For years I’ve been telling entrepreneurs that a high net renewal rate (and net dollar retention) is one of the most important SaaS metrics. While net renewal rate is important, two people in the last week have told me gross churn — both logo and dollar — is more important. And I believe them.
Why is gross churn more important? Let me count the ways.
- Black and White Value – With gross churn, the math is straightforward: how many customers (or dollars) are up for renewal at the start of the time period vs how many renewed. Pretty easy. Now, for net renewal rate, things get more complicated. Do temporary upgrades/downgrades count? What about deals with subsidiaries or related businesses? You could ask 10 different SaaS companies how they calculate net renewal rate and get 10 different answers. Gross churn calculations should always be the same.
- Ability to Understand – Similar to the first point, it’s much easier to rally the team around a gross renewal rate since it’s easier to understand and calculate. Say we start the year at $10 million in annual recurring revenue and have 20% gross churn, we know directionality that we need to sign more than $2 million of new recurring revenue to grow (assuming no upgrades/downgrades). Now, if we can get better and only have 10% gross churn, we only need to sign more than $1 million of new recurring revenue to grow. Pretty simple.
- Recurrence of Upgrades – People love talking about their > 100% net renewal rate, myself included. Only, it’s much more nuanced than upgrades outweighing churn and downgrades. Are the upgrades across every cohort or do customers primarily upgrade in their first year (implying they’re still rolling it out) and not upgrade after that? Do customers often downgrade in year two or three implying they finished a component of a project or transformation? Are the upgrades primarily from a specific vertical and has that vertical been tapped out? Net renewal rate can become less compelling with a more detailed analysis of the cohorts.
SaaS entrepreneurs should focus on the gross churn rate and ensure it’s as low as possible (under 20% annually for SMB and under 10% annually for enterprise). The old saying that’s it cheaper to retain a customer than sign a new one has never been more true, and is even more important with SaaS.
Make fighting churn a top priority of the company.
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David Cummings, Khareem Sudlow
