So your customer success team is up and running, revenue churn is down to a record low of 0.5% per month, and everything is right in the world. Or is it? Yes, a 0.5% monthly churn rate gives your company a solid chance at expanding revenue by adding the necessary number of new customers to not only offset churn but to also grow the business. However, could you be doing more; should your team aim to achieve negative customer churn rates?
What is negative customer churn and why is it so appealing?
Negative customer churn rates occur when the revenue from your existing customer base grows quickly enough to offset the revenue lost from customers who canceled during that time period. Negative churn is a bit of a contradictory statement- how can churn be negative? In reality, negative churn is an attempt to understand net organic revenue growth in terms of the churn rates you know and love. Not everyone is a fan of the term, with some folks preferring to calculate organic net revenue rates separately.
With all that said, why exactly is negative churn so appealing? When churn rates rise, a startup begins to burn much more capital to maintain the same revenue. As I mentioned in a previous post, the difference between a slightly positive churn rate and negative churn could mean millions of dollars in lost profit and sunk capital. From that post:
Graph #1 (above) shows the potential impact a slightly negative customer churn rate could have over time. If you made just 0.25% more revenue each month, over 3 years you would bring in $21 million more than a company running a 5% monthly churn rate.
Pricing your product for success
The most important step towards hitting negative customer churn rates is to ensure your pricing structure allows for opportunities to increase revenue from existing customers. You will never be able to achieve additional revenue growth with your existing customers if your pricing is capped at say $5,000/month based on an “all you can eat” product license. It is ideal to create a value-based pricing model where your company benefits from a customer’s increased success with your product. To do this, create scalable pricing axes. There are a few different axes you can experiment with when it comes to pricing out a SaaS product.
Product Features: Restrict certain features to higher priced plans
Number of seats: The more seats (users) a company has, the higher the cost
Higher Utilization: Explore what “utility” your company might be offering and aim to capture additional revenue as utilization increases. A good example of this model is Dropbox, which charges users based on how much storage space they need. Most customers start with a modest plan that meets their current needs. However, as they move more and more of their files onto Dropbox, they have to pay for increased storage space
Cross-Sell: Sell your current customers other services that are complementary to your core product offering
Companies can also incorporate two to three of these axes into “packages”, which is the approach Slack is using. Another approach is to establish values for each of these axes in the initial contract and upsell based on changes. For instance, if a client wants to add more users and increase their utilization, your company should consider re-negotiating the contract so that you’re able to capture more revenue. Both cross-selling and upselling can be hugely impactful because there is no CAC to invest in securing this new revenue.