Pricing TransformationNov 28, 2022

A Coming Wave of Churn? 

In this guest blog, Todd Gardner, explains why he thinks that there's a wave of churn about to happen for SaaS companies.

Todd Gardner
Todd GardnerManaging Director, SaaS Advisors
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A Coming Wave of Churn? I think so.

Your own CFO is scrutinizing every SaaS subscription you have – so what do you think your customers are doing?

Depending upon your own company’s runway, your CFO is looking at everything from low-hanging fruit like unused seats to cutting anything unneeded to keep the lights on.

This culling exercise is happening in SaaS companies, the broader tech market, and to some degree, everywhere else.

Many SaaS products have nimbly avoided top-down accountability for years by hiding in expense accounts and departmental budgets. Point solutions have proliferated and seeped into every corner of the organization, while product-led growth has only accelerated the phenomenon. One CFO recently commented, “We have 22 marketing applications!”

This issue has been around for a few years, and many organizations have addressed it already, but in this environment, everyone will be looking at cleaning their SaaS house, and the bar for renewal will be higher than ever.

Thanks to David Spitz, CEO of Channel Advisor, for pointing this out to me. He shouldn’t have needed to, but he did. Thanks, David.

The higher churn data has yet to appear in public or private reporting, but it will. The lag is substantial, given that more than half of all SaaS revenue is under annual or multi-year agreements. It’s also true that the economy is a bit schizophrenic right now, with mixed signals of a recession. It’s clear; however, there is a SaaS recession, and if you’re a SaaS company selling to other SaaS companies, hold on. 

I’m not an operator, so I will not proffer-up specific advice on what to do here. However, I do think the following is warranted:

  1. Dive into your data for early warning signs of churn and opportunities for intervention
  2. Recognize customers may wish to renew for shorter periods -- and make that easy
  3. Lean-into consumption pricing

On that last point, the least scrutinized SaaS subscriptions are the usage-based ones. The bill goes to zero without customer intervention if the application is not being used. Customers may wish to push back on unit pricing or even scale back minimums, but they are less likely to cancel or attempt to constrain usage.

With either consumption or seat pricing, teams should consider reaching out to customers with unused seats or excess usage credits and proactively down sell in exchange for an early renewal. Revenue pain now will be offset by customer goodwill and lower churn later.

If you want to learn more about usage-based pricing, go here

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