When you're an early stage B2B SaaS startup (with less than $2M ARR) finding your ideal customers and turning them into raving fans of your product is all that matters. This is hard work. It is easy to highlight whatever signals that show you are making progress. Don't do that. Keep it simple: Reduce gross churn and keep your cost of customer acquisition low until you've truly found product/market fit. Ignore the allure of "net negative churn" and other vanity metrics. I gave this presentation on October 14, 2016 at #brightconf in Chicago.

1. Churn and what it says
about product/market fit
Brian Kelly
Third Rail Group, Inc.
October 14, 2016
#brightconf

2. Brian Kelly
B2B SaaS product guy
@resetbrian
www.thirdrail.co

3. Startup problem:
Fixation on net negative churn
“It compounds!”

4. Today’s lesson:
Avoid premature optimization
1. Get product-market fit
2. Then scale
This applies to every part of the business:
Engineering, marketing, sales, support, …

5. “What is your
churn?”
Source: Lincoln Murphy (sixteenventures.com) - SaaS Churn Rate: What’s Acceptable?

6. “5% churn isn’t
that bad, right?”
Source: Lincoln Murphy (sixteenventures.com) - SaaS Churn Rate: What’s Acceptable?

7. Gross or net?
Customer or revenue?
Monthly or annually?

8. Ways to measure churn
(of paying customers)
- Gross or net
- Customer count or revenue
- Monthly or annually
Start here.
It’s easier to understand* and
compare gross/mo/cust. churn
But, more importantly:
Gross churn tells us more
about PMF.
* Note: If your SaaS business has a large usage-based revenue component,
you may find rev-based churn more useful, even early on.

9. If you have 100 paying customers on Jan 1,
at a 5% monthly customer churn rate, you’ll only have
54 customers remaining at end of 12 months
Not good.
5% monthly
customer churn
= 46% annual
customer churn
54

10. At 2.5% monthly customer churn,
73 customers remain at end of 12 months
= 27% annual churn

11. At 1% monthly customer churn,
88 customers remain at end of 12 months
Better.
= 12% annual churn
…depending on
your CAC.

12. Quick lesson:
LTV to CAC Ratio and payback period
Source: Matrix Partners (forentrepreneurs.com)

13. An example:
Let’s say that on average…
● It costs $500 to acquire a new customer
● MRR per customer is $50
● Customer churn is 5%
Lifetime value of customer is $1,000.
Calculation: (1/0.05) = 20 months * $50 MRR = $1,000 LTV
2.0 LTV:CAC ratio
10 months to recover
CAC (payback period)

14. Benchmark: SaaS companies selling to SMB
Company (year est.) Customers
ARPU
(Monthly)
MRR
Gross monthly
cust. churn
CAC LTV (months) LTV (dollars) LTV:CAC Ratio
PromoRepublic (2014) 600 $10 $6,000 8.0% $100 13 $125 1.3
Hubstaff (2013) 2,360 $34 $81,125 3.9% $92 7 $686 7.5
Prospect.io (2016) 400 $45 $17,000 6.0% $50 17 $750 15.0
Kit CRM (2014) 2,000 $19 $38,000 4.0% $21 25 $475 22.6
Moz (2007) 22,740 $117 $2,660,824 6.5% $110 15 $1,755 16.0
Unbounce (2009) 11,117 $91 $1,008,865 5.4% $424 13 $1,180 2.8
BatchBook CRM (2006) 10,000 $42 $420,000 5.0% $500 20 $840 1.7
Mindmeister (2013) 30,000 $6 $220,000 5.0% $30 20 $120 4.0
Buffer (2010) 52,624 $15 $790,162 5.0% $50 20 $299 6.0
Aweber (1999) 120,000 $19 $2,280,000 4.0% $95 25 $475 5.0
Contactually (2011) 11,667 $60 $700,000 4.0% $60 25 $1,500 25.0
Source: Nathan Latka (nathanlatka.com) - The Top podcast
Nathan rocks!

15. Benchmark: SaaS companies selling to MM & Entr.
Company (year est.) Customers
ARPU
(Monthly)
MRR
Gross monthly
cust. churn
CAC LTV (months) LTV (dollars) LTV:CAC Ratio
Inspire Beats (2014) 700 $1,899 $1,329,300 6.0% $40 17 $32,283 807.1
Vytmn (2015) 85 $1,200 $102,000 4.0% $3,000 25 $30,000 10.0
RJ Metrics (2008) 400 $833 $333,333 3.0% $5,000 26 $21,667 4.3
Fileboard (2012) 800 $2,083 $1,700,000 3.0% $300 33 $50,000 166.7
Lead Genius (2011) 200 $3,333 $700,000 2.8% $15,000 30 $100,000 6.7
DaPulse (2014) 5,000 $72 $360,000 2.0% $600 50 $3,600 6.0
Ambassador (2009) 300 $1,500 $320,000 1.3% $5,000 80 $80,000 16.0
Mattermark (2013) 500 $833 $275,000 1.0% $20,000 24+ $25,000 1.3
SocialHub.io (2013) 116 $549 $69,333 1.0% $2,047 24 $11,129 5.4
Bounce Exch. (2012) 250 $15,000 $2,500,000 0.0% $3,000 unknown $100,000 33.3
Prosperworks (2011) 40,000 $50 $2,000,000 -1.0% revenue not shared not shared not shared 6.0
Cirrus Insight (2011) 100,000 $6 $640,000 -2.0% revenue $85 48+ $750 8.8
Source: Nathan Latka (nathanlatka.com) - The Top podcast

16. How does MRR and churn affect how
VCs think about investments?
Source: Mamoon Hamid, Social+Capital (slideshare.net) - SaaStr Annual 2015
the part of “my” talk today where I
crib this kickass presentation that
Mamoon Hamid (S+C) gave at
SaaStr Annual 2015
Serious props to these guys for sharing!
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17. Source: Mamoon Hamid, Social+Capital (slideshare.net) - SaaStr Annual 2015

18. Source: Mamoon Hamid, Social+Capital (slideshare.net) - SaaStr Annual 2015

19. Source: Mamoon Hamid, Social+Capital (slideshare.net) - SaaStr Annual 2015

20. Source: Mamoon Hamid, Social+Capital (slideshare.net) - SaaStr Annual 2015

21. Source: Mamoon Hamid, Social+Capital (slideshare.net) - SaaStr Annual 2015

22. Source: Mamoon Hamid, Social+Capital (slideshare.net) - SaaStr Annual 2015

23. Source: Mamoon Hamid, Social+Capital (slideshare.net) - SaaStr Annual 2015

24. Source: Mamoon Hamid, Social+Capital (slideshare.net) - SaaStr Annual 2015

25. —Investopedia (investopedia.com): Quick Ratio
“The higher the quick ratio, the better the
company's liquidity position.”
Source: Mamoon Hamid, Social+Capital (slideshare.net) - SaaStr Annual 2015
and ChartMogul (blog.chartmogul.com) - SaaS Quick Ratio

26. Source: Mamoon Hamid, Social+Capital (slideshare.net) - SaaStr Annual 2015

27. Source: Mamoon Hamid, Social+Capital (slideshare.net) - SaaStr Annual 2015

28. Source: Mamoon Hamid, Social+Capital (slideshare.net) - SaaStr Annual 2015

29. Source: Mamoon Hamid, Social+Capital (slideshare.net) - SaaStr Annual 2015

30. “5% churn isn’t
that bad, right?”
Source: Lincoln Murphy (sixteenventures.com) - SaaS Churn Rate: What’s Acceptable?

31. In summary:
Get product-market fit, then scale
Do Don’t
- Make your product ridiculously
good for a very specific group of
customers (ie. find PMF!)
- Measure gross churn diligently
and always be improving it
- Measure SaaS Quick Ratio and
keep it at 4 or higher
- Only focus on MRR growth
- Think about net churn until
gross churn is <1% monthly
- Drive LTV:CAC ratio below 3
before you have PMF
- Ignore payback period

32. Churn and what it says about
product/market fit
#brightconf
@resetbrian
bk@thirdrail.co
Brian Kelly
www.thirdrail.co
Third Rail Group, Inc.
Q+A