Customer churn is simply a consequence of doing business. Even the best SaaS companies, like Salesforce and Concur, will lose customers when companies go out of business. So how do you keep your customer base growing when you will eventually lose some of your older customers? Do you constantly have to sell new ones to make up for the ones you lose? Won’t this simply get harder and harder the larger your existing customer base gets? Well, yes and no. Acquiring new customers efficiently is critical, but you can also offset the loss of customers with upsells and growth from your existing customer base. In fact, the best companies actually experience negative churn – their existing customer base generate more upsell revenue than the revenue lost by churned customers. Veeva Systems is a great example of a company that has turbocharged its growth by following this model. The key to generating negative churn is to have a flexible pricing model that increases with usage (number of seats, number of servers, amount of storage space). Let’s see what this might look like:
As you can see in the chart, revenue growth per cohort increases over time. As a result, by the end, each cohort starts to tilt upward. In this example, the Company actually lost ~16% of its customers over the time period for this chart but more than made up for those customers with additional seats.
The spreadsheet below shows you how to create this chart from the raw data. You can take this analysis one step further by building cohort retention curves, but I’ll save that for another day. :)