📈 Chartpack: Retention and Churn rates
Comparing churn across industries, product verticals and generations
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Hi product people 👋,
Rich here from the Department of Product. Our Chartpacks are designed to equip you with data and insights from across the tech industry so that you can stay ahead and make smarter strategic decisions in your business.
The topic for this edition of Chartpacks is retention and churn. With low interest rates coming to an abrupt end and the wider macro economic climate taking a turn for the worse over the last year or so, consumers and businesses alike have tightened their belts and cut non-essential spending. For subscription-based products, this has naturally meant an increase in churn which in turn has led to some companies increasing their prices.
If you’re working in a SaaS or subscription business, we’ll use this Chartpack to help you to understand what’s happening in the wider market along with some tactics on how to weather the storm.
Coming up:
Market analysis and industry benchmarks - what does churn look like for B2B and B2C products?
A closer look: 3 companies under the spotlight
Understanding generational trends and how to reduce churn
Tools you can use for measuring churn and setting prices
Market analysis and industry benchmarks
Tech companies are currently experiencing some of the highest churn rates in modern history. The health of subscription-based businesses is ultimately the result of balancing 3 metrics: new customers, churn and revenue. If churn increases and new net sales and revenue fail to make up for the loss of customers, a subscription based business shrinks.
For product teams, this is a constant struggle to contend with. At the heart of every product is value delivery: offering customers what they want at a price they’re willing to pay. High retention is a strong indication of product market-fit. But for subscription businesses operating in a challenging macroeconomic environment, even if customers find your product valuable, they may not be in a position to continue paying for it.
And we’ve started to see the real world impact of the economic climate on product development, too. Not just in the tens of thousands of layoffs, but also in product strategy. Monetization is now a core part of tech companies product roadmap priorities and in the face of increases in churn, subscription companies including Netflix, Spotify and iCloud have hiked up their prices.
But what does the market data tell us?
The ProfitWell B2B SaaS Churn Index is a 7 day rolling average measurement of lost monthly recurring revenue due to churn across tens of thousands of B2B SaaS companies.
The reading for May 2023 shows the index dropping to -1.96 which is equivalent to the highest churn rates since the index began in 2019. It is not meant to be used as an exact measure of churn but is designed to help businesses understand the directional trends of churn.
More SaaS, more apps, more churn
A recent study showed that the average department uses 87 SaaS apps with some of the top apps including Salesforce, LinkedIn, Docusign and Miro.
The same study also showed that only 47% of SaaS licences are actually ever used. A remarkably dismal statistic but not too different from where it has been in previous years. The difference now though, is that CFOs are increasingly putting SaaS under the spotlight when budgets tighten.
Churn and company size
Churn rates are also impacted by the size of the company using your product.
As you might imagine, a smaller business with smaller budgets is likely to be more financially prudent and careful when it comes to measuring utilisation rates of SaaS products when compared to larger companies. And this is played out in the data, too.
When categorised according to annual recurring revenues (ARR), the smaller the company, the higher the churn rate.
Companies with ARRs of less than $300k have a median churn rate % of 6.0%. Compare that to companies with $15-$30 million ARR and the number drops to just 1% median monthly net churn rate.
This has implications for product companies who are developing their go to market strategy or setting upcoming roadmap priorities. How? If churn is likely to be much lower for high ARR enterprise customers for example, does it make sense for your company to pivot its offering to cater more to enterprise needs than smaller SMEs?
It’s rarely possible to target both SMEs and enterprise businesses, particularly in the early days of a business, and landing an enterprise client in the first place is often far more difficult than onboarding a smaller company, but it’s a consideration nonetheless.