn

I get asked pretty frequently about churn rates being available as an input to the modeling that happens underneath the SimSaaS hood.

The truth is, although it's easy to multiply last month's revenue by a fraction to get a new MRR number, gross churn is a terrible way to forecast the growth of a SaaS business, which lives and dies by the survival of its subscriptions. And what dictates survival? Product stickiness, aka "long-term cohort survival rates."

To illustrate this point, consider the following two lives of the same SaaS company.

In both cases, we will assume fairly normal 8% churn MoM of monthly subscriber. Both are enjoying good growth for now (although the weaker one doesn't know he's living in the worse universe), thanks to a referral program that's generating 4 new leads per signup. Awesome!

But what happens when each has a different percentage of subscribers cancel or stay with the service long-term?

First, the weakest case -- everyone cancels eventually. This is a common situation with SaaS products with weak fit. As soon as acquisition slows, revenue will flatten and ultimately decline. The product simply isn't mission critical, or is easy to replace with a competitor.

Before you think this is terrible ... keep in mind that the longest-lived customers will still subscribe for almost 4 years!

And here's the revenue:

Looks okay at $59k average MRR. Right?

But what would happen if we figured out a way to create a moat around our business, such that canceling is inconceivable for 75% of our customers? The kind of product that people plan to buy and keep as long as it's sold. The kind where switching to a competitor isn't easy, or perhaps just not worth it?

Revenue on the same time horizon nearly doubles to $116k average MRR!

Maybe 75% feels unrealistic, too ambitious for your product strategy. Let's lower it to 35%. Roughly 1 out of 3 of your paying customers absolutely loving your product for the price they pay. Revenue becomes this:

In the average case, for this particular startup, a product strategy with a goal of getting one-third of your customers to stick around long-term is worth an extra $120k annually in 23 months. And this will compound as the subscriber base grows.

Thanks for learning more about the stickiness feature. The ability to select a long-term retention rate is available through our Advanced plans. You can find the slider under "Product."

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