001 – Negative Churn
Is this the holy grail of SaaS?
Hey! Sam here. Thanks for stopping by. I’ve wanted to start writing for a while, so here’s my first shot at it. I haven’t always been great at sticking with strict routines, but I’ll do my best to publish these as frequently as I can.
If you’re reading this, you might be interested in growth, startups, tech, product or anything in between. In each issue, I will try to break down an interesting growth concept or story I’ve dug up, and maybe share new product discoveries, awesome companies to look out for and thought-provoking growth-related content I’ve stumbled upon.
I find writing to be one of the better ways of retaining information. So, perhaps selfishly, one of the main reasons I’ve decided to start this was to help crystallize my thinking – to help me memorize these concepts better. I hope these posts will do the same to you.
I hope you enjoy this first issue, and don’t hesitate to shoot me an email if you have any questions!
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What is negative churn?
Not long ago, I was introduced to the concept of Net Negative Churn. Among highly successful entrepreneurs, net negative churn is viewed as the holy grail of SaaS. Here’s what it means:
When you have net negative churn, the additional revenue you generate from your existing customers month over month is outpacing the revenue you're losing through cancellations and downgrades. (Source)
In other words, the additional revenue you generate from your existing users exceeds the loss of revenue from downgrades and cancellations. It looks like this:
It’s an incredibly attractive metric because it means that even when you can’t add new users, or when increasing prices is not easily achievable (say, during a financial crisis), your revenue still goes up day by day.
Rob Walling, the founder of Tiny Seed, Drip and a host of other SaaS products, was recently interviewed on the IndieHackers podcast, and said:
I think net negative churn […] is the golden ticket of SaaS. It’s the pinnacle. It’s the thing you aspire to do. […It means that] if you literally added zero new customers, your revenue would increase month-to-month. (Source)
When asked about the potential of starting another SaaS business on that podcast episode, Walling said he would only start another one if net negative churn is possible.
A prime, but somewhat of under the radar, example of negative churn is Outreach. Late last year, during an interview on Nathan Latka’s Podcast, Outreach CEO Manny Medina mentioned that his company was hitting 145% net revenue retention. This means that the revenue they generate from their existing customers is 45% more at t₁ than it was at t₀. In other words, they have a 45% negative churn (wow)!
There are a number of ways to model a business that has the potential of achieving negative churn. Some examples are:
Seat-based. Having a seat-based model means that, organically, over time, as your customer’s business grows, more and more people within their organization will want to have access to your product. Some examples are Hubspot, Salesforce, Intercom, etc.
Resource-based. This means that the more a customer uses your product, the more they get charged for it. A prime example is AWS. When their users get successful and grow, it means they need more storage, servers, etc., which means more $ for Amazon.
There are surely more ways of achieving negative churn, but these two are probably the most powerful and widely spread.
If you’re thinking about starting a business, it’s a good idea to think about ways to foster negative churn.
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Cheers!
Sam 🚲