SaaS Benchmarking – Churn and Gross Margin

SaaS Benchmarking – Churn and Gross Margin

This post provides SaaS entrepreneurs, Business Managers and Investors with the top 75 best practice benchmarks for your SaaS and Software business. Within this chapter we are covering Benchmarks to keep and grow customers.
The Keep-and-Grow phase is split into two stages to maximize retention and profitability deals with paying customers

  • Retain customers – defining customer churn important to calculate the customer lifetime as well as revenue expansion of paying customers
  • Deliver profitaby – defining the profitability of a paying customer also being relevant to calculate the customer lifetime value

 

Benchmarks to retain customers

The Monthly Churn Rate is the percentage of Monthly Recurring Revenues which are “churning,” that is, being lost on a monthly basis. In general, there is an important distinction between “Revenue Churn” and “Customer Churn”. Whereas Revenue Churn can result from customers downgrading their subscription, Customer Churnresults from Customers who discontinue their subscriptions in a given month.

On the other hand, you have to consider the Monthly Expansion Rate which is the percentage of increase in monthly recurring revenue received from existing customers who increase their purchases of services. This can be achieved by selling more units within the customer’s plan or by the upgrade of a customer into a higher service tier. Ideally, expansion rates are higher than churn rates – delivering a negative net churn.




Churn Impact on Revenue Growth

Reducing Monthly Churn from 4% to 0% doubles MRR within 2 years
FINANCIAL METRICSREVENUE CHURNCUSTOMER CHURNGROWTHREV GROWTH

 

Sales and Marketing Spend Required to Double Revenue by Different Churn Rates

When churn rates rise, more capital is burnt to maintain the same revenue
FINANCIAL METRICSCACCHURNREVENUE CHURNOPEXS&MGROWTHREV GROWTH

 

Annual Net Dollar Retention from Existing Customers

103% median annual net dollar retention rates including churn and upsell’s benefits.
FINANCIAL METRICSCHURNREVENUE CHURNALL PROCESSESCUSTOMER LIFETIME VALUERENEWAL

 

Preferred Method to Measure Churn

Majority of companies measures churn by the number of customer lost
FINANCIAL METRICSCHURNREVENUE CHURNCUSTOMER CHURN

 

Annualized Revenue Churn

35% of companies report high churn (>10%), while 31% have medium churn (5-10%)
FINANCIAL METRICSCHURNREVENUE CHURN

 

Monthly Churn by Growth Rate of Companies

Fastest growing companies (>75% YoY revenue growth) have the lowest churn
FINANCIAL METRICSCHURNREVENUE CHURNCUSTOMER CHURNGROWTHGROWTH RATE

 

Benchmarks to deliver profitably

In order to measure profitability, Gross-Margin is a key metric. Gross Margins primarily depend on the Type of Revenue (e.g. Recurring Revenues vs Professional Service Revenues). The Gross Margin on Recurring Revenues is the percentage of recurring revenues retained after paying the direct Cost of producing the services which were sold. This includes the cost of customer on-boarding, hosting and service.

The Gross Margin Professional Services is the percentage of one-time professional service revenues retained after paying the direct Cost related to that service. This includes the cost of one time services such as service setup, service integration or training.

Obviously, Gross Margins also depend on the scale of the company.

Average Gross Margins by Revenue Types

Gross Margins from Subscriptions are averaging 80% – whereas Gross Margins for Professional Services are around 30%
FINANCIAL METRICSCONTRACT VALUEREVENUESPROFITABILITYGROSS MARGINCOMPANY PROFILESERVICE TYPEPROFESSIONAL SERVICESSUBSCRIPTION SERVICES

 

Median Gross Margins by Revenue Types

Gross Margins for SaaS revenue is the largest (79%)
FINANCIAL METRICSPROFITABILITYGROSS MARGINCOMPANY PROFILESERVICE TYPEPROFESSIONAL SERVICESS- UBSCRIPTION SERVICES

 

Gross Margin Trends over Time for Public SaaS Companies

Gross Margin of SaaS companies increase to 75% over time
FINANCIAL METRICSPROFITABILITYGROSS MARGIN

 

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