October 3, 2023
It’s easy to wonder what churn rate has to do with financial health.
After all, it’s knowing how many customers leave over a certain period, right?
With profit and loss statements, balance sheets, and cash flow, churn rate might not be top of mind when checking how your SaaS business is doing financially or when budgeting. Yet, this often-forgotten metric usually has a lot to say!
In this post, we’ll explore the importance of churn rate on your SaaS business’s financial health.
Let’s get started.
Your business needs new customers, but you also need to keep the ones you’ve already acquired. However, acquiring new customers can be costly, and it’s often more cost-effective to keep the customers you already have.
If churn is high, you’re stuck in an endless cycle of budgeting more money on marketing and sales just to replace the customers you’re losing. Fortunately, the various subscription management software can help achieve this task by automating renewals, preventing failed payments, and managing plan upgrades/downgrades.
These tools let you invest more in keeping the existing customers happy and engaged, reducing your overall customer acquisition costs (CAC).
When customers leave, you lose their recurring revenue and the potential to upsell or cross-sell to them. If the churn rate is high, you must allocate more of your budget to marketing and sales just to replace lost customers, straining your financial planning.
With lower churn rates, you free up resources in your budget that you would’ve spent acquiring new customers. Instead, you can reinvest in improving customer retention, like better support or loyalty programs.
Lower churn means more predictable revenue and healthier profit margins, making it easier to plan and manage your finances.
Customer Lifetime Value (CLV) is the total amount of money a customer spends with your business over time, and the churn rate plays a huge part in it. The longer a customer stays with you, the more revenue they bring over time.
If your churn rate is high, customers aren’t sticking around long enough to be valuable.
When you reduce churn, you can extend the length of time customers stay, boosting their lifetime value to your business. And the longer they stay, the more revenue they contribute and the better you budget.
Tracking your churn rate gives you a good idea of how steady your customer base is.
The average churn rate for SaaS companies is about 5-7% per year. If your churn rate is higher, chances are your business is losing customers faster than you're bringing them in, which isn’t ideal. On the other hand, a stable, low churn rate suggests that you’ve got solid offerings that keep customers happy.
This stability can help with long-term business growth and makes it easier to budget and allocate resources effectively.
According to Younium, revenue forecasting using revenue recognition data is among the most important parts of budgeting in B2B SaaS. It helps plan expenses, predict cash flow, and ensure financial stability.
That’s why if churn is all over the place, predicting future revenue gets tricky. Investors, stakeholders, and your finance team rely on accurate numbers to make smart decisions. A steady, low churn rate makes revenue forecasting easier and more reliable since you can estimate subscription renewals, expansion income, and overall cash flow.
Impressing investors isn’t always a walk in the park. Before investing in your business, they want to see stable and growing customer bases.
A low churn rate shows that your business has a loyal customer base, making it more appealing to investors. It also shows that you rarely budget resources to acquire new customers and replace lost revenue.
This is a clear sign of efficient budgeting and resource allocation and that your business is financially disciplined and sustainable. This subsequently builds investor trust and confidence in your business’s potential to make reliable returns.
The SaaS industry is crowded, and customer loyalty is everything. If your churn rate is high, you’re losing customers to competitors who are doing or offering something much better than you.
Keeping churn low means you’re providing real value, which helps you stand out in a crowded market. Satisfied customers are more likely to refer your SaaS businesses to others, giving you a competitive advantage without extra marketing costs.
The SaaS business is changing, and the traditional metrics for checking financial health are no longer enough. Churn rate, long used to check customer-related elements, is now a goldmine for financial information.
If you’re not paying attention to it, you could be losing money, opportunities, and market share. So, start analysing your churn rate today to optimise your SaaS business financial health and budgeting.
