Reducing Churn and Increasing Net Revenue Retention are Critical Growth Levers

For up-and-running SaaS companies, growth isn’t just about GTM–going to market to acquire new customers with marketing and sales efforts. There are other levers that help create more efficient revenue growth in the long run.

The magic of SaaS is consistent, ongoing revenue from most of your customers. Of course, the next growth lever is minimizing customer churn.

SaaS startups quickly realize that losing too many customers every year becomes very expensive and slows growth.

High customer churn is like a leaky bucket that requires more effort and investment to refill every month to get back to net new customer growth.

As your company grows, even a low churn percentage will add up to a large customer number that needs to be refilled before net new growth can occur.

An 8% annual churn for a mid-market product is great, but when you have 500 customers, it requires adding 40 new customers before any net new growth happens, all other things equal.

After you fix the holes in your product and your onboarding process, 50% of your churn is about who you let in the door. Eventually, you have to stop selling to customers who are likely to churn in the first place. That’s real PMF.

Then there’s net revenue retention—the magic of increasing overall revenue from existing customers even when you lose customers every year.

Net revenue retention (NRR) grows by increasing average revenue per customer every year. It’s a perpetual motion machine for SaaS companies.

You can grow revenues without adding new customers by increasing prices, upselling additional products, and expanding usage-based transaction revenue.

In the last two years, efficient SaaS companies have grown more revenues from their existing customers than from adding new ones. Their NRR focus did wonderful things for their cash flow and profits (or burn rates).

It’s no wonder that so many acquirers and private equity buyers immediately run this playbook, starting at the bottom of the revenue funnel: increase value, raise prices, sell more to existing customers, reduce preventable customer churn, and stop wasting money in marketing and sales on customers who won’t stay long.

Reducing customer churn and increasing net revenue retention are major revenue growth levers in themselves, but they also have very positive effects on your new customer acquisition engine with sales and marketing efforts.

  •  Happy customers tell their friends, creating qualified pre-warmed prospects that are the least expensive to acquire. This is especially important in small, connected vertical markets where most buyers talk to each other.
  •  A lower churn rate increases your effective customer lifetime value, so you can spend more to acquire customers at the same LTV/CAC ratio. The company with the highest LTV in your space can spend the most cost per customer to acquire them, which is a GTM superpower.

What other levers do you see that drive efficient revenue growth for SaaS companies?


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