SaaS Benchmarking – Churn and Gross Margin
- Benchmarks to retain customers
- Benchmarks to deliver profitably
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.
|Reducing Monthly Churn from 4% to 0% doubles MRR within 2 years|
|FINANCIAL METRICS– REVENUE CHURN– CUSTOMER CHURN– GROWTH– REV GROWTH|
|When churn rates rise, more capital is burnt to maintain the same revenue|
|FINANCIAL METRICS– CAC– CHURN– REVENUE CHURN– OPEX– S&M– GROWTH– REV GROWTH|
|103% median annual net dollar retention rates including churn and upsell’s benefits.|
|FINANCIAL METRICS– CHURN– REVENUE CHURN– ALL PROCESSES– CUSTOMER LIFETIME VALUE– RENEWAL|
|Majority of companies measures churn by the number of customer lost|
|FINANCIAL METRICS– CHURN– REVENUE CHURN– CUSTOMER CHURN|
|35% of companies report high churn (>10%), while 31% have medium churn (5-10%)|
|FINANCIAL METRICS– CHURN– REVENUE CHURN|
|Fastest growing companies (>75% YoY revenue growth) have the lowest churn|
|FINANCIAL METRICS– CHURN– REVENUE CHURN– CUSTOMER CHURN– GROWTH– GROWTH 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.
|Gross Margins from Subscriptions are averaging 80% – whereas Gross Margins for Professional Services are around 30%|
|FINANCIAL METRICS– CONTRACT VALUE– REVENUES– PROFITABILITY– GROSS MARGIN– COMPANY PROFILE– SERVICE TYPE– PROFESSIONAL SERVICES– SUBSCRIPTION SERVICES|
|Gross Margins for SaaS revenue is the largest (79%)|
|FINANCIAL METRICS– PROFITABILITY– GROSS MARGIN– COMPANY PROFILE– SERVICE TYPE– PROFESSIONAL SERVICESS- UBSCRIPTION SERVICES|
|Gross Margin of SaaS companies increase to 75% over time|
|FINANCIAL METRICS– PROFITABILITY– GROSS MARGIN|