Negative Churn and Expansion Revenue are huge terms in the SaaS industry, and today, we’re going to learn a little more about these terms and how it will impact your business.
What is Negative Churn?
Firstly, what is Negative Churn? It is a state where your existing customers spend more on your product or service as compared to what they did last month.
Formula to understand Negative churn better:
Here’s a simple formula, to understand this concept better.
Negative Churn = (New Customers + Existing Customers) – Churned Customers
This concept can be explained in two ways - customer centric and revenue centric. Negative churn is that additional revenue that a company generates, month on month, from its existing customers who are currently using that company’s products or services. Let’s delve deeper into this by using Company XYZ for example.
So, Company XYZ receives 1000 customers every month but loses 100 customers each month making its customer churn rate 10%. Now, those 1000 customers contributed to a total monthly revenue of $10,00,000 out of which the 100 churned customers contributed to $50,000. That means, the revenue churn rate is only 5%.
All you need to know about Negative churn rate:
The SaaS industry is more revenue centric and hence, to simplify this discussion, we shall talk about churn rate, only with respect to revenue. The above example stated the meaning of churn rate. But what exactly is negative churn rate? Now, if those 900 retained customers made higher value purchases of Company XYZ’s products in the current month, as compared to the previous month, then that would result in a negative churn for the company. So, Negative churn is in fact a good thing for your company. Everything negative isn’t bad after all, eh!
What is Expansion revenue?
How do you make your existing customers increase their value of purchase within a month? This process is called as Expansion Revenue. It literally means to expand the revenue that your company is currently achieving from its existing customer base. There are different types of Expansion that lead to the same goal of making your users buy a little more than what they did last month.
This method encourages you to add more seats (read customers) to the existing group of customers who are already using your product. Company XYZ used this technique to increase its negative churn rate. Majority customers of Company XYZ use their signature product - XYZee. But, in order to expand its revenue, the company added features to this product that enabled their client’s HR team manage payroll and other attributes in an automated and systematic manner. This feature was sold as an add-on with a view to increasing the number of customers that signed up from each company.
This method makes you allure your existing customers with resources that may be added to their currently used product. Dropbox is a good example to state here. The user has to upgrade his/her current plan based on the storage units used so far. If your product follows a similar approach wherein the user has to deal with storage space or battery charge, then you might consider this method to expand the revenue of your business to attain a decent negative churn rate.
Cross-selling is a technique used to sell additional products to your existing customers that will complement a product that they are currently using. Just imagine someone trying to sell a nice pair of shoes that match an outfit that you recently purchased. Your original intent was not to buy those shoes, but the moment you saw them and realized how well they would suit your outfit, you couldn’t resist purchasing them. That’s what is cross-selling in a layman’s terms.
4.Upselling and Upgrades
As we have already discussed in the previous chapter, upsells and upgrades are great ways to make your customers purchase a higher version of the product they are currently using. Refer “Your ultimate guide to the art of SaaS upselling” to know more about this method.
There are plenty of ways to expand your business’ revenue. Other than the ones mentioned above, you may want to increase sales for your product through existing customers, by offering them an intensive training program regarding your product or industry as a whole or by handing them an exclusive ebook or whitepaper that involves great amount of research and learning that could benefit your customers. These are subtle means to promote your offerings and tempt them to make higher value purchases with your company.
The key take-away here is to strategically identify the correct approach for your customers and seamlessly executing your idea in order to achieve your goal. Expansion revenue can yield high returns with minimum investment if you tactfully apply your learnings combined with an intuitive solution.