Growth is slower, NRR drives growth but Founders focus on Go-To-Market

Churn remains an unglamorous topic. When tasked with accelerating growth, most companies instinctively focus on new go-to-market strategies or scaling their existing approaches. However, I contend that building robust capabilities to diagnose and address churn is the critical first step toward achieving faster, more sustainable growth. According to the 2023 High Alpha / Paddle (formerly OpenView) SaaS Benchmarks Report, (1) revenue growth has slowed since 2021/2022, (2) NRR (base churn + expansion) is a major driver of growth. However, the report shows most founders focused on GTM execution.

Source: 2024 High Alpha/OpenView Benchmark Report

In many cases, investing in retention has a higher payoff

When growth slows, it’s tempting to look to investments in sales, marketing and partnerships to drive growth – it makes intuitive since if your objective is to ‘grow’. However, adding more water into a leaky bucket isn’t likely to growth in an efficient manner.

So how should you grow: reducing churn or increasing acquisition spend? It’s typically not an either/or decision. However, I would argue that churn reduction frequently pays off at a higher rate.

Let’s take the following example where we have two scenarios:

(1) We reduce churn by 25% and keep acquisition spend constant
(2) We increase acquisition spend by 25% and keep churn constant

The inputs in the above model are based on realistic assumptions from my experience with SMB SaaS products (though the numbers have been rounded and modified a bit).

Over a broad set of realistic inputs to this model, you’ll find that the net value created in a given month (defined as lifetime gross margin value generated minus acquisition spend) is greater in a lower churn scenario than in the greater acquisition spend scenario. I haven’t included incremental costs for reducing churn in this example. You can do your own calculation adding that in. However, in my experience, churn reduction can largely be achieved by reallocating existing resources. Additionally, lower churn tends to reduce customer service and other operating costs (and increase gross margin) over time – which is not included here.

Your mileage may vary—your inputs might be different. There may be other investment options, including finding more effective means of acquisition. However, in many cases, churn reduction will be a great investment.

What do you think? Shoot me a note at hello@rule40group.com with your thoughts (or leave a comment).