The Hidden Cost of Churn to Enterprise Value

After 35 years of determining what makes businesses thrive, l’ve learned the keystones of business success and how some companies maximize their Enterprise Value while others, flounder or worse.  One of the most surprising insights I garnered was the severe cost of churn to enterprise value, here’s what I’ve discovered.

One of the top questions my clients often have is how can they grow revenue and expand their customer base. While customer acquisition is important to business growth, an incredibly overlooked area is customer churn. Through my extensive research and analytics, I’ve uncovered just how expensive churn is, and have developed tools for businesses to use to keep customers from walking away.

Let me share some of my findings with you.

According to the 2017 KeyBanc study by David Spitz, which examined 400 SaaS companies, the median gross dollar churn rate is 8%. That’s 8% of paying customers who leave for a competitor, put down a product or solution, cancel their subscription, and more.

Every time one of these customers leave, businesses lose recurring revenue, expansion opportunities, referral and advocacy benefits. Businesses take a hit to their growth rate, EBITDA, brand value and reputation, and have to make up for these missing customers by spending significantly more to attract new customers just to get back to even.

But, I believe the least understood cost of churn is the damage it inflicts on Enterprise Value. 

Calculating the cost of churn to Enterprise Value is straightforward yet powerful:

Calculation Graphic _v3.PNG

Let’s break it down.

According to the Key Bank Study, the median annual recurring revenue (ARR) is $8.5M.

ARR Graphic.PNG

With a median Gross ARR Churn of 8%, it equates to $680,000.

Gross Revenue Churn Graphic.PNG

Looking at the cost of Churn to Enterprise Value and using a valuation range of 5x – 10x, the numbers are staggering – $3.4M to $6.8M in just one year!

Cost of Churn Chart.PNG

When I share these findings with my clients, suddenly we’re not only talking about how to get more customers, but we balance this conversation with how we can also keep customers from walking away while expanding the relationship.  These results clearly showcase that the cost of retained and expanded revenue is far less than the cost of attaining revenue from new customers. 

How can you fuel your organization to reach your desired destinations? First, you need to stop the leak from within. In my next article, I’ll share a sneak-peak into how you can quickly analyze churn using my cost of churn calculator.