The bond between a company's growth prospects and churn is strong. Companies, especially in the SaaS industry, plow away to find new customers only to see it all fade away due to churn. A company able to find new customers at a monthly rate of 5% and facing a 5% monthly customer churn remains stagnant in terms of its customer base. A mere one percentage point decrease in the churn rate would have a major impact on the company's growth over time. How much exactly, depends on the how we define growth:
The choice is not trivial, as in the non-compounding case (Alternative A), the company's growth has an upper limit as churn catches up with the new growth. At some point, the new 4% churn equals the 5% growth, and growth flatlines. This is due to the fact, that churn is always assumed to be compounding, and therefore relative to the previous month, not to a fixed point in time. In Alternative B, there is no upper limit, as growth is relative to the previous time period and compound interest works its magic.
Regardless of the alternative, the impact of the reduction in churn remains large. See the churn calculator below for visualization of this. Companies cannot definitely be categorized under one alternative or the other, as the nature of a company's growth tends to change over time. Generally speaking however, more mature companies in a saturated market tend to gravitate towards non-compounding growth as the avenues for growth are more scarce. Companies in a challenger position and in a growing market however can report compounding growth over long periods of time.
The churn calculator below starts with non-compounding revenue growth, but you can switch between alternatives by toggling the switch. In the default case, we assume a monthly recurring revenue of 25,000, a growth rate (excluding churn, i.e. how much would the company grow in the absence of churn) of 5% and a base churn level of 4% (churn is always compounding, i.e. relative to the previous month). By setting the improved monthly churn at 3%, we can simulate the impact of a one percentage point improvement in the company's churn, from 4% to 3% monthly. See for yourself just how big of an impact such a small change has:
As noted earlier, regardless of the growth case, the impact of a small change in churn has a great impact. In the non-compounding alternative, the amount of extra revenue from the decreased churn rate becomes stable (the area between the two revenue projections gets constant), while in the compounding case, the difference will grow until infinity (see how the area between the two revenue projections keeps growing as time passes).
Finally we get to the punchline. Below I have plotted the 3-year ROIs (return on investment) of selected assets (the S&P 500 index, the NASDAQ index, Apple stock, Bitcoin and Tesla stock) and churn. The return on churn here is calculated by taking the revenue development above (the figures in the graph are linked to the figures below) and assuming a gross profit margin of 75% (margin for SaaS businesses) and a monthly cost of 250 for the churn reduction initiative that is required to achieve the result:
Plugging these figures into the ROI calculator below yields a very high return on investment for churn. (With the default assumptions) you can see that the 3-year return on churn exceeds that of the other assets, including Bitcoin and Tesla. Given the lower risk of losing your capital in investing in churn against investing in bitcoin or Tesla, I am at ease offering SaaS companies this piece of investment advice: invest in churn, or you are sure to miss out.
Need help in calculating the ROI of churn for your business? Or simply want to discuss churn further? Feel free to contact me at firstname.lastname@example.org.
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