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The most important SaaS metric

Originally posted on Quora.

As easy as it is to give an it depends answer to this question, I actually believe there is a key metric that every subscription business should obsess about.

And that metric is retention/churn.

No matter whether you’re looking for product/market fit (PMF) or for ways to quickly grow your business, optimizing for retention should always come before anything else.

If you’re at the stage, where you’re still looking for PMF, the churn rate is a useful guide on how you’re progressing on that path. You might have identified a problem that many companies/consumers need solving, but if you’re seeing a high level of churn, it probably means your solution is lacking.

It’s easy to point out the obvious answer and say that retention is especially important in SaaS because of the typical business model, in which a customer is signed up at a loss (because of CAC) and only becomes profitable gradually over the course of their lifetime. Therefore, the lower your churn, the more profit you can extract from your customers.

Most important SaaS metric: link between CAC and LTV

However, there’s another (less obvious) reason that makes retention the most important metric. Over the last few years, a consensus has emerged that the funnel/bucket approach is not the best way to think about the customer lifecycle in marketing.

Some of the leading practitioners in the field have united around the idea that growth in subscription companies comes from a series of loops. You can see this clearly in companies like Drift and Intercom:

Drift's growth loop

Source

Every time a new customer/user embeds a chat on their website, Drift’s product is exposed to a new set of potential customers, some of whom would, in turn, start using the product, ember it on their website, drive new customers, etc. The wheel keeps spinning.

So, if we magically halve Drift’s churn rate, that would not only increase the revenue generated by the average customer, but it would also maximize the potential for Drift to acquire even more new customers because it would increase the number of people who go through the loop described above.

That’s what leads authors like Brian Balfour to conclude that retention is the one metric that drives everything from acquisition to monetization.

Finally, it is also important to focus on churn, because it imposes a ceiling on how much your business can grow. Even with a high acquisition rate, a company with high churn is like a gas-guzzling SUV — you’re going to run out of gas very soon.

Most important SaaS metric: churn puts a ceiling on your growth

Every company needs a growth engine in order to be successful. But before you’re ready to start pouring fuel into your engine, make sure you’ve plugged the big holes in it — i.e. fix your churn.

To learn more about retention, check out the following resources:

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