How public SaaS companies report churn, and what you

can learn from them

christophjanz.blogspot.com/2017/12/how-public-saas-companies-report-churn.html

While doing some research for another post I just stumbled on this excellent overview
from Pacific Crest on the churn rates of publicly listed SaaS companies. I’ve seen posts
with churn benchmarks of public SaaS companies before, but this one is by far the most
comprehensive collection I’ve seen and I think it’s very useful.

What’s maybe even more interesting than taking a look at the numbers themselves is to
see how different companies define churn (or the inverse, retention). Since there is no
official US-GAAP definition of churn or retention, different companies use different ways
to measure and report these metrics. And because public companies are under the
scrutiny by the SEC, any non-GAAP metric they report must be accompanied by a razor-
sharp definition.

Most public SaaS companies report churn in the form of their dollar-based net retention
rate, i.e. the inverse of net MRR/ARR churn (as opposed to account/logo churn), which
compares the recurring revenue from a set of customers across comparable periods.
Here’s a particularly nice description of this metric, coming from AppDynamics:

“To calculate our dollar-based net retention rate for a particular trailing
12-month period, we first establish the recurring contract value for the
previous trailing 12-month period. This effectively represents recurring
dollars that we should expect in the current trailing 12-month period
from the cohort of customers from the previous trailing 12-month
period without any expansion or contraction. We subsequently measure
the recurring contract value in the current trailing 12-month period from
the cohort of customers from the previous trailing 12-month period.
Dollar-based net retention rate is then calculated by dividing the
aggregate recurring contract value in the current trailing 12-month
period by the previous trailing 12-month period.”

If you take a look at the data assembled by Pacific Crest you’ll see that many companies
use the same logic with minor variations. For example, some companies look at the
trailing 12 month period, while others look at calendar years, quarters, or months.

Some companies exclude customers that do not meet certain criteria, for example:

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 Box includes only customers with $5k+ ACV and annual contracts
Alteryx considers only customers which have been paying customers for at least
one quarter.
AppDynamics includes only customers who have been paying customers for at
least one year.
Zendesk excludes customers on the starter plan.

This makes perfect sense: It tells you what type of customer the company is focused on,
and you can see the retention metrics in regards to this type of customer.

Other companies use variations that I think are questionable. Some companies report
customer count-based retention, which I think is much less interesting than dollar-based
retention. Some report renewal based on the number of seats; one company,
Fleetmatics, reports churn based on the number of vehicles under subscription. But the
majority of companies does report dollar-based net retention rate in a way that allows
for an apples-to-apples comparison across companies.

What can you learn from this?

(1) There is not one perfect definition of churn that is right for every SaaS
company. Depending on the specifics of your business you might want to:

focus on monthly, quarterly or annual retention

exclude customers that churned within the first, say, two months
include only customers that represent the core of your business, e.g. customers
above a certain ACV

(2) Having said that, dollar-based net retention is the way to go. You should stay close
to the definition above and tweak it with care.

(3) There may not be one perfect way to define and measure churn, but there sure are
lots of ways to get it wrong. :) One classic example is to calculate a monthly churn rate
and to mix in annual plans with monthly plans. By including customers on annual plans
who aren’t up for renewal in the period you’re measuring you’re underestimating your
true churn rate.

(4) Whatever metric you choose, make sure that you use it consistently and that you
have a razor-sharp definition.

Bonus tip: Whenever you report numbers, be it in monthly updates or in a Board deck,
include footnotes or an appendix with definitions of every metric that you’re reporting. I
can almost guarantee you that this will save you ten minutes of discussion with your VC
Board member(s) who (understandably) want to make sure that they understand the
numbers you’re showing them. :)

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