Churn

Churn is the proportion of customers, or of recurring revenue, that a business loses over a stated period, normally expressed as a monthly percentage.

What it means at this size

Customer churn and revenue churn are different numbers and sellers conflate them constantly. Losing five customers out of a hundred is 5% customer churn, but if those five were on the cheapest plan the revenue churn is lower, and if one was the largest account it is far higher. State both, and state the period.

At a $50,000–$150,000 close, churn is the single figure that most reliably separates two businesses with identical profit. A buyer is not purchasing this month's revenue. They are purchasing however many months of it survive.

Where it bites

Compounding is what founders underestimate. A monthly figure that sounds small does a lot of damage over a year, and it is the annual effect a buyer prices.

Worked example

A micro-SaaS has 150 customers paying $20 a month, so $3,000 of MRR. At 5% monthly customer churn it loses seven or eight accounts a month, around $150 of MRR. Left alone for twelve months with no new sales, that base decays to roughly $1,620: a little over half.

The same business at 2% monthly churn would still be billing about $2,355 after a year. On $40,000 of SDE, the first version struggles to hold 2.25× and asks $90,000. The second supports 3× and asks $120,000. The product, the costs and the profit are identical.

Why it matters when you exit

Churn is the most improvable number on this list, and the improvement takes months rather than weeks. Find the cancellation reason, fix the two causes that account for most of it, and give yourself two clean quarters of data before listing. A buyer who can see churn falling across the trailing twelve months will pay for the trend as well as the profit.

Related: net-revenue-retention, mrr-and-arr, customer-concentration, how-much-is-my-saas-business-worth