What is the best way to measure churn?
Some people will tell you to go with net dollar churn. Their logic is simple. Net dollar churn captures both revenue losses and gains among your existing customers. You shouldn’t ignore the impact of upsells, cross-sells, and expansion revenue. These components of negative churn are crucial for SaaS companies.
Since churn is not a GAAP accounting metric, there is no clear rule for how companies should report on it. Some public SaaS companies don’t report it at all. For example, RingCentral shares net monthly dollar retention figures in its public filings, which is are consistently above 99%. In contrast, LogMeIn highlights a gross dollar retention figure, which is a worrying 75%.
At first blush, RingCentral’s numbers look way better LogMeIn’s. But this isn’t an apple-to-apple comparison. RingCentral has provided no visibility into customer losses during the period. There could be a big churn problem here that is being covered by upsell & expansion revenue.
The truth is, we don’t know what the real churn picture looks like at RingCentral.
If you want to improve customer retention in your business, gross dollar churn is the winner. Net churn lacks the necessary information needed to identify and fix retention problems.
Let’s discuss why gross dollar churn is the better diagnostic tool for SaaS companies. We will cover a few common SaaS issues that gross churn reveals. Finally, I’ll share some guidance on the right way to use both metrics. Time to dive in!
Net Dollar Churn Hides Business Problems
What is the greatest strength of net dollar churn? It summarizes all revenue changes of existing customers.
But that is also its weakness.
High customer churn from cancelations is easy to hide in a net dollar retention metric. A good sales team with a multi-product portfolio can grow average revenue from existing customers. But that growth is papering over the cracks if you are losing tons of customers each month.
Gross customer churn is a much better tool for revealing business model issues. You can use it to diagnose many of the typical problems facing SaaS companies. Here are a few worth noting.
1. Aggressive selling
If your salespeople are signing deals with bad fit customers, watch out. Gross churn will be high. This is an issue that many SaaS companies have dealt with at some point (even high-flyers like HubSpot).
Gross churn will be your early warning system on a broken sales process. There are a few things you should be looking out for:
Great salespeople can use a range of tactics to get deals across the finish line. But if they don’t value keeping gross churn low, then they will likely attract risky customers.
If you see aggressive selling is increasing churn, there are a couple of good options to fix it.
First, change the sales compensation plan to reward churn-reducing behaviors. There are many ways to do this. You can increase variable payout based on current churn among a sales rep’s sold accounts. You can also tie promotions to a salesperson’s average contract term. That means requiring a certain percentage of contracts sold to be annual or multi-year commitments. Compensation is the clearest measure of salesperson performance. So linking comp to customer value makes the link clear for your sales team.
Second, set up an approval process for discounts and non-standard contract terms. This doesn’t mean you should be micro-manage every deal. Here’s an example scheme to consider. Give salespeople the discretion to offer limited discounts up to 10%. For discounts between 10-20%, a sales manager must sign off. For discounts greater than 20%, the VP of sales must give the ok. This approach sends an unambiguous message: discounts are a big deal. If you don’t normalize heavy discounting, your team will learn how to sell on value. That is a recipe for long-term success.
2. Out-of-date credit card details
Not all churn problems are big and flashy. Your biggest retention issue may be hiding in plain sight.
That’s become some customers disappear without making any fuss. One moment they’re using your service, the next – vanished. How do customers drop off the map without warning? Out-of-date credit card information.
Most SaaS companies allow users to pay by credit card. This makes it super easy to collect payments for a subscription model. But it also has some risks. The typical credit card expires after three years. Do some back-of-the-envelope math, and you’ll find that ~3% of customer credit cards expire each month. Over the course of a year, that turns into a whopping 33%!
Without a proper process for updating credit card details, you could lose up to a third of your customers. These aren’t unhappy users – merely forgetful. Who spends time updating credit card details for all their subscription services? These types of things often slip through the cracks.
Companies like Netflix automate the process of notifying and correcting inaccurate payment details when charges fail to go through. This process, called dunning, is vital for reducing involuntary churn.
Outdated credit card details are the unforced errors of churn management. Don’t allow a simple mistake to cost you future growth.
3. Customer adoption challenges
This is the biggest problem hidden by net dollar churn.
Great product experience is vital to your company’s success. When customers are struggling to get started with your solution, they get irritated. When the struggle continues into daily use, the frustration continues to build.
This product friction lowers the perceived value of your solution. When perceived value decreases too much, customers disengage. Your product no longer solves a problem. It has become a problem.
Product management and customer success teams should be aware of poor customer adoption. But these issues are easy to forget when customer cohort revenue increases steadily.
If you rely on your sales team to “outrun the churn,” you’re ignoring a product problem that will come back to bite you.
To speed up, you need to slow down. Examine your product conversion funnel, identify the bottlenecks where customers are dropping off. Then figure out how you can reduce friction at these pain points.
The answer might not even need a product fix. Make it super easy for users to troubleshoot issues and find solutions on their own, and you can scale your customer success efforts with fewer people. The effectiveness of this approach has led to the rise of easy to digest, self-serve training content.
The HubSpot Academy is an excellent example of this. It provides product training for new customers, as you would expect. But it goes even further than that, offering education on many sales and marketing topics. They also provide free certifications for non-customers. That makes it a lead generation tool for new business too.
Putting It All Together
Relying on net dollar churn is a surefire way to miss significant problems hiding in your SaaS business. But if you pair net churn with gross churn, there are a lot of valuable insights to capture.
Use net churn as a goal-setting metric. Set targets for upsells & expansions, then set your sales team loose! Your customer success managers should also own revenue growth responsibilities.
Use gross churn as a diagnostic metric. Dig into the causes of customer revenue loss, then craft the appropriate solution.
With thoughtful persistence, you can reduce customer churn on an ongoing basis. So don’t deceive yourself with net churn numbers – focus on gross churn instead.