Two ways to visualize the importance of churn & expansion.

A primer to help executive teams invest in what matters.

Sponsored by Churnkey: Churnkey helps subscription companies like Jasper, Veed.io, and Copy.ai, to drastically reduce voluntary and involuntary churn. On average, Churnkey saves companies 20%-40% of subscription revenue that would otherwise be lost to churn.

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Paying attention to churn is what separates the growth heroes from the growth zeroes. Churn is the inverse-metric for retention, and understanding how you’re keeping or losing customers should be the #1 priority for every team. But most teams ignore it. 

Why? I think there are two reasons. 

For one, company and executive priorities. Retention will make or break your company revenue model, but for some reason, many organizations only seem to care about the top of the funnel (and, yes, they always think it’s a funnel 🤮). Nod along if you’ve heard this one before: “We need more revenue… that means we need more customers… that means we need more leads. Hey, can you make us go viral???”

There’s a lot to unpack there, but the point is: Growth teams often don’t deal with churn & retention, because the value isn’t fully appreciated.

The second issue is related: Lots of teams just don’t know how to approach churn. Maybe because companies don’t always value it, which means that the methodologies don’t get the attention or funding. There are tried and true ways to manage churn, but I’d be surprised if you’ve heard them even 1/10th of the number of times you’ve heard “How to boost your landing page conversion rates!” (Maybe 1/100th?)

So, although I can’t make your leadership team care about the right part of the funnel, I can give you some context to make the argument and some key frameworks to understand the different types of churn and how you should be measuring it.

Ready to jump in? Let’s go!

Example #1: The Magic of the Revenue “Smile Curve”

Revenue can grow via:

1. Adding new customers to the user base, aka new revenue.

2. Selling more to the existing retained customers, aka expansion.

The ability to diversify your revenue growth by flexing both acquisition and expansion is… everything.

To measure expansion, SaaS companies generally use Net Dollar Retention (NDR):

Here’s an example to make NDR calculation a little clearer:

A business starts the year with $500,000 in annual recurring revenue. Over the year:

→ Some existing customers decide to upgrade their subscriptions, paying $100,000 more.

→ Some customers decide to reduce their subscription, causing a reduction of $30,000.

→ Some decide to stop their subscriptions altogether: $10,000 in total.

Plotted into our above net dollar retention rate formula, the equation becomes:

($500,000 + $100,000 - $30,000 - $10,000) / $500,000 x 100 = 112% NDR

That year, the existing business grew by 12% ($60,000) in ARR. Any new revenue they acquired through acquisition and conversion of new customers is just a cherry on top!

A NDR > 100% means that the revenue generated from existing customers is expanding, compensating for any loss due to customer churn within that specific group. This means your revenue grows even if you don't acquire new customers. The existing user base plays the key role in your overall revenue growth of revenue.

When a company's NDR < 100%, it's experiencing shrinking revenue from its existing customers. This company musts get new customers to compensate for the loss with its existing user base.

The fastest growing businesses in the world all have NDR > 100%.  They diversify their revenue growth across both new and existing customers.

Best-in-class NDR rates are > 120%. This means even if a business doesn't get new customers, its revenue grow over 20% year-over-year. Which is fantastic!  For example, Snowflake and Twilio NDR were 138% and 155% at the time they went public.

Want to see how powerful this can be? Let’s look at some charts.

Unfortunately, churn is unavoidable.

50%, gone in a snap.

The best you can hope for is a short drop and then a flat line. Get to a stable plateau as fast as possible and you’re good—that’s the goal! You should visualize your churn on a cohort basis via a spaghetti chart, plotting the term on the x-axis and any given customer cohort retention on the y-axis.

But when you look at the revenue generated from the cohort, there’s hope for a completely different shape: A smile! 😊

Here’s a hypothetical example that assumes the churn rate (blue line) and an NDR of 120%, with the green line (revenue) showing that coveted ‘smile’.

As you can see, the revenue from the cohort initially decreases, as accounts in the cohort churn out. But over time, you should see the trend reversing—although the number of accounts in the cohort remains the same (or continues to decrease), the dollars from each account will grow, as you expand revenue within each one.

If this won’t sell your execs (it should), then try this…

Example #2: The Layered Cake

If you pay attention to how businesses—especially subscription businesses—build revenue, it looks kind of like a layer cake (or maybe a mountain?)

If you have NDR > 100%, it may look like this (real example from Slack!):

You can see that each cohort expands in its contribution to the overall revenue over time. Such a beauty.

If NDR ~100% it may look like this (hypothetical example):

Here, each cohort continues to contribute a meaningful amount to the overall revenue.

The main point is that after 6 or 7 years in business, as much as 80% of revenue comes from existing accounts. Despite the leadership’s insistence that we should be frantically chasing net-new accounts, many mature businesses only receive 20% of their overall revenue from these new paid customers.

At SurveyMonkey, 85% of our revenue was from existing users. At Dropbox, after 17 years in business, it’s very much the same situation.

Please pay attention to this: The longer you’re in business, the more churn makes a big difference! Moving churn 0.1% is generally a multi-million dollar outcome, while 0.1% in conversion rate is maybe a couple hundred thousand. Or be doomed for your layered cake to look like this:

Yuck.

Like I said before: Churn & expansion is where top growth teams pay attention, and if your company’s leadership team happens to want long-term, compounding growth… they will, too.

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Edited with the help of Jonathan Yagel—check out his awesome Substack.

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Thanks, again, to Churnkey: If you’re looking to save 20%-40% of subscription revenue that would otherwise be lost to churn, check them out: