Why churn turns you into an addict

The mathematical reason why churn forces SaaS businesses to run faster and faster.

The first SaaS business I started grew to about $30k in MRR and then plateaued and then contracted. At the time I couldn’t really understand why - we weren’t doing anything different to what we’d always done. And in any case it was a side project so after a few minutes of scratching my head I just moved on to the next big thing that was screaming for my attention. If you’d asked me back then why the business plateaued and then went into decline, I would have come up with a few possible explanations:

1. The market has moved on: there are other players doing what we do, but doing it better.

2. People realised over time that the product wasn’t that useful.

3. We were lucky when we started and now our luck has changed.

4. We probably should have spent more on developing the product and maybe done some more marketing.

And while some of these may have been true, the main reason (that I hadn’t appreciated) comes down to the simple math behind churn and growth and is based on these two immutable facts:

1. Churn is directly related to your current MRR

2. New business is unrelated to your current MRR

Let’s imagine that:
- your revenue churn is 3% per month
- your MRR is $10k
- your marketing engine consistently delivers $2.5k/month in new revenue

On the face of it that looks pretty good, right? Revenue churn at 3% gives you $300, but you’re generating $2.5k/month in new revenue month-in-month-out. So this month your net growth will be $2.2k. Happy days.

Then what happens as you grow? Let’s say you’ve reached the magic $83.33k/month mark (or $1m in ARR). Yay - champagne for everyone!

Your marketing machine is still chugging away delivering its consistent $2.5k/month like the diligent predictable workhorse it is. And your churn is still at 3% of MRR, but that MRR is now much bigger - 3% of $83k is actually $2.5k.

Hang on a minute, my new revenue is $2.5k, but now my churn is $2.5k too? Plateau Time.

That doesn’t seem fair: you didn’t do anything different to what you’ve always done, but now your success has caught up with you and you’re in trouble.

Clearly the only way to stop this (other than reducing churn) is to increase your ability to drive more new revenue. And this is what I mean by churn turning you into an addict. You have to get a bigger and bigger fix if you want to move forward.