If a typical SaaS business loses about 2 to 3% of their customers each month to churn, the business must grow by at least 27% to 43% annually to maintain the same revenue.
The idea written as an equation:
Revenue Growth = Customers x Avg. Contract Value x (Growth Rate - Churn Rate)
At the beginning of a SaaS startups' life, when the company generates $1M in annual revenue, churn in absolute dollar terms is small, about $300k for the year. This number is particularly easy to write off if the company is growing quickly, perhaps tripling to $3M in revenue next year. Fast forward two or three years to a SaaS company generating $15M per year and churn is now $5M per year. Then two or three years later that number could be $10M or $20M.
As a startup becomes a growth stage company, churn’s importance grows substantially because the startup is beginning to fight the downward pressure of sales efficiency slowing. New sales processes take more effort and time and expense.
Fast growth doesn’t mask churn rates as it once did and the absolute revenue-at-risk numbers are measured in the millions or tens of millions.
At this stage, the internal capability to save revenue dollars at risk by engaging customers becomes paramount to continuing to grow the business. But scaling a team from nothing to one that can save $10M per year is no mean feat. If one account manager can handle $500k of revenue at risk per year, the customer success team must be 20 people.
This is why customer success must be a core discipline of SaaS startups from the very first day. In addition to being able to scale the team with revenue/churn, the customer success team is on the front lines with customers passing feedback to product and marketing. Customer success provides a check on the sales team, ensuring the right customers are prioritized and closed.
Investing early and often in customer success is essential to keeping a fast-growing SaaS business’s momentum.