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Growth has been the key value driver for SaaS business for several years. But in this presentation IVP (Institutional Venture Partners) makes the case that retention is more important than growth in determining value of a SaaS business.

Related posts on retention:

http://growthhackers.com/retention-is-king-guest-post/

http://growthhackers.com/22-ways-to-reduce-churn-with-growth-hacking/


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  • Sean Ellis (@sean)

    Most SaaS business that I’ve been involved in focus the majority of their efforts on MRR (monthly recurring revenue). In order to growth MRR, you need to have strong retention. Otherwise your new customers are simply replacing your lost customers. I was surprised that the presentation didn’t mention MRR.

  • benhoffman (@benhoffman)

    This is a great slide deck. What does LTM mean (slide 9)?

    @sean when calculating churn, do we include all our various contract lengths or do we only calculate churn by buckets (monthly, bi-annual, annual contracts? I read online that churn of less than 3% is great but I wonder if that includes all contract lengths calculated together? I’ve seen other companies with 1% churn but that’s because they included many 6-month and 12-month contracts. As soon as they isolated the monthly contracts, churn shot to 15%+.

    Do we include all contracts in our churn calculations or do we isolate by contract length?

    Anyone’s opinion / experience on this matter is greatly appreciated.

    Thanks!

    • Sean Ellis (@sean)

      I’m guessing LTM is lifetime margin.

      Regarding calculating churn, you should include any contract that you are using in your MRR calculation. Generally I’d recommend any contract that is expected to renew. But rather than calculating “user churn” I prefer “dollar churn.” For example, if you have a cohort of 100 users and lose 2 of them per month, you would have 2% monthly churn on that cohort. But if the average contract size of the remaining users increases by 10% per month through upselling and cross selling, then you’ll actually have negative churn.

      When you think about a SaaS business that way, essentially the sale is never “done.” Lifetime value is based on a series of conversion events. The key levers start with marketing and sales setting the right value expectations, then having effective onboarding, then working to improve engagement and finally upselling and cross selling. Every user has a key goal for their specific stage in the lifecycle.

      BTW, there are a lot of people that understand SaaS and churn better than me, so feel please correct me if I made a mistake above.

      • benhoffman (@benhoffman)

        Interesting. Thanks for the follow up. We track both person churn and MRR churn.

        I see the value in including all contracts while calculating MRR churn but not sure if the same theory applies to person churn. It seems there is back-and-forth debate about whether you include all customers or only customers that could have churned in that particular month.

        Anyway, thanks for the insight!

        • Danny Beck (@danny-beck)

          Hey Ben, on slide 9 I think LTM means Last Twelve Months. LTM EBITDA is a measure that is typically used in valuing companies.

  • PushkarGaikwad (@pushkar-gaikwad)

    Very valid point and thanks for sharing.

    VCs are only interested in making money and the bigger the number looks, the better exit option they will have. I think it is the founder who should focus on retention than on growth.

  • Ramin Assemi (@ramin)

    Reminds me of a graph I recently saw -> http://blog.datanyze.com/whos-winning-and-losing-in-marketing-automation/
    Look at the adds, drops. Makes me wonder about Hubspot, that’s some massive churn…

    • Sean Ellis (@sean)

      Thanks for sharing that link. I hadn’t seen the article. One thing mentioned in the article is that trials add a lot of fuzziness to the data. My guess is that for Hubspot a lot of the drops are from trials. They have one of the best marketing machines of the group.

      • Ramin Assemi (@ramin)

        Yes, we shouldn’t weight that single graph too heavily :) And their marketing is awesome. Still thinking though, especially since HubSpot isn’t a quick & easy free trial signup but requires some involvement & commitment… seems to be quiet a high number of drops. (More pondering this question out of curiosity, I’m sure they have a room full of rocket scientists optimizing for the best bottom line, which is what I find this interesting).

  • Angelo Lirazan (@angelolireezy)

    I specifically like slide 23 where it compares with animals, the favorite being the hare and the tortoise. AND THE UNICORN! Thanks for the share!

    • Angelo Lirazan (@angelolireezy)

      And I especially like the Magic Number and LTV/CAC. I feel like these would be important to look at in other businesses too.. But maybe not as important when you don’t have investors to be accountable to, since they’re interested in growth.

  • GeorgeBullock (@george-bullock)

    Overall, it’s a compelling deck. The cohort slides are very interesting and 2 x 2 matrix provides a nice way to frame a company in terms of growth-retention combinations.

    I’m not sure how I feel about the the Magic Number metric. At first glance it seemed interesting, but after a thinking about for a few minutes, I’m not convinced it’s the best way to answer the question “when do we break even on our S&M spend?” It also appears to be retrospective instead of prospective in terms of inputs, which if true, would heavily discount its usefulness in my view. Maybe I’m missing something in terms of how it’s supposed to be used. I might have to watch the Youtube video later and figure it out.

    I can confirm the conclusion of @danny-beck. LTM, in the context of EBITDA, definitely stands for “last twelve months.” In a former life, I was financial analyst and LTM figures were often the input for calculating financial ratios (P/E, PEG, etc.) and in some cases the baseline for forecasting financial statements.